Long-term reinsurance and ILS are set for growth

After a record-breaking  2024, Bermuda’s life reinsurance sector is likely to expand further this year, according to lawyer Brad Adderley (pictured).

Adderley, who is managing partner of Appleby in Bermuda and runs its insurance practice, said in an interview at the Bermuda Risk Summit last month that, based on the new large reinsurers his firm was incorporating so far this year, there was a strong likelihood that Bermuda would match the 10 that were formed in 2024.

Adderley said the new companies – which must have capital of at least $500 million of assets – were beneficial to Bermuda and were engaged in large transactions with life and annuity insurers around the world, often in the tens of billions of dollars.

As importantly for the Bermuda domestic economy, the companies were hiring staff and expanding their offices.

Since 2014, 54 Class E reinsurers have formed in Bermuda, while trade organisation Bermuda International Long-Term Insurers and Reinsurers (BILTIR) says it represents more than 70 businesses, although not all are Class E.

Adderley said he believed the long-term reinsurance sector was now a standalone market and should be viewed as a separate pillar of the Bermuda economy from property and casualty insurance.

“This is likely to be a phenomenal year,” he said. “If you think of the multiplier effect of those new people coming to the island, we will get to a marketplace where people can move around within the Bermuda market.”

Adderley said the other sector which is growing rapidly is the insurance-linked securities (ILS), where Bermuda had established a dominant position which meant that new entrants needed to be on the island.

“Catastrophe bonds are going crazy,” he said, adding that approximately 90% are registered in Bermuda and listed on the Bermuda Stock Exchange. “That's great for the island. We have service providers coming to Bermuda who end up meeting with the sponsors, the investors, and the regulator and as a result the same entities end up choosing Bermuda as a one stop shop.

“I think every major ILS player has a Bermuda operation/connection of some sort, whether it's an ILS vehicle or an investor office here, or has securities listed on the BSX or using a Bermuda ILS platform.

Adderley said it will be interesting to see how property catastrophe re/insurers perform this year after the Los Angeles wildfires caused up to $50 billion in insured losses in January - traditionally a quiet time of year compared to the June to November hurricane season.

Despite that, Adderley has been advised that wildfire renewals proceeded without major increases and as such it will be interesting if  there would be any material  increase in June and July when Florida hurricane reinsurance policies were renewed.

Adderley said this suggested the industry still had excess capital to deploy, but he said if the rest of the year proceeded in line with 2024, that could mean a record $200 billion in catastrophe costs in 2025.

One factor that has surprised industry observers in the hard market is the lack of new entrants into the market.

Adderley said a number of start-ups had tried to raise capital after the advent of the hard market in 2023, but of them, only Brian Duperreault-chaired Mereo, which launched in January, had been successful.

Adderley, who advised several groups including Mereo, said the main reason more did not launch was because they could not secure a lead investor.

“We had lots of follow investors, and I think one or two of them would have been really large if they had one or two lead investors,” Adderley said. “I think part of it was that people didn't believe the market was really hard, and then, if it is really hard, will they get on the good lines?”

Reflecting on the hard market, he said there were still questions about whether the reinsurance market could maintain market discipline.

He noted that the market was underpriced for seven years and struggled to return the cost of capital.

Now after two profitable years, rates were falling until the LA wildfires even though two good years could not make up for seven poor ones.

“So why are rates going down? Is it  because the industry never learns - is this what investors are thinking.”

Brad Adderley is managing partner of Appleby Bermuda. He can be contacted at badderley@applebyglobal.com.

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