Bermuda special

What are these Bermudan companies that are intriguing thanks to their outstanding responsiveness, and whose performances have haunted even the almighty Lloyd's market? Just like phoenixes reborn from their own ashes, these companies which were believed ruined by the huge losses due to natural catastrophes, have shaped up pushing forward for bigger shares of the market.

Thanks to a local favourable environment, which has managed to attract investors, and to incentive taxation, this Atlantic archipelago has, in a few years, managed to stand as a stronghold of the world's reinsurance business, especially in the segments of natural catastrophe and energy-related major risks.

Photo credit: Caleb Moore Bermuda: a small pebble carrying the seeds of a rock, also called the reinsurance Silicon Valley

  • Area: 53 Km2
  • Population: 65 800 inhabitants
  • GDP: 4.5 billion USD (2004)
  • Official language: English

Bermuda: a fiscal paradise with transparent legislation

  • Bermuda offers an offshore company status with tax-exempt profits until 2016.
  • Shares with anonymous holder are prohibited.
  • There is no legislation on bank secrecy.
  • To prevent the risk of money laundering, Bermuda has signed a legal assistance convention with the United States.

Its assets

  • A strict legislation and financial governance
  • Financial capacity
  • Infrastructure
  • Accessibility and geographic proximity to the American market
  • Climate

A success story

Photo credit: Mike Oropeza

In thirty years time, Bermuda has witnessed the succession of three reinsurance generations.

The first one was born in the 1970s when Bermuda was specializing in reinsurance captives created by industrial groups to cover part of their own risks. In the 1980s, newly-established companies have bought out some of Europe's traditional reinsurers and diversified their portfolios. They have turned into composite reinsurers operating in all life and non-life classes of business.

The flow of business and funds speeded up in 1992 after hurricane Andrew which strained numerous reinsurers with heavy damages amounting to 17 billion USD.

The second new wave of Bermudan reinsurers has turned up following the World Trade Centre disaster in 2001 and the market reconfiguration that ensued. These new comers have fully benefited from the increases in reinsurance rates in 2002-2003. In a very short lapse of time, record-high profits have been amassed by these companies.

  • 2002: Gross premium volume = 63.3 billion USD
  • 2003: Gross premium volume = 94.7 billion USD
  • 2004: Gross premium volume = 95.8 billion USD

The 2005 black series with hurricanes Katrina, Wilma and Rita have marked the start of a new era. Many of Bermudan companies have sustained the backlash from the huge losses caused by the natural catastrophes, which cost them a downgrading of their ratings. Some have stopped their underwritings while others such as Alea or Rosemont Re have ceded their portfolios or simply vanished.

  • Ace has paid a bill of 742 million USD.
  • Montpelier Re has lost 691.9 million USD.
  • XL Capital has lost 440.1 million USD against 868.5 million USD profits in 2004.
  • Endurance has reported a loss of 220.5 million USD against 298.8 million EUR (362.3 million USD) profits in 2004.
  • Partner Re has displayed a net loss of 42.9 million EUR (52 million USD) against 413.8 million EUR (501.7 million USD) profits in 2003.
  • Renaissance Re has reported a loss of 573 million USD.
  • PX Re has reported 409 million USD losses.

Paradoxically, the crisis has produced a catalyst effect by spurring capital appeals. New investors have promptly injected enormous sums of money to bail out creeping companies or to set up new ones.
In a record lapse of time, creations have succeeded to one another with no less than 14 for just the last quarter of 2005. No sooner had these so-called third generation reinsurers started business than they applied for the ratings of large international rating agencies. More than 8 billion USD have been invested in the Bermuda's new structures.

The new wave's main stakeholders

  • Harbor Point, capital: 1.5 billion USD
  • Lancashire, capital: 1.065 billion USD
  • Amlin Bermuda, capital: 1 billion USD
  • Ariel Re, capital: 1 billion USD
  • Validus Re, capital: 1 billion USD
  • Flagstone Re, capital: 552 million USD
  • Hiscox Bermuda, capital: 502 million USD
  • New Castle Re, capital: 500 million USD
  • Cyrus Re, capital: 500 million USD
  • Blue Ocean Re, capital: 300 million USD

The race towards rating

Image provided to Microsoft by iStockphoto. Used with permission from Microsoft Set up after hurricane Katrina, New Castle Re has obtained the rating “A-” from A.M Best on November 4, 2005. Between December 13 and 20, 2005, A.M Best has attributed the rating “A-” to seven of these start-ups: Amlin Bermuda, Validus, Harbor Point Re, Lancashire Insurance, Hiscox Bermuda, Ariel Re and Flagstone Re, which has put these companies in a good position for the January-2006 renewals.

These reinsurance battle horses have benefited from the state of confusion resulting from hurricane Katrina and the delays caused to contract programs' renewals. However, and against their wishes, the awaited rates' increase did not occur and the overall trend is now bound to caution.

The crisis' lessons and prospects

According to the forecasts, reinsurance demand for natural catastrophe risks is likely to increase as reinsurance and insurance companies are getting under the pressure of rating agencies to seek new ways of reducing their exposure. Some even came to believe that the 2005 catastrophes have spurred demand of invested capital for this type of risk. The 2005 moral has helped reduce the magnitude of the cycle and had a lesson impact on the regional reinsurers.

Nonetheless, it is believed that some of these start-ups, which focus a great deal on the volatile risks pertaining to natural catastrophes, risk to encounter future hardships in case tariffs came to a low. The only way to guarantee durability is the diversification of their business through the buyout of classical portfolios. Takeovers or mergers of medium-sized companies are therefore expected.

Despite the 2001 and 2005 heavy losses, the Bermudan market has displayed a great ability to bounce back and attract capitals. Out of a total comprised between 16 and 17 billion USD raised since hurricane Katrina struck, Bermuda got hold of the biggest share.

Financial results for selected Bermudan insurance companies as at December 31, 2005
in millions USD
 Gross premiums04/05 growthNet premiums04/05 growthNet
04/05 growth
16 814+4%11 752+6%1 029-11%
XL Capital
11 849+7%9 617+7%(1 292)NA
Everest Re Group
4 110-13%3 963-10%(219)NA
Arch Capital Group
4 015+9%2 978+2%257-19%
Partner Re
3 665-6%3 599-4%(51)NA
AXIS Capital Holdings
3 394+13%2 554+26%90-82%
Aspen Insurance Holdings
2 093+32%1 508+22%(178)NA
Renaissance Re Holdings
1 809+17%1 403+5%(274)NA
Endurance Specialty
1 669-2%1 724+6%(223)NA
Max Re Capital
1 246+19%1 039+13%7-95%
Montpellier Re Holdings
IPC Holdings
Scottish Re Group
NANA1 934+228%125+76%
NA: Not available Source : The Official Journal of the Bermuda Insurance Industry (2006-Vol. 2)
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