Bermuda Startups Face New Challenges

Softening market tests carriers’ discipline, but future still looks bright

It’s been about 20 years since Bermuda began its evolution from a captive domicile into an international reinsurance/insurance center, and much has changed in global markets during that time.

Some of the changes–including the establishment of finite products, corporate excess liability, and property-catastrophe insurance and reinsurance specialists–were driven by developments on the island itself.

In addition, the Bermuda reinsurance market has historically capitalized on its flexibility to serve the changing needs of international clients and navigate market turbulence. Supporting this tradition has been the alluring combination of the island’s light tax environment and a business-friendly regulatory structure made possible by Bermuda’s status as insurance domicile rather than a market in itself, along with its proximity to the U.S. insurance market–still by far its largest single business source.

The year 2001 marked another watershed for Bermuda, with over 100 new companies formed–both captives and commercial insurers. More than half of the new capital raised in the aftermath of 9/11 was directed to Bermuda–particularly to the new large and now predominantly publicly-traded firms. These include AXIS Specialty, Endurance Specialty, Montpelier Re, Max Re, Arch Capital, Allied World, among others (and with Platinum Underwriters, Aspen, Alea and Quanta all launching initial public offerings since then).

Other established players–including ACE, XL Capital, RenaissanceRe and PartnerRe–also raised capital to strengthen balance sheets and seize on opportunities afforded by a hardening pricing environment in both insurance and reinsurance, and across both property and liability classes.

The Bermuda markets that started during 2001 and 2002 are a different breed. With some exceptions, this crop of startups distinguished itself from previous waves of new market entrants by following a diversified strategy–in both insurance and reinsurance, and in property and liability.

Consequently, today’s Bermuda market faces a somewhat different set of priorities compared to the market of the mid-1990s. During that time, most companies were specialists in either excess liability insurance or property-casualty reinsurance. Also, mergers and acquisitions were a common strategic priority back then–supported by assertions of improved capital efficiency from a broadened diversification.

In contrast, only a few of the new market entries from 2001 and 2002 are mono-line specialists, and thus the benefits of M&A activity are less obvious, given these companies’ already established position in various markets and access to a full spectrum of global brokerage relationships.

Moody’s expects that with time, M&A activity might accelerate, but it will likely focus more on opportunities for renewal rights and perhaps selective acquisitions in established continental markets.

However, given the universally acknowledged onset of a softer pricing environment–which comes after three years of top-line growth and internal capital generation spurred by the recent hard market in international commercial insurance and reinsurance–capital management has returned as a paramount consideration.

The current situation mirrors that of the mid-1990s, when ACE, XL Capital and nearly all the property-catastrophe reinsurers established in 1993-94 also pursued varying strategies in capital management and business diversification.

To date, most Bermuda management teams and their shareholders have kept their focus on strong operating returns–the absence of legacy liabilities has allowed them to remain competitive relative to onshore peers, and also highly profitable.

However, the softening property risk market, and the flattening/softening casualty market this year and beyond, will likely put these management teams to the test on their willingness to hold the line. Therefore, the capital allocation decisions and pricing discipline exercised by Bermuda startups will be a key determinant of the market’s overall pricing trend.

To date–and as seen in first-quarter 2005 results–several companies have indeed reined in their growth through a commitment to sustaining or tightening pricing and underwriting. This has been true across both insurance and reinsurance segments, and across various lines of business–most notably property-catastrophe reinsurance and aviation, marine, professional liability and other casualty classes of business.

Moody’s further expects that some companies–having grown rapidly during the past three years–will see the need to pare down their portfolios and risk positions, as some accounts deemed profitable in the past may no longer seem attractive.

On the capital management front, debt offerings and ongoing share repurchase activity, or the declaration of extraordinary dividends, has accelerated because underwriters see fewer attractive underwriting opportunities.

The current indicators bode well for discipline in the local market. However, that said, the Bermuda market does not operate in a vacuum, and responses to competitors’ strategies in established onshore markets–together with the managing of shareholder priorities–will likely be persistent themes over the next couple of years.

It will take some time before a consensus develops on the effectiveness of the range of approaches adopted by Bermuda insurers and reinsurers. As their strategic directions diverge, it appears certain their financial and business fortunes will follow.

However, the combination of the island’s creative human resources and financial capital, together with its excellent geographic placement and business-friendly environment, should ensure that Bermuda will remain a centrally significant presence in the global insurance marketplace.

Alan Murray is a senior credit officer in the insurance and financial institutions group of Moody’s Investors Service in New York.

Flag: Rising Tide

Head: Bermuda Market Booming

Caption:

Bermuda saw over 100 new companies formed in the aftermath of Sept. 11, 2001, sending the island’s premium volume soaring, but a shift in pricing trends may force many to pare down their portfolios to maintain profitability.

“To date…several companies have indeed reined in their growth through a commitment to sustaining or tightening pricing and underwriting.”

Alan Murray