Will New Bermuda Startups Survive Over The Long Haul?

Reinsurers have of late typically generated between 50 and 90 cents of premium for every $1 of capital held (operating leverage). This suggests the Bermuda startup contingent is looking to write as much as $7.6 billion of premium from its $8.5 billion of new capital.

However, operating leverage is at the very low end of its historical range, which, in a firm pricing market, has gone as high as $3 of premium for $1 of capital. By that reckoning, Bermuda startups would be looking to write a whopping $25.5 billion of premiums in a global reinsurance market that produced about $90 billion in premium in 2001.

It is hard to see how the requisite demand could be achieved without a series of pricing discounts. That would lead to disappointing operating results for the underlying investment community.

Although reinsurance premium rates have soared in recent renewals–with hikes of 35 percent and substantially more in some cases–most Bermuda insiders report dissatisfaction that the increases were not higher still, while some of the startups missed the Jan. 1, 2002, policy renewal period.

Nor will higher prices translate directly into earnings, because gains are offset by lower volumes as commercial policyholders elect decreasing levels of coverage, or find substitutes such as collective coverage arrangements.

With little to commend them other than cheap capital, few startups will match the creative impetus, or achieve the widespread acceptance that their predecessors established–and that with much less haste–following Hurricane Andrew in 1992. ACE and XL are among the notable examples of startups from that earlier era, for which innovation has proven a major factor in their long-term success.

The new entrants must also contend with competitive pressures in business lines where established players have already achieved a strong market position.

The newcomers will tend to concentrate their risk in fewer business lines and gravitate, in seeking higher returns, to lines marked by greater volatility.

Compounding the problem is the frequent absence of a parent company to fall back on should things go awry, and the largely untested ability of management to write new business, apply disciplined underwriting, or manage expenditures.

There are also signs that the investment communitys ardor is beginning to cool. Once content to pour capital into ventures without so much as a Post Office box, let alone a coherent business plan, investors have since balked at such largesse. This was the case with startup Danish Re Bermuda Ltd.–which, having briefly basked in an A.M. Best rating of "A-minus," suspended its efforts to raise capital and forced a hasty withdrawal of the rating.

These concerns are set in a Bermuda reinsurance industry that has recently lost much of its luster. Overseas Partners Ltd.–which, based on earned premium and assets, ranked fifth in Standard & Poors 2001 survey of Bermuda insurers–was placed into runoff early in 2002, following underwriting losses of $328 million.

Stockton Reinsurance Ltd., which had planned a joint finite-risk business with OPL, is also in poor shape, while Mutual Risk Management Ltd., in default on its debt, has come under review by the Bermuda Monetary Authority.

Finally, Scandinavian Reinsurance Company Ltd. recently decided neither to write new business nor renew existing business.

Meanwhile, in the global reinsurance arena, there are moves afoot among both financial services companies and some insurers to divest non-core property-casualty reinsurance operations, and with them, a source of volatile earnings.

The prevalent, although unvoiced, investment strategy behind the Bermuda startups is to make a quick profit, then to cash in with a lucrative IPO in a few years. It is a mindset underlined by the vanguard of insurance war-horses brought out of retirement to lead these ventures.

However, it will take more than cheap capital to elevate the supply-laden upstarts beyond a mere footnote in Bermudas financial services success story. In the end, the new adventurers seeking an enchanted haven in Bermuda could find it as bare as Prosperos island, its opportunities melted into thin air.

Donald S. Watson is the managing director and team leader of Standard & Poors Reinsurance ratings group, based in New York.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.