Class Of 2010 Unlikely, Say '05 Members

The latest class of Bermuda startups may well be the last of its kind, some members of the Class of 2005 predicted recently, although dissatisfaction with the Bermuda domicile is not the reason, they say.

“One can speculate that new capital coming into the market would go to existing players in the form of sidecar vehicles,” said Gary Prestia, chief underwriting officer for North America at Flagstone Reinsurance.

He was referring to special purpose vehicles in which third-party investors, such as hedge funds or private equity funds, collaborate with an underwriter to provide additional capacity to existing reinsurers for property-catastrophe retrocession or short-tail lines of business. This form of temporary capital became more popular than it had been in the past at about the same time the Class of 2005 sprouted up.

Flagstone, classmates Validus and Harbor Point, as well as members of older Bermuda classes were involved in the sidecar movement.

“I think the likelihood of seeing a broad class of [startups] is probably greatly diminished. I wouldn't say you won't see any, but I don't think you'll see the same number you saw in 2005,” Mr. Prestia said.

As a result of being proactive in the sidecar market, he said Flagstone learned that you don't need permanent capital–that being able to use transportable capital while there is a market opportunity is an attractive way to develop returns for investors and the company. Commissions and profit-sharing boost returns for sidecar sponsors, he noted.

John Berger, chief executive of reinsurance for Alterra Capital Holdings, agreed. “I do not foresee another wave of new companies,” he said. Instead, investors will recapitalize existing companies “with the best track records, or you'll have the phenomenon of the sidecars.”

As for lessons learned from the Class of 2005 wave, he said one was clearly that “it's very easy to access capital for opportunities,” referring to the fact that the industry was recapitalized with $40- or $50 billion almost overnight. In contrast, it took RenaissanceRe founder James Stanard about a year to raise the money to start up his company following Hurricane Andrew.

However, “it's not as easy as just [saying], 'let's put a couple of billion dollars in Bermuda, get some underwriters, flip the company and make a lot of money in a two-year period,'” he said, imparting another lesson. “You need a game plan that's going to work over time.”

Separately, Class of 2005 representatives discussed a recent spate of redomestications from Bermuda to places like Zurich and Dublin, including one by Flagstone to Luxembourg this year–the second of two key organizational changes for Flagstone that started with a 2008 restructuring.

The earlier move, consolidating the operating companies and capital into Flagstone Reassurance Suisse S.A., gave Flagstone a competitive advantage with respect to tax treaties, said Brenton Slade, chief marketing officer, adding that the more recent migration of the holding company to Luxembourg has a similar effect.

“It moves us out of the crosshairs of onerous tax and other regulations. Most importantly, it takes us out of an offshore tax haven–Bermuda–and moves us onto an onshore European taxpayer,” he said.

“We feel that gives us an added layer of advantage when it comes to forward-business planning,” he said. “We don't have to worry about potential regulation or onerous taxation, like people who have stayed in Bermuda have to deal with.”

In contrast, Ariel Holdings sees little need to move from its Bermuda roots, according to CEO George Rivaz.

“For our existing business, we're comfortable that our mostly property and marine reinsurance business is appropriately run out of Bermuda,” he said, pointing to an able team that extends from trainee modelers to senior management. “We have a good intake of Bermudian talent at ground level and mid-level people for finance and accounting.”

Mr. Rivaz said he believes actions that others are taking to move holding companies and operating companies to Europe are driven by regulatory developments that impact carriers writing more insurance than reinsurance. “We don't write much insurance business at all, and virtually none of it out of Europe or Bermuda,” he said.

At Alterra, Mr. Berger said, “I'm not sure that domicile of the holding company makes all that much difference,” pointing out that even though ACE Limited redomiciled from the Cayman Islands to Switzerland, and Flagstone from Bermuda to Luxembourg, they still have Bermuda underwriting platforms.

“Bermuda will remain a vibrant short-tail market, and a U.S. liability market, too,” he said. “If holding companies go to Zurich or elsewhere, you will likely still have underwriting platforms here.”

“You wouldn't have as many infrastructure people in Bermuda, so overall it's not that great for the island. But it's not like the insurance and reinsurance industry in Bermuda closes its doors and there's no more insurance and reinsurance market there. That's not going to happen,” he said.