Easy Sailing for Bermuda Reinsurers During Q1, But Tides May Change

2011 was a brutal year for global natural disasters, with catastrophic earthquake losses in New Zealand and Japan; flooding losses in Australia and Thailand; and hurricane and windstorm losses in the United States and Australia, says David Fox, director of information for the Bermuda Insurance Development Council (BIDC).

"The [2011] numbers include an incomprehensible loss in economic terms, estimated at about $435 billion; insured losses swelled above $100 billion," with Bermuda companies shouldering 40 percent of that, according to Fox.

In addition to the relative dearth of disasters so far this year, Bermuda's carriers are benefiting from upward-bound pricing—a direct result of last year's record-setting catastrophes.

Jamie Veghte, executive vice president and chief executive of XL Group's Reinsurance Operations, says, "We are certainly seeing pricing improvement across the market. Catastrophe-exposed short-tail lines such as Property and Marine are hardening, and we are even seeing pockets of long-tail Casualty lines improving."

This combination of fewer catastrophes and higher rates has led to some striking numbers that dramatically underscore the night-and-day opposition of Q1 2012 and 2011.

XL Group's Bermuda Reinsurance Operations posted a combined ratio of 33.1 in Q1 2012 compared to 203.7 in Q1 last year.

"Suffice to say, reduction in natural-catastrophe activity was a major driver in improvement," notes Veghte.

CARRIER COMEBACK— BUT STORMY PATH AHEAD

XL is hardly alone in enjoying a tremendous turnaround.

Aspen Re in Q1 2011 reported a net loss of $152.8 million but saw a swing back into the black in Q1 2012, with $78.7 million in net income.

Montpelier Re recently reported $107.1 million in net income against its first-quarter loss of $104.3 million in 2011, with net-premium growth of 9 percent.

Renaissance Re Holdings made $201 million against last year's $248 million loss, and Arch Capital Group and Everest Re reported income revenue of $157.8 million and $304.7 million, respectively, over almost inverse losses last year.

Yet neither island carriers nor their representative associations are in any mood to relax about the future.

"The first quarter does not foretell the calendar year, so there is no way to project what the rest of the year holds," warns Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR). "The 2011 underwriting results were affected by mega-catastrophe losses, which could certainly occur again in 2012."

Indeed, there is much concern that the relatively benign first quarter of 2012 is but a temporary respite.

Munich Re has noted that the first half of 2011 saw $265 billion in economic losses—a figure which "easily exceeds" the total figure for 2005 ($220 billion), previously the costliest year to date. And 2010 saw a total of 950 natural catastrophes, markedly exceeding the annual average for the 10 years prior (785 events per year).

The BIDC's Fox says that, looking at this alarming data, the consequences of climate change are quickly becoming a top-of-mind issue for Bermuda reinsurers.

And Guy Carpenter's Flandro notes that investment income has been lackluster of late—an ongoing issue plaguing all insurers, regardless of location.

"The other issue is the European sovereign-debt crisis," says Flandro. "Bermuda reinsurers have not been immediately affected on their balance sheets because they are mostly invested in high-grade government and corporate bonds. We are waiting to see what will happen further in the year, but the Bermuda composite should be less affected by any debt crisis than carriers in the European countries in question."

RMS VERSION 11 & SOLVENCY II

The changes embedded in the RMS Version 11 catastrophe model, released in March of 2011, had only a minimal impact last year on the total business of Bermuda reinsurers.

But the impact this year is expected to be far more substantial as RMS Version 11—which significantly increases probable maximum losses for most U.S. property portfolios—is widely implemented and its impact fully accounted for.

The Bermuda Insurance Institute's annual update highlights RMS Version 11 as a "key driver for the first six months of 2012" and notes that reinsurers are starting to see positive effects.

"We have fully implemented the RMS framework both in our pricing and risk-management systems, and it's clearly one of the drivers for rate improvements on U.S. windstorm business," says XL's Veghte.

"It has taken a year for the industry to absorb the full impact, but it should be fully baked by the time we finish our July 1 renewals this year," he adds.

An estimate from Marsh puts the typical change of exposure resulting from RMS Version 11 implementation between plus-50 percent and plus-150 percent for wind losses, with a 20 percent upswing in annual average losses for storm-surge damage.

On the regulatory front, Bermuda's achieving Solvency II equivalency is the issue most currently in the spotlight.

"In Bermuda, the focus is on getting ready for another round of regulatory changes to respond to the original assessment of Solvency II-equivalency requirements," says ABIR in a statement.  

Solvency II equivalency will allow commercial lines of reinsurance to do business on a cross-border basis between Europe and Bermuda without collateral requirements, according to ABIR.

Equivalency also means that the Bermuda Monetary Authority (BMA) will be recognized as the group supervisor for designated internationally active insurance groups and that additional capital requirements in Europe, based on the parent being in a non-equivalent jurisdiction, can be avoided.

In a specially prepared statement for NU, the BMA writes that the European Commission is on track to grant bifurcated equivalence to Bermuda, which will distinguish between the different risk profiles of captives and the commercial sectors. The statement adds that commercial insurers will see "easier access to European Union markets for firms and more efficient, less duplicative regulation." The framework will be fully in place by January 2013.

"While businesses are preparing for this transition, it is still a long way to implementation," Fox says. "One result of the exercise has been that the strength of Bermuda's regulatory infrastructure has become more recognized and respected globally, as more became known about its efficiency. And it doesn't stop there: The Bermuda Monetary Authority has demonstrated a continued commitment to evolve with the times."