BERMUDA'S ROLE as a pre-eminent jurisdiction for reinsurance has long been established, and Bermuda is now considered to be one of the three largest jurisdictions for insurance and reinsurance, and, more significantly, the reinsurance capital of the world. the size and role of the Bermuda insurance and reinsurance market is epitomised by the value of its aggregate capital and surplus (US$185 billion in 2011) and total assets (US$524 billion in 2011), no small feat for a remote island in the middle of the Atlantic of only 21 square miles.
The Bermuda reinsurance market has attracted capital in the form of new large and highly capitalised commercial Class 4 startups, writing primarily property catastrophe and casualty reinsurance since the early 1990s, with each wave of startups resulting from a shortage of capacity following catastrophic events. The start ups of the most recently established Class 4 reinsurers in 2011 and 2012 in the Bermuda market are somewhat aligned to this theory in that their establishment likely has some correlation to the catastrophic losses incurred in the industry in 2011.
Many have categorised 2011 as the worst year for cat losses experienced to date, when US$110 billion worth of losses were incurred and reinsurers were experiencing combined ratios in excess of 100 per cent. However, it is not necessarily the case that the 2011 losses created a capacity shortage even in the soft market currently being experienced. For these reasons and others, a new genre of large property catastrophe and casualty reinsurers comprising three new Class 4 reinsurers and at least one Class 3B reinsurer having been recently formed in Bermuda.
Emergence of Hedge Fund Backed Reinsurers
The twist in the tale for the new genre of highly capitalised Bermuda property catastrophe reinsurers such as third Point Re, SAC Re, AQR Re and PaCRe is the form of their sponsors or investors. Each of these large reinsurers established following the cat losses in early 2011 have been formed either entirely or mostly comprised of hedge fund investment and with a platform for all of their reinsurance assets to be invested by their well reputed hedge fund backers or asset managers. the expectation for this new class of hedge fund established reinsurers or convergence reinsurers is that the experience and investment returns which the hedge fund or asset managers are accustomed to obtaining will provide strong investment income for the reinsurers, thus equalising their balance sheets and taking some pressure of the underwriting constraints that they are otherwise facing in a soft market.
The reinsurance companies which traditionally realise a significant portion of their earnings from investment income have struggled in recent years to maintain prior levels of investment income as a result of the financial crisis, poor stock markets and the global economic crisis. the emergence of the hedge fund backing for these new reinsurers as initial start up capital, and the corresponding anticipated investment management and returns on their collateral and assets in such an alternative investment strategy is therefore expected to augment the returns and margins for this new class of reinsurers, or, at a minimum, reduce the pressure on the underwriting side in the current soft market.
Whilst it is not a new phenomenon for hedge funds to invest in insurance and reinsurance companies and structures, it is fairly unusual to see these hedge funds as the founders and sole backers for their own structures, occasioning the hiring and establishment of veteran reinsurance underwriters, actuaries and senior management teams. It is also not entirely surprising that the hedge fund market has begun to comfortably settle itself in the reinsurance space given their cash rich nature and the opportunity for them to experience returns which are un-correlated to market and global economic conditions.
The relative expediency with which the hedge fund industry veterans have entered the Bermuda reinsurance space has been somewhat surprising though and is an interesting trend to follow. Notably many of the CEOs of this new wave of convergence reinsurers have spoken publicly on why Bermuda has been the jurisdiction of choice for their reinsurance platforms, for which they cite the established and well respected jurisdiction and its regulatory environment, including the international respectability of the Bermuda Monetary Authority, the pool of reinsurance expertise and professionals and the geographic location of the island.
Insurance Linked Securities and Catastrophe Bond Market
A further emerging trend which Bermuda has reaped the benefit of in the insurance linked securities space is the catastrophe bond or cat bond market. Whilst cat bonds have been used in the industry for many years, it is clear that the Bermuda cat bond market has been growing exponentially in terms of its creation and issuance of catastrophe bonds, with those that are listed on the Bermuda Stock Exchange now totaling just under US$4.35 billion in value. the Bermuda Stock Exchange doubled the value of its insurance linked securities listed (primarily comprised of cat bonds) in just under a year to July 2012.
With the introduction, through legislation initiated by the Bermuda Monetary Authority in 2009, of a special category of insurer, termed the 'special purpose insurer,' the development of the insurance linked securities market in Bermuda, and in particular the cat bond market, was facilitated through ease of capitalisation and regulation. Indeed 2011 saw a flurry of special purpose insurer formations, particularly following the first quarter's catastrophic events, with 21 of the total 23 special purpose insurers being formed in the second, third and fourth quarter of the year, the largest majority of which will have been used for the issuance of cat bonds. To the end of May 2012 ten additional special purpose insurers had been created on the island clearly evidencing the emergence of the insurance linked securities market and in particular Bermuda's continued growth as a domicile of choice for the issue of cat bonds.
Bermuda now provides approximately 20 per cent of the value of the global cat bond market, a feat which it has achieved within a very small timeframe. It is expected that Bermuda's cat bond market will continue to grow at accelerated rates as it becomes more and more the domicile of choice for these products given Bermuda's flexible regulatory regime and the ease and speed to market which is imperative for cat bond transactions. Bermuda, and in particular the Bermuda Monetary Authority, continues to adapt its infrastructure to facilitate the growth of such emerging markets whilst the latter balances its role as regulator of the insurance and reinsurance industry in Bermuda. A recent example of this would be the reduction, by close to half, of the licensing fees for special purpose insurers, which are now set at US$6,000 per annum.
Latin American Markets
The Bermuda reinsurance marketplace is also benefiting from some increasing interest originating in the Latin American market, although typically the interest comes in the form of captive creation and use rather than the commercial reinsurance sector. With Bermuda now having signed a number of tax information exchange agreements (TIEA) with Latin American countries, the interest in the Bermuda reinsurance market and in particular captives continue to evolve. Notably Mexican tax regulations that took effect in January 2011, introducing the full benefits of the TIEA signed between Bermuda and Mexico in October 2009, paved the way for the revival of certain Bermuda dormant captives and a number of large Mexico corporations which are now considering Bermuda as their jurisdiction of choice for the establishment of a captive. In addition Panamanian and Colombian companies, including certain state or nationalised companies, have established captives in Bermuda, and the expectation is that the Latin American market will continue to increase and develop its interest and standing in the Bermuda insurance and reinsurance market.
Above all it is clear that Bermuda continues to grow and expand its reinsurance market, particularly in non traditional sectors, with an increased focus on the insurance linked securities sector and all of the products and markets that this segment entails. Bermuda's strong regulatory environment, including its operative target of achieving Solvency II equivalency, its intellectual capital, cost competitiveness and ease and speed to market, make it a jurisdictional industry leader in the field of reinsurance and it is easy to see why Bermuda has become the domicile of choice for reinsurance, not only over the last several decades, but also in relation to the development of new significant capital start ups and insurance linked security products.
Originally published in IFC Caribbean Review 2012.
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