ReactionsNet Bermuda Insurance and Reinsurance Market Review 01 February 2012

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1 ReactionsNet Bermuda Insurance and Reinsurance Market Review 01 February 2012 Bermuda s insurers and reinsurers have weathered a torrid 2011 for catastrophes and are now looking optimistically forward to this year, with further price increases and M&A the talk of the island. The island of Bermuda, nestled in the Atlantic Ocean, has had what might be described as an active year, not least for the numerous hurricanes such as Irene, which passed close to the territory. The insurers and reinsurers on the island have been active beyond simply boarding up their windows, however. Following an active renewals season, Reactions spoke to leading members of some of the largest firms in Bermuda to gauge the state of the market at the entrance to Locals say that the Bermudian industry has weathered the storms of 2011 in more ways than one, and although challenges remain it is clear that the industry is hoping for a more peaceful, and positive, year. A mood of cautious optimism seems to have washed over the Bermudian market, with almost all stating that 2012 should prove that the lessons of the past 12 months have been thoroughly learned. I think the industry is very glad that 2011 is over given the tumultuous activity catastrophe and otherwise that we saw, says Bill Jewett, president of Endurance Specialty. With more than $100bn of property cat loss, it was the second most active year in history...so I think there s a sense of relief that we have come out the other side and that there s a new beginning. Jewett says that local firms have been heartened by increases in rates at the January renewals. Although it s clear that some firms would like to see rates rise further, it has been enough to build confidence on the island. As individual companies, many are very positive about their own situation, says Jewett. They re somewhat positive about the market in general as far as their ability to grow and generate appropriate returns for shareholders. I wouldn t say that the market is overflowing with optimism, but it s not negative either. People feel pretty good, particularly about their own space in the market. It s a market that is rational, even though it s not a great market. Over at Alterra Capital, CEO Marty Becker agrees that, while the new year has been greeted with enthusiasm by local firms, market participants are not blind to the potential challenges of the next 12 months. I think the Bermuda market started the year off with more optimism than it started 2011, in that pricing on most all your property business was up meaningfully, he says, suggesting that US property pricing on the whole saw rises of between 5% and 15%. I don t think anybody is singing happy days are here again, but I do think they feel that the market is responding appropriately given the losses that have taken place.

2 Separating the good, the bad and the ugly Catastrophe losses figure heavily in any discussion of the state of play of Bermuda, and it is almost impossible to look forward through 2012 without touching on how severely the island s firms were hit by Clearly, 2011 was a horrific year however you manage it, says Charles Cooper, president and chief underwriting officer at XL Re. There have been various publications that have put the nat cat losses in excess of $100bn, but I think the thing that people miss a little bit is that there really was no region that was immune to that. Cooper stresses that 2011 was not only a year that had continued catastrophe events, but also one in which those events spanned the globe, beginning with flooding in Queensland, Australia before disasters, both natural and man-made, struck on every continent. It started early, it went all year long, it ended late, it hit virtually every region in the world, says Cooper. This has created a challenging marketplace, with a focus on disciplined underwriting renewed in Bermuda. Jewett welcomes the challenge. Unlike the environment going into 2002 and 2003, it s not the type of market where you can go in and be an index player rising with the tide and make a lot of money as long as you aren t irrational, he says. This is the type of market that separates the companies that are focused on underwriting and risk management and are good at it from those that aren t. It s a differentiating market. I think you will see over the next year or two who excels at what they do and who has fallen short. Renewals season has broadly been welcomed, with many Bermudian reinsurers confident about the price rises they have won in property and catastrophe rates globally. The optimism has been strengthened by expected substantial increases for Japanese business in the upcoming April renewals. I think that the mood is positive as far as Bermuda being a domicile for insurance and reinsurance companies, says Guy Hengesbaugh, director at Towers Watson s Bermudian reinsurance business. The island has proven a very disciplined underwriting culture as a whole, which has kept it in very good stead, and we also have a very deep pool of talent. Hengesbaugh cites statistics on the growth of new entrants into the market last year as evidence that optimism about the market exists even under, or perhaps because of, strained financial times.

3 The island is actually set up for a very positive Just working off of the trends from 2011, there were more new companies formations in 2011 than there were in I think there s something like 37 new formations in 2011 including special purpose vehicles, and in 2010 there were 10 or 11, he says. I don t know that we can predict the number of companies that will come into the fore in 2012, but I can say that all indications are that there s plenty of capital in the wings should the appropriate environment present itself. A trickle rather than a flood The presence of capital in the wings is something that few would dispute, but many on the island are less convinced of the imminence of new businesses. Some suggest that it is likely to take the shape of a broader asset strategy, such as Third Point Re, which was formed last year and recently received its first ratings from AM Best. There s only so much appetite for that type of strategy, and frankly, there s only so many funds, like Greenlight or Third Point, that want to be that materially in the reinsurance space, says Becker. I think it s more the exception than the rule. You might see one or two, but you re not going to see a wave of lookalikes. When large catastrophes have occurred in previous years, they have been followed by the emergence of a whole new group of reinsurers. September was followed by the Class of 2001 while Hurricane Katrina prompted the formation of the Class of There had been speculation over a new class emerging following the losses of the past year, but Bermudian firms seem dubious about such a possibility. I don t anticipate another Class of Year, because I believe that most of the resources to start a new operation are already in their seats, says Susan Patschak, CEO of Canopius in Bermuda. Patschak notes that following the entrance of Third Point Re, helmed by former Alterra reinsurance CEO John Berger, and the imminent arrival of SAC Re, led by Simon Burton, formally of Lancashire, there are few capital providers left who would be interested in such a move at this time, though she concedes Hengesbaugh s point. There s always some capital waiting in the wings to take advantage of the really big single event losses, Patschak says. That presence is not necessarily one that is welcomed by reinsurers in a territory that is already rich in capital, preventing rates from rising further. But some suggest that raising funds to enter into the space has proved move difficult of late, limiting the number of entrants. In November there were a number, five or six at least, collateralised cat ILS funds that were out there and actively raising money for the Jan 1 funds renewal and most, if not all, failed to meet that target, says Bill Pollett, senior-vice president at Montpelier Re Holdings. Some of them appear to have thrown in the towel; the others are still trying to get something up and running before the June 1 renewals. It s proving very difficult for start up funds to raise that money no matter what past experience or track record they might have, and from the market s perspective that s a good sign. You don t want a rush of fresh capital ever time you have some loss activity. Outside of new capital entering the Bermudian industry, potential remains for mergers and acquisitions (M&A). Last year included two long-running pursuits involving Bermuda-based firms: Validus and Allied World were both ultimately unsuccessful in their bid to acquire Transatlantic, losing out to

4 US firm Alleghany, while former Flagstone Re chairman Mark Byrne s attempts to purchase Lloyd s underwriter Omega came to a similar end. Opportunities for such acquisitions remain, but much of the industry is trading at or below book value, making potential buyers less flush and potential targets reluctant to sell. I think we re at the stage of the cycle where historically there has been more M&A as effective internal growth strategies are hard to implement. Managements are looking for how to grow and also how to reduce expense, both of which are fairly natural consequence of M&A combinations, says Becker. The challenge is we have never been in a period with so many companies in our space trading below book value, and therefore with limited currency to do M&A. It is likely, nonetheless, that price-to-book valuations will keep M&A discussions at the fore, and Jewett suggests that this may be further driven by the capital within the industry. Are there too many underwriting entities chasing the same risk? Do you know that fundamentally our rates are suppressed because of that, because too much capital is chasing risk? he asks. That would lead me to say that over the next number of months and years some sort of consolidation might make sense. Chris Schaper, president of Montpelier Re, draws a line between conditions that might be conducive to M&A and the reality of a harsher economic climate for all potential participants. My understanding is that there a lot of firms out there that are interested in some M&A, says Schaper. My perspective is that, and I think is kind of being borne out to an extent, they re not really happening. Although there may be interest from different parties to get engaged in some M&A type activities, given the limitations they have with the various forms of currency that may be available, it puts a restriction on what actually can be transacted. That s my perception. There s always something going on and there s always something that s going to happen, but it s not going to be the year of M&A would be the way to put it, says Schaper. Either way, it is likely to be a busy year on the island, but Schaper notes that firms should not be carried away by optimism. He says it is unlikely 2012 will prove to be the insurance industry s equivalent of a pitcher s perfect game. Of course we hope it s a very good loss year. But the reality is that there s always a loss around the corner, the only question is what the magnitude might be, he says. By Mark Sands msands@euromoneyplc.com

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