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Has Bermuda Lost its Class?
For years, the $64 billion question has been: Would the next great wave of major insurance and reinsurance companies be formed in Bermuda, as was the case in 1993, 2001 and 2005?
The default answer has been, "Yes." Speed to market is compelling when demand for new capacity peaks. The right people with clean money and impeccable track records can be underwriting in Hamilton within a week of applying. It takes months in London and forever in the United States. Has that changed? Following some epic disaster, would we see a new "class" of six to 12 reinsurers opening shop in the mid-Atlantic, bringing new billions to the rescue? No, we wouldn't. I'll explain why in a moment.
Several reinsurers, unable to use all of their own capital, have formed partnerships with hedge funds, and a number of new Bermuda companies has been established in the past year. The product they sell is called insurance linked securities (ILS). (The hyphen has been shed, as have the apostrophes, infuriatingly, in directors and officers coverage). We wouldn't see a Class of 2012 or 2013, because the traditional reinsurance company is apparently a busted play, from the investor's point of view. Shares in established firms doggedly trade at less than book value. Why raise $3 billion to create a company worth much less than that, which can neither make an underwriting profit in this soft, soft market nor earn interest in a zero-rate environment? An ILS is a different kettle of how's your father. The term includes sidecars, cat bonds and other special purpose vehicles, most of them fully collateralized and time-limited (three years or less). They underwrite very specific risks, largely catastrophe-related. The underlying assets, in many cases, are supplied and managed by hedge fund guys. The reinsurers bring the risk and its management to the table, and earn uncorrelated income such as commissions and fees to add to their share, rarely more than 20 percent, of the vehicle's profitability. Lack of correlation is the name of this game. That's the lure for the non-hedge fund investors, too, who assume risks the balance of their portfolio isn't taking. (Some of us think that has the tang of hooey, since big money is cross-invested in everything.) A good proportion of these new vehicles are parked in Bermuda. The reinsurers are there in force; the hedge funds are also represented. Equity investors are everywhere and nowhere, baby. The Bermuda Stock Exchange will wrap the deal up by listing the security on its electronic board, and away you go. One cannot, of course, have insurance linked securities without insurance. What's going on is reinsurance desperate to do business and hedge fund guys who never met a dollar they didn't like. Hedge fund guys is the collective noun, although calling them "an irritation" also works. ROGER CROMBIE is a London-based columnist for Risk & Insurance®. He can be reached at riskletters@lrp.com. July 24, 2012 Copyright 2012© LRP Publications |
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