Hamilton Bound
The flow of capital to Bermuda makes London take notice.
The London insurance market of late is treating Bermuda less like the one to beat, and more like the place to be.
A now-familiar post-catastrophe theme—the flow of capacity into Bermuda—has London players taking more notice than usual as some of their own line up to deposit capital on the island's welcoming shore in the wake of the 2005 hurricane season.
London-based reinsurance broker Benfield Group Ltd. outlined Bermuda's appeal to capital providers in Shaken and Stirred, a report issued in March 2006. The document, part of Benfield's quarterly series on the Bermuda market, recounted how the island's reinsurers lost $11.3 billion on hurricanes Katrina, Rita and Wilma and suffered a net 2005 loss of $2.8 billion. This compared with a profit of $5.5 billion in 2004. Benfield also noted an influx of capital to take advantage of perceived market opportunities. All told, the report said, "$18.4 billion of new capital flowed into Bermuda after Hurricane Katrina."
Lloyd's underwriter Hiscox plc formed Hiscox Bermuda, a reinsurer to be backed with $500 million in capital. Fellow Lloyd's insurer Amlin plc launched reinsurer Amlin Bermuda Ltd. with $1 billion in capital. Amlin supported its venture with a fully underwritten rights issue of £224 million, about $391 million.
Talent on Tap
The new London money in Bermuda suggests a high comfort level. Readily available, London-based expertise that could move quickly to Bermuda gave both Hiscox and Amlin confidence they would be ready for the January 2006 renewals.
Robert Childs, chief executive of Hiscox Bermuda, cited the depth of Hiscox's management. He could go and launch the operation because he had an able deputy in London. "It's a market," Childs said when asked why Hiscox chose Bermuda. "We have to be close to the U.S. market."
Amlin Bermuda's managing director is Stuart MacKellar, a veteran of the Bermuda market who also was an accountant in the United Kingdom. John Andrews, Amlin Bermuda's underwriting director, previously was Amlin's proportional treaty underwriter and Amlin Credit's syndicate underwriter. He has spent more than 25 years in the London market.
In a statement, Amlin Chief Executive Charles Philipps said Amlin Bermuda would "fulfill our strategic objective of establishing a strong underwriting platform outside the Lloyd's market, which will both support and complement the activities of [Amlin's] Syndicate 2001." Philipps added that hurricane-induced premium increases in the market made the timing for the move "opportune."
Childs, also chief underwriting officer of Hiscox plc, said Katrina gave Hiscox the opportunity to do what it already had intended. Hiscox is familiar with Bermuda, having done business there since the early 1990s, Childs noted during an interview in his London office.
Hiscox also was tracking trends in the market. "So many of our peer competitors are based there, and they have a commercial advantage by being there," Childs said. "So we have to be."
Bermuda is central to Hiscox's long-term strategy: Delist from the London Stock Exchange this year, move the financial head office to Bermuda, then relist from Bermuda back onto the London exchange. "What it does, is it puts all of our capital instead of part of our capital in a less onerous tax environment," Childs said. "We'd still be listed in the U.K. And all the people would stay here. It's just the corporate headquarters would move to Bermuda."
Roman Cizdyn, an analyst at Oriel Securities in London, bluntly assessed Bermuda's appeal to London money. "Tax," he said. "That's it. Finished. Next question."
Amlin Bermuda, which began operating Dec. 1, 2005, is targeting catastrophe reinsurance in the United States and beyond. Amlin is looking for $350 million in premium income in 2006 and $500 million in 2007.
In an earlier report on Bermuda, Benfield noted the second half of 2005 reversed the first-half pattern of returning profits to investors. The new capital came from such varied sources as "private equity funds, hedge funds, public subscription and existing corporate financial resources," Chris Klein of Benfield's industry analysis and research team wrote in this report.
"Balance sheets have been replenished and the new funds provide extra capacity to established and new companies wishing to exploit the expected hardening of the market," the earlier Benfield report said.
Bermuda-based companies also have become prominent members of what has been dubbed the "Class of 2005"—a group that joins the 1992 start-ups spawned by Hurricane Andrew and the 2001 formations that followed the terrorist attacks on the World Trade Center. New capital has come from such organizations as Ariel Holdings Ltd., XL Capital Ltd., Aspen Insurance Holdings Ltd. and Lancashire Holdings Ltd. New entrants in Bermuda include Validus Reinsurance Ltd. and Harbor Point Re Ltd.
Ease of Entry
Charles Coyne, an insurance industry analyst at KBC Peel Hunt in London, said Bermuda challenges Lloyd's with its appeal to transient capital and its ease of establishing companies. "My view is that Bermuda is still a magnet for capital, particularly on the property reinsurance side," Coyne said.
A decade ago, Coyne said, Bermuda did a fraction of the amount of business Lloyd's did. Today, he said, the opposite is true.
"I think the trend is pretty clear," Coyne said. "It might be the case that old Europe is happy to set up in Bermuda [and that] the U.S. is happy to set up in Bermuda."
Coyne also pointed to some well-publicized problems that have affected Lloyd's: the expensive failure of Kinnect, its electronic communications initiative; and its legal battles with Swiss Re and brokers Benfield and Aon over its Central Fund.
But Bermuda isn't a cheap option, Coyne said. Start-ups have launched with as much as $1 billion, more than would be needed at Lloyd's, Coyne said. "I think Bermuda is a market where scale counts," he said.
Acknowledging Bermuda's ability to attract prodigious capital quickly, the U.K. Financial Services Authority has signaled willingness to speed its own authorization process "in response to market needs at times of pressure."
Threat Assessment
London-based reinsurers that have developed an interest in Bermuda tend to reject any suggestion that the movement of capital to the island threatens the London market. Bermuda may do business such as catastrophe risk very well, but they note that the island can't support staffing to match London in such areas as aviation and syndicate risk. Lloyd's itself is apt to note Bermuda's role in providing reinsurance back to London. "Munich Re is in every country of the world" without people suggesting a threat to Munich, Childs said.
Reinsurance doesn't make heavy demands on labor, Childs said. "We wouldn't run our insurance businesses from Bermuda," he said.
Simon Sperryn, chief executive of the Lloyd's Market Association, which represents Lloyd's underwriters, said he doesn't regard the flow of capital to Bermuda as threatening London. But he does see it as a warning to the London market to "sharpen up, to understand the reasons for it and to be more concerned that London should be more attractive and competitive."
Sperryn was pleased by the FSA's indication that it may accelerate its approvals process. He also would like the London market to reduce costs, improve efficiency and produce better returns for investors. In Sperryn's view, Bermuda offers three advantages: a light and speedy regulatory system; tax benefits; and a large flow of business. Sperryn said he wasn't troubled by the decision of major global players to invest overseas. "That's what global leaders do," he said.
Bermuda's speedy approvals process was especially important, Sperryn said, for organizations striving to line up new capital during the period after the major hurricanes and before the renewal season. "For people who need to make a move to capture a commercial wave, then [Bermuda] is an attractive place to do it," he said.
Bermuda's tax regime is a tangible but overestimated benefit, Sperryn said. The advantage depends on a group's overall tax position, he said. And the amount of business passing through Bermuda makes it impossible to ignore, Sperryn suggested. "Companies who are leaders in their field will want to have a presence in Bermuda," he said.
Paul Markey, chairman and CEO for reinsurance at Aon (Bermuda) Ltd., said the recent appearance of London capital in Bermuda "continues a trend that we've observed for probably the last four or five years."
Markey cited the earlier arrival of Aspen Insurance Holdings Ltd. and Catlin Group Ltd. "And probably most noticeably, quite a few of the executive-level folks and specialist underwriters are originally Lloyd's of London trained and produced," he said.
Markey brings a wide perspective to Bermuda's "high-severity, low-frequency" market. A U.K. native, he moved to the United States in 1982 and then to Bermuda in 1994. He said he's seen enormous changes in the depth and breadth of the Bermuda market over 12 years.
Bermuda shouldn't be seen as threatening London, Markey said, but rather as part of a healthy international competition for capital and business. Bermuda is one of four hubs for international reinsurance, alongside London, continental Europe and the United States, Markey said. "For some of these guys, having a Bermuda business just makes sense, in addition to their Lloyd's business," he said.
Bermuda offers sympathetic regulation, a highly professional working environment and a pleasant lifestyle, Markey said. Commutes are short and beaches are handy. But "it's an island and quite a small one," he said. High infrastructure costs mean that deals tend to be bigger and involve fewer people. But this also yields high revenue per headcount, Markey said.
Caroline Foulger, Bermuda-based partner in the commercial insurance group of PricewaterhouseCoopers, agreed that the speed of the process in Bermuda smoothed the arrival of new capital. She also pointed to pressure from rating agencies for organizations to be amply capitalized. In terms of its quickness, Foulger said, "Bermuda is in its own category right now."
London-based organizations may view Bermuda as a market in which they can diversify some of their capital, Foulger said. But she warned that Bermuda's tax advantages only accrue to companies that make underwriting profits. By contrast, she added, London insurers can offset losses against future profits.
Hiscox's Bermuda operation can accommodate "pipelines from our other offices around the world to take the business back to the Bermuda capital base but without necessarily having to have the people there," Childs said.
Childs described Bermuda as one of the few places where it's possible to establish a reinsurance company quickly. "It seems to me that part of the business plan of Bermuda is to encourage people to go there," he said. "It doesn't mean that their regulation is less. It just means they don't snow you with reasons why you can't do it."
Hiscox's capital, of $500 million, is the "right amount of money" for Hiscox, Childs said. In the 1980s and 1990s, he said, a business could start with as little as $50 million. Now, 10 times that amount is necessary, he said. Had Hiscox decided to raise more money in equity, it would have had to consult its assembled stockholders and would have missed renewal season.
Childs, who shuttles between London and Bermuda, expects to spend less time on the island as the operation takes hold. Childs also is chairman of U.S.-based Hiscox Inc., a new managing general-agent headquartered in Armonk, N.Y.
Hiscox's global business, run from Lloyd's, draws most of its revenue. "This is where the camels come," Childs said of London. "This is where business has been coming for a long time."
Hiscox transferred five people, including Childs, to Bermuda from London and has recruited four local people. "We had no trouble getting volunteers to go there," Childs said, noting that the plan, as with Hiscox's other international operations, is eventually to put locals in charge.
Bermuda is regarded as a good platform to reach Hiscox's high-net-worth customers in the United States. The Far East, another possible option, is perhaps a generation away from having such a concentration of personal wealth, Childs said.
Hiscox has rented a back office in Bermuda. And Childs has been surprised at how smoothly the launch has gone. "We've been helped by the class of '93 and the class of 2001," he said. "So by coming along in 2005, we didn't have to invent it."
Learn More
Hiscox Insurance Co.(Bermuda) Ltd
A.M. Best Company # 78142
Distribution: Brokers and direct
Amlin Bermuda Ltd.
A.M. Best Company # 78117
Distribution: Brokers
For ratings and other financial strength information about these companies, visit www.ambest.com.
By Robert O'Connor, London editor
