DocHdl1OnPTR1tmpTarget - PwC

NEW YORK’S CHANGING LANDSCAPE Bermuda insurers are heavily involved in providing coverage forthe planned new World Trade Center in New York City. Page 7

BRIAN’SBIG NEWCHALLENGE

ALL THERESULTS &ANALYSIS

REINSURERS’UPBEATOUTLOOK 1

17BERMUDAINSURANCEQUARTERLY© 2008 Bermuda Media in association with

A p r i l 2 0 0 8

Q419056D_BIQ.qxp:19056D_BIQ 3/20/08 5:50 PM Page OFC1

Fifteen minutes of fame is all that most of us can

expect. IPCRe is proudly celebrating 15 years of being

famously focused on property catastrophe excess

of loss reinsurance. Our clients appreciate specialist

advice, common-sense solutions, and exceptional

service. We appreciate their business, and we work

hard to deserve it. In our business, that’s the art.

IPCRe. 15 years of appreciation.

www.ipcre.bm t: +1 441 298-5100 f: +1 441 292-8085 e: [email protected]

19056D_BIQ.qxp:19056D_BIQ 3/20/08 1:00 PM

“Although our premium vol-ume is down, we are pleasedwith the results of our January1 renewals and have con-structed an attractive portfo-lio of business for 2008. Wewill maintain our underwrit-ing discipline, focusing onprofit rather than premium volume.”

— Renaissance Re CEO Neill Currie

“All areas of the Companyperformed well, and thefinancial markets crisis had arelatively modest impact onour results. For the year, weachieved record net incomeand net operating income,which increased 12% and15%, respectively, while book value per shareincreased 16%. Looking ahead, we are well posi-tioned to manage through an increasingly difficultenvironment marked by continuing volatility inthe financial markets, deteriorating economicfundamentals and a softening property and casu-alty market.”

— ACE Chairman & CEO Evan Greenberg

“Our disciplined underwritingcontinues to be supported bysignificant investment returnsand our strong balance sheet.Collectively, these factorsresulted in our generating animpressive operating incomeROE of 22% for 2007 despitethe challenging market conditions. Additionally,our diluted book value per share grew by over 20%during the year even as we acquired Allied Worldstock from one of our founding shareholders.” — Allied World President & CEO Scott Carmilani

“The past year was very successful for Enduranceon many fronts. Financially, we generated recordearnings driven by strong underwriting andinvestment results. We returned over $375 millionof capital to our shareholders through sharerepurchases and dividends and our financialstrength rating was upgraded to A by AM Best.Strategically, we continued to expand our expert-ise through the hiring of several seasoned special-ty underwriting teams and acquired ARMtechInsurance Services, Inc.”

— Endurance Chairman & CEO KennethJ. LeStrange

BERMUDA INSURANCEQUARTERLY

EditorRichard Whitaker

Art DirectorPaul Shapiro

Contributing EditorChris Gibbons

Director of MarketingLissa Fisher

PublisherIan Coles

Published by Bermuda Media, Suite310, The International Centre, 26Bermudiana Road, Hamilton HM 11,Bermuda. Postal address: PO Box HM2032, Hamilton HM HX, Bermuda. Tel:292-7279 Fax: 295-3189 Email:[email protected]. Web: bermudamedia.bm.Printed in Canada.

Published four times a year in associa-tion with PricewaterhouseCoopers.

Bermuda’s reinsurance sectorgets a generally positive out-look from rating agency Fitch

in a new special report.Bermuda Market Review is the

first of what the agency says will bepart of its increased commentaryon the Bermuda market. Thereport also introduces Fitch’sBermuda market aggregate index,a group of Bermuda-based reinsur-ers that are important componentsof the Bermuda reinsurance mar-ket, and provides Fitch’s first dis-cussion of a separate RatingOutlook for the Bermuda market.

The March 3 report states thatBermuda continues to develop as athriving domicile for (re)insuranceorganisations, thanks to an attrac-tive regulatory and tax environ-ment, an accumulation of invest-ment capital and underwriting tal-ent, and innovative approaches torisk management.

However Fitch noted: “Thoughthis market has enjoyed this

tremendous operating success inthe past two years, Bermuda rein-surers will face significant pressureon profitability going forward asproperty/casualty insurance pric-ing continues to trend steadilydownward. Key near-term chal-lenges facing the Bermuda marketinclude managing the executionrisk derived fromexpansion strategiesadopted by somemarket participants,coping with the mar-ket’s unique infra-structure challenges,and retaining finan-cial and competitiveadvantages derivedfrom the island’s tax status.

Fitch believes that Bermudareinsurers’ capital managementprowess will be tested over the nextfew years as they strive to profitablydeploy their capital, or decide toreturn capital to shareholders andrisk reducing their cushion against

unforeseen volatility.The agency is maintaining a

stable outlook on the Bermudamarket, reflecting its belief thatmost rating actions over the next12-18 months are likely to be affir-mative and that the number ofupgrades and downgrades are like-ly to approximate each other.

It says the marketˇfaces additional chal-lenges regarding infra-structure and main-taining its tax advan-tage.

“Attracting quali-fied personnel to Ber -muda is challengingbecause of the myriad

of issues associated with living on a21-square-mile island 650 milesfrom the US coast,” states thereport. “Additionally, finding suit-able and affordable family housingcan be difficult given the dynamicsof the Bermuda real estate mar-kets. Moreover, obtaining work

permits required for non-Bermud -ians can be a difficult and lengthyprocess. In the aggregate, Fitchbelieves that these issues representcompetitive challenges forBermuda-domiciled (re)insurers.

“Historically, Bermuda’s infra-structure was sufficient to enableBermuda reinsurers to overcomethese obstacles in an economicmanner. Fitch continues to believethat this is the case for Bermudareinsurers’ senior managementand, to a lesser extent, for keyunderwriting staff. However, theBermuda market’s rapid growthsince 2005 has strained the coun-try’s infrastructure to the pointwhere it is increasingly difficult tojustify the economics of conduct-ing back-office and ancillary oper-ations on the island. In response,several reinsurers have decided toconduct such functions in loca-tions other than Bermuda, andFitch expect this trend to continuefor the foreseeable future.”

THE QUOTES OF THE QUARTER

V o l u m e 4 , N u m b e r 2A p r i l 2 0 0 8

Fitch releases new Bermuda report

[ 1 ]

UPBEAT OUTLOOK FOR ISLAND’S REINSURERS, BUT WARNINGS OF PRESSURE ON FUTURE PROFITABILITY

‘The market’srapid growthhas strainedthe country’sinfrastructure’

19056D_BIQ.qxp:19056D_BIQ 3/20/08 12:03 PM Page 1

NEWS REVIEW

Troubled Bermuda-based lifeinsurer Scottish Re says it plansto sell off some of its business

and seek strategic alliances as themortgage crisis continues to batterits investments.

The company says it will try tosell some of its smaller businesses,including its International LifeReinsurance division and thewealth management unit, andattempt to strengthen its main lifereinsurance business in the US andCanada by tracking down strategicalliances or “other means.”

Scottish Re announced inAugust that it had more than $2billion of securities backed by sub-prime mortgages and $1 billion ofAlt-A mortgage-backed securities.The crisis had already led toalmost $100 million of unrealised

losses at that point. The situationhas worsened since then andScottish Re’s shares have slumped.

Standard & Poor’s downgradedScottish Re to BB on January 31,and placed the ratingson Credit Watch withnegative implications.Scottish Re said sim -ilar actions by otherrating agencies wouldmake it difficult toachieve its goal ofrestoring its ratingto at least A– by themiddle of 2009 and“its ability to growits life reinsurance businesses andmaintain its core competitive capa-bilities”.

On February 21, a SpecialCommittee formed earlier this

year to evaluate strategic alterna-tives by management, recommend-ed that the Board accept therevised business strategy.

In a statement, the companysaid: “The Board un -animously adoptedthe Special Comm -ittee’s recommenda-tions and the Com -pany will now activelypursue the foll owingkey strategies:

“Pursue disposi-tions of the Com -pany’s non-core assetsor lines of business,

including the International LifeReinsurance segment and theWealth Management business;develop, through strategic alliancesor other means, opportunities to

maximise the value of the compa-ny’s core competitive capabilitieswithin the North American LifeReinsurance segment, includingmortality assessment and treatyadministration; and rationalise thecompany’s cost structure to pre-serve capital and liquidity.”

The company added: “Therecan be no assurance that any ofthese key strategies will be success-ful and each of them may be sub-ject to review by insurance regula-tors. The company will report fur-ther developments regarding anystrategic actions only as circum-stances warrant.”

It also said it had established aprogramme of financial incentivesdesigned to persuade essentialemployees to remain with thecompany.

Scottish Re reels over mortgagesUNCERTAIN FUTURE AS COMPANY’S RATINGS ARE DOWNGRADED

[ 2 ]

‘There is noassurancethat any ofthese keystrategies

will be successful’

OBM InternationalWoodbourne Hall1 Gorham Road Hamilton HM08Bermuda

T 441 295 5137E [email protected] www.OBMI.com Antigua • Bath, UK • Bermuda • British Virgin Islands • Cayman Islands • Madrid • Miami • Trinidad & Tobago • Turks & Caicos Islands


NEWS REVIEW

Billionaire backs Assured Guaranty$1BN VOTE OF CONFIDENCE IN BERMUDA-BASED BOND INSURER

[ 3 ]

Leading financier Wilbur Rosshas given the troubled bondinsurance market his backing by

agreeing to invest up to $1 billionin Bermuda-based bond insurerAssured Guaranty Ltd.

In a February 29 announce-ment, New York-based investmentfirm WL Ross & Co. said it wouldpurchase $250 million worth ofcommon stock and commit tobuying an additional $750 millionin shares at the company’s option.

Many bond insurers have strug-gled due to the sub-prime mort-gage crisis and their all-importantcredit ratings have come underpressure. Assured is one of onlytwo that have managed to retainAAA ratings from all three majorcredit agencies, and its municipalbond business quadrupled inDecember and January.

Analysts say Assured Guarantyand Dexia SA’s Financial SecurityAssurance Inc. avoided much ofthe losses because they didn’texpand as rapidly into guaranteeson subprime-mortgage securitiesincluding collateralised debt obli-gations. Even so, Assured reporteda $260.1 million loss for Q4 2007after a drop in the value of securi-ties it guarantees.

Bloomberg said that Ross’sinvestment would provide Assuredwith the capital to win marketshare from its larger rivals MBIAInc. and Ambac Financial GroupInc. which have been losing busi-ness as they struggle to raise moneyto retain their AAA ratings.

In a company statement, Rosssaid: “We believe that Assured hasan excellent opportunity duringthis time of uncertainty in thefinancial markets to provideinvestors with credit enhancementproducts in both the public andstructured finance markets. Welook forward to a long and prof-itable association with Assured.”

Assured’s President and CEODominic Frederico said: “We areextremely pleased that WilburRoss has chosen Assured as his

preferred investment vehicle in thefinancial guaranty industry. Thisflexible capital source will allow usto continue to capitalise on the sig-nificant growth opportunities wesee, and will support our furtherexpansion in both the direct andreinsurance markets.”

Bond insurers are under in -creased scrutiny as ratings on

CDOs (collateralised debt obliga-tions) they guarantee have beenslashed amid record rates of USforeclosures and house price falls.Analysts estimate banks could loseas much as $70 billion on insureddebt they own if the ratings ofbond insurers are cut. MBIA saidthat it was writing very little busi-ness and had sold off more than $1

billion of common shares to wardoff a ratings downgrade. Its insur-ance unit also sold $1 billion innotes to help bolster its capital.

Ross’s investment may indirect-ly help the other troubled bondinsurers because by insuring secu-rities already guaranteed by rivals,Assured Guaranty would helpthem free up capital.


NEWS REVIEW

RenRe behind latest Disney attractionREINSURERS HIGHLIGHT SEVERE WEATHER RISKS IN NEW STORMSTRUCK EXPERIENCE

[ 4 ]

Move over Thunder Mountain,Bermuda-based reinsurer Ren -aissance Re is one of the com-

panies behind a new Disneyattraction.

Scheduled to open in late sum-mer, “StormStruck: The Tale ofTwo Homes,” at INNOVENTIONS atEpcot at the Walt Disney WorldResort, will give visitors a taste ofwhat it’s like to be in a hurricane

— and raise awareness about riskresearch and recommendations forreducing homeowners’ risk.

StormStruck is being puttogether by RenRe and its USaffiliate WeatherPredict Consult -ing Inc. with the non-profitFederal Alliance for Safe Homes,Inc. (FLASH), State Farm andSimpson Strong-Tie. RenRe saysStormStruck will “combine experi-

encing what it feels like to be insevere weather, with learning aboutthe associated risks and ways toprotect the home in an interactiveand entertaining setting.”

The INNOVENTIONS attraction,located in the heart of Epcot, ismore than 100,000 square feet ofhands-on, interactive exhibitsabout innovations that improvepeoples’ lives and expand their

horizons. The weather-relatedexperience will be located inINNOVENTIONS East, one of twobuildings in the pavilion at Epcot.

Neill Currie, RenRe’s CEO,said: “Understanding severeatmospheric hazards and vulnera-bility has been central to ourbusiness since our founding. Ithas been a natural extension ofour philosophy, over time, toincrease our focus on developingloss mitigation technologies, notonly to reduce the severity of thefinancial impact of storms on ourclients, but ultimately to enablepeople to make themselves, theirfamilies and their businessessafer.

“We are delighted to join forceswith our partners in theStormStruck experience to shareimportant information on how toprotect communities from severeweather storms.”

Craig Tillman, President ofWeatherPredict Consulting Inc.,said: “A critical component of min-imising both loss of life and prop-erty damage in a hurricane is tobetter understand the impact ofthese storms on our buildings.RenaissanceRe demonstrated adesire to lead by example with thelaunch last year of the Ren -aissanceRe Wall of Wind hurri-cane safety testing facility inFlorida. StormStruck represents awonderful opportunity to furtherthe risk mitigation effort in anexciting, entertaining way.”

RenaissanceRe has been inves-tigating the damage patterns andeconomic impact of catastrophicstorms for several years.WeatherPredict Consulting Inc.leads the company’s hurricane riskmitigation efforts, which havebecome an increasingly importantcomponent of RenaissanceRe’sbusiness strategy.

In 2007, the ground-breaking“RenaissanceRe Wall of Wind”testing facility was launched, inpartnership with the InternationalHurricane Research Centre atFlorida International University.

UNLEASHIMAGINATION.

Coverages underwritten by one or more of the ACE Group of Companies. Not all coverages available in all jurisdictions.

Let ACE take on the responsibility of risk. Our expert underwriting, superior claims handling and local market experience free you to focus on the possibilities, not the liabilities. Learn more at insuringprogress.com

MAKE PROGRESS.MAKE PROGRESS.

PROPERTY & CASUALTY ACCIDENT & HEALTH L IFE


Finance Minister Paula Cox’sBudget got a lukewarmresponse from Bermuda’s inter-

national business sector.The Association of Bermuda

International Companies (ABIC)— whose members include theIsland’s leading (re)insurance com-panies — was broadly supportiveof Budget measures to assist a larg-er cross-section of the communityin vital areas such as education,housing and transport, but ex -pressed concern about the growthof Government expenditures anddebt loads, and theadditional taxes im -posed on businessesto support them.

In a statement,ABIC noted thatwhile increased taxesto their memberswere supporting gov-ernment initiatives,the Budget failed to address theirspecific needs such as streamliningthe work permit process.

In her Budget statement, MrsCox said: “Financial services con-tinued to be the leading contribu-tor to the growth of the nation’seconomy. This was especially trueof international business. This sec-tor expanded by four per centwhile generating an additional 198jobs.”

ABIC chairman David Ezekielsaid: “That’s simply a statement offact. What we were looking for wasthe follow on: ‘… and because theyare so important, we’re doing A, Band C’. We just didn’t see that sec-ond piece. There was no indicationthat this sector, which is so impor-

tant to them, is at the top of theirthoughts. The Budget is an annualreport of the Government and assuch the Government should reas-sure its biggest customer thatthings are being done for them.”

Mr Ezekiel said his membershad wanted to see a maximumfour-week turnaround for workpermit applications. “There hasbeen some improvement of latebut we were looking for reliablebenchmarks so that we can planaccordingly. It’s not just work per-mits but temporary permits where

people are starting upa company. These areessential in the earlyperiod before all staffare in place.”

ABIC is also un -happy about anotherincrease in payroll tax.The standard rate forbusinesses with annu-

al payrolls of $1 million or more,and on exempted companies, willincrease from 13.5% to 14% in2008/09, although the salary capwill remain at $350,000. The lowerrates of payroll tax for small andmedium sized businesses, willremain unchanged, as will theemployee portion of the payrolltax, currently at 4.75%.

Bermuda-registered companiesalso face a 6.5% increase in compa-ny fees, applicable from April 1,2008. According to Mrs Cox, thismeasure will raise an additional $2million in revenues, that willensure that the government has“the necessary financial resourcesto address improvements to ourregulatory framework”.

She added: “The cost of main-taining the good name ofBermuda’s company registry con-tinues to increase. We have alwaysprided ourselves on effective gatekeeping powers. We must continueto enhance that and to ensure thatwe have the necessary resources.There have been instances ofaction, and in tandem with thework that the independent regula-tor is undertaking, we inGovernment also have to ensurethat we have the necessary finan-cial resources to address improve-ments to our regulatory frame-work.”

Mr Ezekiel noted: “Payroll taxhas now become the single majorexpense for many companies in theInternational Bus iness and localsectors. Especially hard hit bythese increases are the ‘servicecompanies’ in each of these sectors,whose major expense has alwaysbeen payroll. Service companiesare the lifeblood of any economy,and we would ask Government toensure that these businesses are

encouraged to grow.”Failure to do so, he said, would

lead to an increase in outsourcingto other, cheaper countries. Facedwith rising local costs, a growingnumber of Bermuda companies areusing improving technology tooutsource everything from claimsand IT to catastrophe modeling.

He said: “ABIC has previouslywarned that the move to outsourc-ing will start to have a majorimpact on entry level job opportu-nities for Bermudians in the inter-national sector, which is to beavoided at all costs.”

He added: “The more expensiveis gets to employee people here, themore likely companies are to ask,‘Can we do this better and cheaperanywhere else?’”

The Island’s top executives mayalso think twice about some oftheir leisure activities as the dutyon boats rose from 33.5% to 55%.Like everyone else, businesses willalso have to fork out $10 more inindividual departure tax, whichrose to $35 per head.

NEWS REVIEW

Industry muted over BudgetDISAPPOINTMENT AT HIGHER PAYROLL TAX AND FAILURE TO STREAMLINE WORK PERMITS. CHRIS GIBBONS REPORTS

[ 5 ]

Payroll is nowthe single

major expensefor many

companies

“Oh, I’m really sorry. I just placed three millionwith some broker who called five minutes ago.”

Asset Management Solutions for CaptivesAsset Management Solutions for Captives

BIAS’ penchant for thinking several steps ahead has allowed our Captive clients to more accurately immunize assets against expected claims, creating larger surpluses whilst fostering more rapid asset growth.

anagemMsset MAA anagemanagemsset Msset MAA ffolutions fooSt Snmen ofoolutions folutions ffoft St Smenmen sesvaptivCC esesaptivaptivor Cor C

wth.orapid asset grtieacr,claimsedtxpece

moottsclieneaptivCthinorffotpenchan’BIAS

gsset MsAA anagemanagemsset Msset MAA

whilstplusessurgerlarngeimmunizelytacuraceor

haheadepsstalersevingk

oolutions ffoo oot Stmen ofoolutions folutions ffoft St Smenmen

emoringerostffoagainst assets

ouredwallohas

eseaptivaor C esesaptivaptivor Cor C


[ 6 ]

NEWS REVIEW

Bermuda-based specialty proper-ty/casualty insurer and reinsur-er Catlin Group Limited has

purchased a collateralised US$150million annual aggregate reinsur-ance contract to protect theGroup’s portfolio of propertytreaty reinsurance against accumu-lated losses from specific perils.

According to a company state-ment: “The transaction is unusualas it provides retrocessional ‘cata-strophe bond’ type coverage for adiverse portfolio of property catas-trophe exposures on an indemnitybasis. As it would be triggered byCatlin’s actual losses, it reduces thebasis risk present in most index-based or parametric-based catas-trophe bond products.”

The coverage, which expires onDecember 31, 2010, will be trig-gered if Catlin’s losses from

defined US windstorms and earth-quakes, European windstorms, andJapanese windstorms and earth-quakes exceed an annual aggregatethreshold amount. The coveragecomplements the collateralisedcatastrophe protections purchasedby Catlin in 2006 and 2007 and itstraditional reinsurance pro-gramme.

Under the contract, Catlin hasentered into a reinsurance agree-ment with Newton Re Limited, aCayman-based special purposereinsurer. Newton Re in turn hasissued US$150 million of principalat-risk variable rate notes, the pro-ceeds of which will be used to pro-vide collateral for Newton Re’sobligations to Catlin under thereinsurance agreement.

The notes, which were rated‘BB’ by Standard & Poor’s and ‘bb’

by A M Best, have a coupon ofLibor plus 750 basis points.

Mark Hvidsten, CEO ofWillis Capital Markets, whichacted as co-lead manager of theoffering, said: “Careful and

sophisticated structuring hasresulted in a transaction thatenables investors to support thedeal, while providing Catlin witheconomic and rating agency capi-tal efficiencies.”

Catlin agrees to $150m cat bond dealCOMPANY UNVEILS ‘UNUSUAL’ AND HIGHLY INNOVATIVE TRANSACTION

“The dip in sales seems to coincide with thedecision to eliminate the sales staff.”

Church St. East, tel: 292-0893www.bermudamotors.bm

The Ultimate Driving Machine


[ 7 ]

Bermuda insurers have againbeen heavily involved in pro-viding coverage for the planned

new World Trade Center develop-ment in New York City.

On February 25, World TradeCenter developer Larry A.Silverstein announced the place-ment of the Workers’ Comp -ensation, General Liability, ExcessLiability, and Specialty insuranceprogrammes for the constructionof Towers 2, 3, and 4 at 200, 175,and 150 Greenwich Street.

ACE and XL — which paidout $298 million and $67 millionafter the 9/11 terrorist attackwhich destroyed the original TwinTowers — are again involved.ACE USA is leading the ExcessLiability Programme that also fea-tures many of the world’s leadinginsurers including Bermuda-based

Aspen, Allied World and XLInsurance. Ironically, Allied Worldand Aspen were among the “classof 2001” insurers formed when the9/11 tragedies led to a drain onmarket capacity.

The insurance programmeswere finalised in anticipation ofthe recent turnover to SilversteinProperties by the WTC site’sowner, the Port Authority of NewYork and New Jersey, of the sitesfor Towers 3 and 4. The site forTower 2 is expected to be deliveredin mid-2008.

The three office towers, devel-oped by Silverstein Properties anddesigned by award-winning archi-tects Norman Foster, RichardRogers, and Fumihiko Maki, willrise along the site’s eastern edge.As the first construction-relatedliability insurance programmes

secured for the three towers, theycover the contractors’ employeeson the site, and the liability expo-sure resulting from construction.

“This is a significant step in ourefforts to build these three build-ings,” said Mr Silverstein. “Theinsurance industry has an historicconnection to lower Manhattan,and our renewed partnership withthe industry is key to the entirerebuilding effort.”

Since last April, the WTCinsurance team led by global bro-kers Willis engaged more than 60insurance markets in the UnitedStates, London and Bermuda. Theteam developed a comprehensiveand open approach to informingprospective insurers about thisworld-renowned project.

The WTC insurance teamincluded more than 40 technical

experts and placement profession-als from Willis, led by LeslieNylund and Silverstein’s WTCexecutives led by Shari Natovitz,Silverstein’s Risk Manager.

The WTC insurance pro-gramme responds to the specifica-tions of the Port Authority as oneof the requirements for siteturnover. The Controlled Insur -ance Programme, which consists ofWorkers’ Compensation and Gen -eral Liability, is being provided byAIG Group. The programme alsoincludes extensive safety and losscontrol resources, as well as a tai-lored claims management pro-gramme to assist workers. AIG hasalso been selected to underwriteenvironmental liability insurancefor the project. Beazley Syndicate(Lloyd’s of London) is providingspecialised protection.

INSURANCE PROGRAMMES REVEALED FOR TOWERS 2, 3 AND 4

Bermuda market has new WTC coveredNEWS REVIEW

Giving You aGiving You aCompetitive EdgeCompetitive Edge

When you outsource

your IT needs to Ignition,

you can expect the

latest technology and

reliable service to drive

your business. With

our wealth of technical

expertise and years of

experience, Ignition gives

you guaranteed service

in today’s business

environment.

“At Mello Jones & Martin we strive to give“At Mello Jones & Martin we strive to give our clients the ultimate in legal services.our clients the ultimate in legal services.

Ignition is our sole provider of IT supportIgnition is our sole provider of IT support and services. Ignition backs-up our effand services. Ignition backs-up our effortsorts

every step of the way.”every step of the way.”

Alan W. Dunch, J.P.Alan W. Dunch, J.P.

PartnerPartner

Mello Jones & MartinMello Jones & Martin

Barristers and AttorneysBarristers and Attorneys


[ 8 ]

NEWS REVIEW

XLCapital management says itis not concerned about thefuture of the company

despite being downgraded by rat-ing agency A M Best following itsrecord fourth quarter loss of $1.06billion. XL reported a net incomeof $430 million for 2007, com-pared to a $1.76 billion profit in2006.

The results reflected charges

totaling $915.5 million related toits $670 million investment inbond insurer Security CapitalAssurance Ltd. (SCA). XL wrotedown $523.7 million of its invest-ment and set aside $330 million inloss reserves in connection withSCA.

XL owns a 46% share in SCAwhich has lost more than 80% ofits market value since last summer

as a result of the US mortgage cri-sis. Some of the mortgage-linkedsecurities guaranteed by SCA haveplummeted in value as a wave ofdelinquencies has swept the US inthe wake of plunging propertyprices.

As a result, in late January Bestdowngraded the financial strengthrating (FSR) to ‘A’ (Excellent)from ‘A+’ (Superior) and the issuer

credit ratings (ICR) to “a” from“aa–” of XL Capital Group and itsmembers. Best also downgradedthe ICR to “bbb” from “a–” and allexisting debt ratings of CaymanIslands-based, XL Capital Ltd.However, Best maintains a stableoutlook on all of the ratings.

Standard & Poor’s said it wastaking no action on XL’s ratingsand maintaining its ‘A–’ (Stable)mark. “XL’s capital adequacy,though diminished, remains verystrong and well supportive of therating,” it said.

Henry Keeling, XL’s COO, toldThe Royal Gazette: “We are disap-pointed with Best’s decision, butan A from Best is still an excellentrating.” He said XL still had a verystrong capital base and its corelines of business were still per-forming well, and that excludingthe charges, the company stillmade a profit of $430 million.

“There is no reason for peopleto be concerned about the future ofthe company,” he said. “We have a21-year track record of paying cus-tomers’ claims and we shall contin-ue to do that.”

Insurance Journal commented:“The differences in the two ratingactions are more apparent thanreal. S&P currently rates XL ‘A–’with a stable outlook, which is atthe lower end of its third highestcategory (S&P’s ratings go from‘AAA’, ‘AA’, ‘A’, etc. further modi-fied by a ‘plus’ or a ‘minus’ sign).Best’s ‘A+’ rating is its second high-est (‘A++’ is the highest). XL’s onenotch demotion removes its rat-ings from the “Superior” category,and brings them roughly into linewith S&P’s.”

In a statement accompanyingthe fourth quarter results, XLPresident and CEO Brian O’Harasaid: “I believe that these previous-ly announced fourth quartercharges, while disappointing, havereduced uncertainty and increasedinvestors’ ability to recognise thestrength of XL’s diversified andglobal insurance and reinsurancefranchise, which continues to per-

XL rides out record losses, downgradeCEO SAYS NO FURTHER LOSSES ARE EXPECTED AFTER TAKING ‘THE FULL MEASURE OF PAIN’

Navigate the legal risk.

Insurance | Bermuda | Reinsurance

www.aswlaw.com


NEWS REVIEW

[ 9 ]

form very well as evidenced by ourfull year combined ratio of 88.8%.In addition, our investment fundand manager affiliates have hadanother strong performance in2007. We remain committed tobuilding shareholder value as weexecute our strategy.”

However, Best voiced ongoingconcerns about SCA, in relation toXL’s recent history, stating that“XL Capital’s risk managementcontrols are below expectations asthe company takes an unanticipat-ed charge, albeit below the operat-ing line, continuing the trendestablished by the litany of NACRe related reserve charges, theWinterthur acquisition charge andhigher than anticipated lossesstemming from the 2005 catastro-phe season.”

The agency said XL might stillhave exposure to SCA losses, aswell as “further subprime exposurethrough its D&O and E&O liabil-ity portfolio on both a primary andreinsurance basis. This exposuregives rise to concerns that theremay be a potential resurgence inclaims for these lines as they relateto subprime issues in the future.”

However, Brian O’Hara said hedid not anticipate further losses.“We don’t anticipate anythingmore emerging in future quarters,”he told The Royal Gazette. “Wehave taken the full measure ofpain. We still have $117 million ofequity in SCA and if conditionsdeteriorate further than expected,then it is a possibility that it couldbe written down further. But onceit gets to zero, if it goes that far,that’s it.”

While XL’s capital adequacywas not an immediate concern,Best said the extent of the lossesraised questions about “XLCapital’ s earnings inconsistencyand enterprise risk managementthat are not indicative of aSuperior-rated company.”

In explaining its ratings review,S&P said the $550 million write-down did not affect its view of cap-ital. “Similarly, our model incorpo-rated a material quantitativecharge relative to outstandingrelated party arrangements withSCA, thus addressing a significantproportion of the $330 million inadditional loss reserves on reinsur-ance agreements with SCA.”

S&P added that it believes XLhas “the appropriate liquidity andfinancial flexibility to address sucha scenario”.

S&P said its current rating onXL and its subsidiaries was basedon the company’s “very strongglobal market presence, very stronginterest and fixed-charge coverage,and diversified earnings stream.Somewhat offsetting thesestrengths are a track record ofinconsistent earnings performance;material, though reduced, exposureto large catastrophic losses; suscep-tibility to adverse reserve develop-ment, and business integrationchallenges borne from the relative-

ly rapid building of a very strongand diversified global competitiveposition.

“The stable outlook reflects our

expectation that the continuedintegration of XL’s strongly posi-tioned global platform of insur-ance, reinsurance, and life opera-tions — in combination withreduced volatility borne from anevolving enterprise risk manage-ment process — will result in astrong, consistent earnings streamconsistent with similarly ratedpeers, with capitalisation remain-ing at a very strong level.”

The agency warned: “If thereare significant negative operatingdevelopments, particularly in theoperating segments, that dampenconsolidated results, the outlookcould be revised to negative.”

XL chief Brian O’Hara

Renaissance House, 8-20 East Broadway

Pembroke HM 19 Bermuda

Tel: 441-295-4513 Fax: 441-292-9453

A+ by A.M. Best

AA- by Standard & Poor’s

A2 by Moody’s

A+ by A.M. Best

AA by Standard & Poor’s

A by A.M. Best

A+ by Standard & Poor’s

We have been global leaders of property catastrophe and specialty reinsurance for well over a decade. Why? Because we

understand that your risks evolve and your business is constantly changing. We understand that a dynamic market calls for

dynamic capital management. We understand that to give you an edge, we must continue to be leaders in

risk analysis, refining our modeling expertise and investing in pioneering scientific research.

We also know the value of consistency. For more than a decade we have delivered consistent

risk-based pricing, financial security and outstanding service.

For dynamic risk coverage that consistently puts you ahead, talk to us.

www.renre.com

RenaissanceRe offers:

Property Catastrophe Reinsurance

Catastrophe Exposed Workers’ Compensation

Surety

Terrorism

Medical Malpractice

Casualty

Other Specialty Lines

Dynamically managing risk

eRecnasisaneR :sreffe o e have been gloW

DynDynamical

obal leaders of property catastrophe a

lly managing risk

and

k

opxe EhportsataC

ee Rhportsatay CtreporP

seniy Ltlaicepr SehtO

yltasuaC

ecitacrplaMlaciMed

msiroerrTTe

yterSu

notiasnempoC’srekrod Weso

ecnarusnie

rthe W

in pionrisk ana

that to givdynamic ca

echanging. WWeunderstand th

specialty reinsu

outstanding service.risk-based pricing, financial security

han a decade we have delivered consi. Falso know the value of consistency

neering scientific research.lysis, refining our modeling expertiseve you an edge, we must continue to b

e understandapital management. We understand that a dynamic market cat your risks evolve and your busines

urance for well over a decade. Why? B

andistent

For more

and investingnbe leaders i

rofsllacyltnatsnoss is c

Because we

y A bA

+A

s’ydooy M2 bA

s’rood & Pradnaty S- bAA

tse. BM.y A+ bA

s’rood & Pradnaty S+ bA

tse. BM.y AA b

s’rood & PradnatS

tse. BM.y A+ b

: 4

m

xa3 F154-592-14: 4leT

adumre9 BM 1e HkorbmeP

tsa0 E2-, 8esuoe HcnassianeR

oe.crner.www

puts you ahead, talk to us.For dynamic risk coverage that co

3

onsistently

549-292-144

yawdaort B


[ 10 ]

S & P REVIEW BOND REINSURANCE COMPANIES’ CAPITAL POSITIONS

NEWS REVIEW

Standard and Poor’s has placedits ratings on BluePoint Re Ltd(AA), Channel Reinsurance

Ltd. (AAA), and RAM Rein -surance Co Ltd (AAA) onCreditWatch, with negative impli-cations due to projected subprime-related losses. Ratings on the com-panies’ related entities, as well asRAM Re’s contingent capital facil-ity, were also affected. S&P also

affirmed its AA rating on AssuredGuaranty Re Ltd., with a stableoutlook.

S&P stated: “The rating actionsare the result of our most recentreview of all the bond reinsurancecompanies’ capital positions, ourprojections of their respective sub-prime-related losses, and the com-panies’ plans for managing theircapital positions. This review is

part of Standard & Poor’s ongoingassessment of these bond reinsur-ers’ potential subprime-relatedlosses and management of theircapital positions to handle thelosses. Further reviews will occuras circumstances warrant.”

Standard & Poor’s has assignedits BBB+ long-term counterpartycredit and insurer financialstrength ratings to Bermuda-based

marine insurer The SteamshipMutual Underwriting Association(Bermuda) Ltd with a stable out-look. S&P said the “ratings reflectthe company’s core status withinthe economic grouping collectivelyknown as The Steamship Mutual,of which the principal operatingentities include its sister directunderwriting company, the UK-based Steamship MutualUnderwriting Association Ltd,and Bermuda-based reinsurerSteamship Mutual UnderwritingAssociation (Reinsurance) Ltd.The ratings also reflect the club’sstrong and improving competitiveposition, strong financial flexibili-ty, and the high barriers to entry ofprotection and indemnity (P&I)insurance.

Partially offsetting thesestrengths are an aggressive invest-ment strategy and the moderatelyhigh industry risk of the P&Isector.”

Company ratings on CreditWatch

Aon buysGallagher unitsAon Corporation has agreedto buy most of Arthur JGallagher & Co’s US and UKreinsurance brokerage opera-tions. Aon said it will pay $30million in cash, plus a per-formance-related sum basedon revenues generated in the12 months following the closeof the transaction.

Gallagher’s reinsurancebusiness employs about 250people in 14 offices in the US,UK, Bermuda, Singapore andAustralia — but the deal isnot likely to affect itsBermuda office, which oper-ates under the Artex RiskSolutions brand.

David McManus, Presidentof Artex Risk Solutons, said:“As of January 1, 2007, wehad separated our insuranceand reinsurance operationsfrom a strategic perspective.


[ 11 ]

Troubled Armonk, New York-based bond insurer MBIA Inc.says it will move to Bermuda

unless the US Government closesthe controversial tax loophole thatbenefits competitors with foreignaffiliates.

CEO Jay Brown, in a February25 letter to investors, said theloophole benefits companies sell-ing insurance in the United States,from financial guarantors to prop-erty-casualty insurers, who thenreduce their tax bill through rein-surance arrangements with Ber -muda-based affiliates.

“In a move to level the playingfield in terms of the cost of capital,we will escalate our efforts to cam-paign vigorously against the abilityof US financial guarantors to rein-sure US domestic financial guaran-tee transactions with foreign affili-ates without paying US corporatetax rates,” he wrote.

“As more money comes intoexisting and new competitors’ pub-lic finance business, the discrepan-cy this loophole allows becomeseven more pronounced. In a com-petitive and open market to pro-vide all American public entitieswith access to the capital markets,it makes no sense to allow foreigncompetitors with US domiciledoperations to operate without pay-ing their fair share of US taxes.

“I still don’t look good inBermuda shorts, but we will even-tually have to move the company ifthe US tax code is not modified,”he added.

Meanwhile, Brown said thisyear MBIA would earmark $1 mil-lion or more towards the Coalitionfor a Domestic Insurance Industry(CDII), which is lobbying theGovernment to close the loophole.

As reported in the last issue ofBIQ, the CDII wants to see off-shore competitors like Bermudapay higher excise tax, or be restrict-ed in the amount of business theycan acquire from within the US inorder to level the playing field withsolely US-based companies, andpay full taxes on earnings.

In September, the Associationof Bermuda Insurers andReinsurers (ABIR) put their casebefore the US Senate FinanceCommittee, claiming the CDIIattack is not just on Bermuda sub-sidiaries but on any US sub-sidiaries of a non-US owned enter-prise.

BIR and the Coalition forCompetitive Insurance Rates

(CCIR) have called the move pro-tectionist and anti-competitive.They warned that it would lead todecreased capacity and higherinsurance costs for US policyhold-ers.

MBIA announced last weekthat the tax issue was one reasonwhy it would be withdrawing fromthe Association of FinancialGuaranty Insurers (AFGI), the

bond insurance trade group.According to a Reuters report,

in the past Brown has been criticalabout the tax loophole benefitingrival bond insurer Security CapitalAssurance Ltd., in which Ber -muda-based XL Capital is a majorinvestor.

ACE spin-off Assured Guar -anty Ltd is also based in Ber -muda.

ANALYSIS

MBIA threatens Bermuda moveCONCERN OVER TAX LOOPHOLE COULD FORCE TRANSFER

At Max, we’ve recruited some extraordinary talent to drive our business. From offices in Bermuda, Ireland and the United States, we underwrite a wide range of Property and Casualty Reinsurance and Insurance transactions, as well as Life and Annuity Reinsurance. Expanding the possibilities with financial strength, focused expertise and new approaches to established convention.

TALENT EXPANDS POSSIBILITIES

www.maxcapgroup.com

A.M. Best A - (Excellent) Fitch A (Strong) Moody’s A3 INSURANCE/RE INSURANCE


[ 12 ]

ANALYSIS / PRICEWATERHOUSECOOPERS

OPERATING RATIOS

FINANCIAL STRENGTH RATINGS

ANNUAL LOSS RATIOS2007 2006 2005

ACE 61.6% 61.2% 74.5%Arch 55.8% 58.1% 67.2%Aspen 53.0% 53.0% 90.1%Allied World 58.8% 59.0% 105.7%Axis 50.1% 52.9% 80.3%Endurance 47.0% 50.5% 95.8%Everest Re 63.7% 63.2% 94.0%Hiscox 44.0% 49.3% n/aIPC 31.9% 14.7% 237.0%Max Re 64.0% 67.7% 98.0%Montpelier 31.8% 29.6% 178.0%PartnerRe 50.8% 54.8% 87.3%Platinum 55.9% 56.9% 87.8%Renaissance Re 33.6% 29.2% 116.6%Validus 33.1% 29.8% n/aWhite Mtn 61.0% 71.0% 90.0%XL Capital 59.8% 62.2% 107.4%

ANNUAL EXPENSE RATIOS2007 2006 2005


ANNUAL COMBINED RATIOS2007 2006 2005


A M BEST RATING S&P RATINGA M BEST RATING S&P RATINGMar 7, 2008 Mar 9, 2007 Mar 7, 2008 Mar 9, 2076

ACE A+ A + A+ A+Arch A A A A –Aspen A A – A AAllied World A A A – A –Axis A A A AEndurance A A – A A –Everest Re A+ A + AA– AA–Hiscox A A A AIPC A A A – AMax Re A – A – NR NRMontpelier A – A – A – A –PartnerRe A+ A + AA– AA–Platinum A A NR NRRenaissance Re A+ A AA– A+Validus A – A – NR NRWhite Mtn A – A – A– A –XL Capital A A+ A+ A+NR — Not rated by S&P

Renewals� Rates have continued to softenmore steeply than expected in cer-tain lines in the second half of 2007.� Competition for new businessis particularly strong and thoserates are showing significantreductions over expiring rates.� The reduction in demand in thecat reinsurance market for the firsttime since 2005 was commentedon by some companies.� Despite this softening, clientretentions continue to rise, possi-bly due to their own business beingwritten at softer rates.� Several Bermuda companiescontinued the trend of buildingout their US operations, particu-larly in specialty areas.

Earnings� Despite a lack of premiumgrowth, most companies exceededannual earnings estimates andseveral generated record earnings,

due to a combination of betterthan expected current year com-bined ratios as well as prior yearreserve releases. � It has been a year of relativelylow insured catastrophes, withWindstorm Kyrill, the summerUK floods and the California wild-fires being some of the more sig-nificant.� Net investment income provid-ed a strong contribution to thebottom line and sub-prime lossesto date have been generally mini-mal for the Bermuda companies inthis listing, with the exception ofXL Capital.

Capital management� For the year, the Bermuda com-panies repurchased shares to avalue of approx $4.5 billion. � The expectation is that sharerepurchases will continue in 2008due to the limited growth oppor-tunities expected.

Year end 2007

2007 2006 2005

ACE 17,740 17,401 16,811Arch 4,140 4,282 4,015Aspen 1,819 1,946 2,093Allied World 1,506 1,659 1,560Axis 3,590 3,609 3,394Endurance 1,781 1,790 1,669Everest Re 4,078 4,001 4,109Hiscox 2,397 2,206 n/aIPC 404 430 472Max Re 1,078 865 1,246Montpelier 654 728 979PartnerRe 3,810 3,734 3,665Platinum 1,140 1,275 1,765Renaissance Re 1,810 1,944 1,809Validus 989 541 n/aWhite Mtn 4,190 4,312 4,602XL Capital 8,998 9,786 11,849

2007 2006 2005

ACE 12,297 11,825 11,748Arch 2,945 3,082 2,978Aspen 1,734 1,676 1,508Allied World 1,160 1,252 1,272Axis 2,734 2,694 2,554Endurance 1,595 1,639 1,724Everest Re 3,998 3,853 3,963Hiscox 1,929 1,741 n/aIPC 391 397 453Max Re 818 665 1,053Montpelier 557 583 848PartnerRe 3,777 3,667 3,599Platinum 1,173 1,337 1,715Renaissance Re 1,424 1,530 1,403Validus 858 307 n/aWhite Mtn 3,784 3,713 3,799XL Capital 7,205 7,570 9,617

ANNUAL GROSS PREMIUMS WRITTEN $M

ANNUAL NET PREMIUMS EARNED $M


[ 13 ]

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings per share ($)Net income (loss) attributable to common shareholders ($m) Fully diluted earnings per share ($)Q4 2007 Q4 2006 Q4 2005 Q4 2007 Q4 2006 Q4 2005

ACE 572 665 236 1.69 1.99 0.69Arch 234 239 101 3.31 3.12 1.34Aspen 135 120 30 1.44 1.20 0.33Allied World 123 128 (24) 2.01 2.04 (0.08)Axis 306 281 233 1.89 1.69 1.47Endurance 149 195 (52) 2.18 2.70 (0.80)Everest Re 12 206 (162) 0.19 3.15 (2.63)Hiscox n/a n/a n/a n/a n/a n/aIPC 167 108 (75) 2.48 1.52 (1.28)Max Re 62 95 (11) 1.00 1.51 (0.20)Montpelier 91 122 (61) 0.97 1.26 (0.68)PartnerRe 172 234 (42) 3.04 4.03 (0.76)Platinum 100 83 (103) 1.60 1.28 (1.94)Renaissance Re 62 201 (210) 0.88 2.78 (2.97)Validus 139 69 n/a 1.77 1.16 n/aWhite Mtn 101 278 33 9.55 60.33 2.82XL Capital (1,216) 471 (822) (6.88) 2.62 (5.51)

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings (loss) per share ($)2007 2006 2005 2007 2006 2005

ACE 2,578 2,305 1,028 7.66 6.91 3.31Arch 832 693 256 11.28 9.08 3.43Aspen 489 378 (178) 5.11 3.75 (2.40)Allied World 469 443 (160) 7.53 7.75 (3.19)Axis 1,055 926 90 6.41 5.63 0.57Endurance 506 483 (223) 7.17 6.73 (3.60)Everest Re 839 841 (219) 13.19 12.87 (3.79)Hiscox 382 321 n/a 0.93 0.79 n/aIPC 368 377 (626) 5.55 5.48 (12.30)Max Re 303 217 10 4.75 3.43 0.18Montpelier 316 303 (753) 3.31 3.22 (11.16)PartnerRe 683 715 (86) 11.87 12.37 (1.56)Platinum 347 319 (138) 5.38 4.96 (3.01)Renaissance Re 570 762 (281) 7.93 10.57 (3.99)Validus 403 183 (50) 5.95 3.11 (0.85)White Mtn 407 673 290 37.89 62.32 26.56XL Capital 206 1,722 (1,292) 1.15 9.60 (9.14)

2007 2006 2005

ACE 16,677 14,278 11,812Arch 4,036 3,591 2,480Aspen 2,818 2,389 2,040Allied World 2,240 2,220 1,420Axis 5,159 4,413 3,512Endurance 2,512 2,298 1,873Everest Re 5,685 5,108 4,140Hiscox 1,640 1,337 n/aIPC 2,126 1,991 1,616Max Re 1,584 1,390 1,186Montpelier 1,653 1,493 1,058PartnerRe 4,322 3,786 3,093Platinum 1,998 1,858 1,540Renaissance Re 3,478 3,280 2,254Validus 1,935 1,193 n/aWhite Mtn 4,713 4,455 3,833XL Capital 9,948 10,131 8,472

2007 2006 2005Common shares issued Market value Common shares issued Market value Common shares issued Market value

ACE 329,704,531 61.78 326,455,468 60.57 323,322,586 53.44Arch 67,318,466 70.35 74,270,466 67.61 73,334,870 54.75Aspen 85,510,673 28.84 87,788,375 26.36 95,209,008 23.67Allied World 48,741,927 50.17 60,287,696 43.63 50,162,842 n/aAxis 142,520,000 38.97 149,982,000 33.37 148,868,759 31.28Endurance 60,364,488 41.73 66,480,381 36.58 66,138,901 35.85Everest Re 65,400,000 100.40 65,000,000 98.11 64,600,000 100.35Hiscox 393,573,000 5.70 393,916,000 5.49 n/a n/aIPC 57,626,395 28.87 63,706,567 31.45 63,666,368 27.38Max Re 57,515,075 27.99 60,276,560 24.82 58,829,354 25.97Montpelier 99,290,078 17.01 111,775,682 18.61 89,178,490 18.90PartnerRe 57,379,516 82.53 57,076,312 71.03 56,730,195 65.67Platinum 53,779,914 35.56 59,671,959 30.94 59,126,675 31.07Renaissance Re 68,920,319 60.24 72,140,045 60.00 71,552,701 44.11Validus 74,199,836 25.98 58,482,601 n/a n/a n/aWhite Mtn 10,553,572 514.05 10,782,753 579.43 10,779,223 558.55XL Capital 177,910,151 50.31 180,983,611 72.02 179,528,593 67.38

MARKET CAPITALISATION

ANNUAL EARNINGS DATA

Q4 EARNINGS DATA

SHAREHOLDERS’ EQUITY ($M)n/a = data not publicly available


Insurance sector CEOs are just asconfident about revenue growthover the next 12 months as their

peers in other industries, accordingto PricewaterhouseCoopers’ 11thAnnual Global CEO Survey. Butthe report reveals uncertaintiesamong insurance bosses aboutwhat the future holds.

For example, more insuranceCEOs are worried about low cost

competition than their peers in thebanking sector. The survey showsthat they are more concerned thanexecutives from other industriesabout how pandemics and otherhealth crises could threaten busi-ness growth.

Feedback from insurance execu-tives about perceived opportunitiesfor business growth shows thatorganic growth (better penetration

of existing markets) scores higherthan growth through new productdevelopment or mergers & acquisi-tion. Only 20.4% of insuranceCEOs indicated that they are plan-ning M&A in the next 12 months,compared to 30.9% globally.

But will Bermuda companiesresist the urge to merge?Commenting on the survey, PwCmanaging partner Peter Mitchellsays companies could have morereason to partner up. “There maybe some M&A as Bermuda com-panies seek to consolidate theirposition,” he says. “We have seenthis cycle before, as CEOs look tomaintain IRR in a difficult busi-ness period.”

Regulatory risk is a constantpreoccupation for the insuranceindustry. The report found thatover three quarters of insurance

industry respondents factor in theregulatory framework to a greatextent when making business deci-sions (globally the figure is 62.5%).Asked to identify the most impor-tant area in which governmentcould potentially improve the busi-ness environment, insurance exec-utives follow the global trend bychoosing “tax regime” followed bylabour laws.

Peter Mitchell says: “CEOs areconscious of the labour costs andimmigration issues in Bermuda andthere is a trend for companies tooutsource certain labour intensivefunctions to other geographic loca-tions, which will assist in control-ling costs without affecting theirBermuda domicile and tax status.”PricewaterhouseCoopers’ 11th AnnualGlobal CEO Survey is available atwww.pwc.com/ceosurvey

ANALYSIS

[ 14 ]

CEOs get a fix on the futureFEARS OF COMPETITION AND REGULATORY RISK, SAYS NEW SURVEY FROM PRICEWATERHOUSECOOPERS

Hardy on course for BermudaHardy Underwriting Group PLC, is the latest Lloyd’s of London insurerand reinsurer to announce it will redomicile in Bermuda.The companysaid it is making the move to take advantage of the country’s “strate-gic positioning in the insurance and reinsurance market.” Hardy joins agrowing list of Lloyd’s insurers and reinsurers including Kiln, Hiscoxand Omega Underwriting that have either opened offices in Bermudaor redomiciled there, to take advantage of the Island’s proximity to theUS catastrophe reinsurance market and its low corporate tax rate.


[ 15 ]

“We lost business to people whoare giving 40% reductions. And Ifind it mind-boggling that that’shappening, but it happened, so wecanceled the business.”

— Aspen CEO ChristopherO’Kane in an analysts call, com-

menting on competition fromFlorida’s Cat Fund which is impact-

ing sales in US hurricane regions[Sarasota Herald Tribune]

“We’re not pleased with these

results especially given the contin-uing strength of our underlyingproperty and casualty business.”

— Brian O’Hara, CEO of XLCapital in a conference

call with analysts

“Clearly we are way undervaluedand this has to be a result of theoverhang from what people thinkwe have liabilities for — but wedon’t think we do, as we keep try-ing to tell people. In time, I think

investors will get their mindsaround that. Clearly we shouldbe trading above book value, likeour peers.”

— Brian O’Hara, CEO of XLCapital, The Royal Gazette,

February 15

“I’ve seen headlines that claim thefinancial guaranty industry standsto lose $200 billion and that’s noteven in the realms of possibility.And I don’t think the general pub-

lic fully appreciates that there’s abig difference between beingdowngraded and going bankrupt.A company which has been down-graded to AA still has a very highcredit rating. It’s not such a fallfrom grace. And it can still write alot of business.”

— Dominic Frederico, CEO ofBermuda-based bond

insurer Assured Guaranty,remains bullish amid

the sub-prime crisis

It’s a mind-boggling business!MEDIA WATCH

ONSHOREJune 10–11Insurance Day SummitBermudawww.insurancedaysummit.com

June 16–19Bermuda Captive ConferenceFairmont Southampton,Bermudawww.bermudacaptive.bm

OFFSHOREApril 9–12Mealey’s 15th Annual InsuranceInsolvency & ReinsuranceRoundtableScottsdale, AZwww.lexisnexis.com/conferences

April 13–15Intermediaries and ReinsuranceUnderwriters AssociationSpring ConferenceHilton Head, SCwww.irua.com

April 27–May 1RIMS 2008 Annual Conference & ExhibitionSan Diego, CAwww.rims.org

May 8–9NCCI Annual IssuesSymposium — NationalCouncil on CompensationInsuranceOrlando, FLwww.ncci.com

WHAT’S ON


[ 16 ]

LYNDA MILLIGAN-WHYTE& ASSOCIATES

A full service internationalbusiness law firm

P.O. Box HM 1913Hamilton, Bermuda HM HX

Tel: 441-295-1302Fax: 441-295-8555

Email: [email protected]

Lynda Milligan-Whyte & Associates isa full service international business lawfirm with attorneys who have over 20years of experience in practicing cor-porate/commercial law in Bermudaand internationally particularly in com-pany and trust formation, insuranceregistration, mutual fund regulation,civil litigation/insolvency matters andcorporate governance/governmentcompliance areas.

The law firm was founded by LyndaMilligan- Whyte, J.P., the former U.B.P.Government Leader in the BermudaSenate.

BARRISTERS & ATTORNEYS

77 Front StreetHamilton HM 12,

Bermuda

Tel: 1(441) 296-5627Fax: 1(441) 296-1749Email: [email protected]

Contact: Laura E. Jackson

BES LIMITED is a leading provider ofpermanent and temporary recruitmentservices to Bermuda’s Business Sector.

Specializing in a broad range of indus-tries including the insurance and reinsur-ance business arena, BES provides inno-vative and flexible recruitment servicesincluding comprehensive employmentand relocation assistance to new start-upcompanies. All services are tailored tomeet the individual business needs ofeach client.

www.bermudaemployment.com

Trott & Duncan is a full service law firm that provides legal advice and consultation inevery aspect of legal practice, including:

� Commercial Law� Insurance & Reinsurance� Insolvency� Arbitration� Incorporations & Corporate

Administration Services

We invite you to contact Trott & Duncan for acomphrensive review of our capabilities and toexperience the confidential and personalisedway in which we will meet your every requirement.

Contact: Delroy B. Duncan, FCI Arb., JP

17A Brunswick StreetPO Box HM 2094Hamilton HM HX

TEL: (441) 295-7444 FAX: (441) 295-6600EMAIL: [email protected] WEB: www.td.bm


At a time when most people inhis position might consider rid-ing off into the sunset with a set

of golf clubs slung over his shoul-der, Brian Duperreault is taking onarguably the biggest challenge ofhis career.

Instead of grasping the oppor-tunity of a well-earned early retire-ment, the 60-year-old Bermudian,who enjoyed a hugely successfulcareer as chairman and chief exec-utive officer of ACE Limited, hasbeen named Marsh & McLennanCompanies’ (MMC) new presi-dent and CEO.

Duperreault has been chairmanof the board at ACE since step-ping down as CEO in 2004, butrelinquished that post to replaceMichael G. Cherkasky as CEO ofbeleaguered MMC. Duperraultwas paid $5 million in severance byACE as “compensation for his pastservice”, according to an SEC fil-ing.

MMC, the US-based globalprofessional services and insurancebrokerage firm, has been in troublesince 2004 when its insurance bro-kerage unit, Marsh, was involvedin a price-fixing scandal.

Stephen R. Hardis, chairman ofMMC’s board, welcomed Dup -erreault in a company statement,saying: “Throughout his career,including 10 years as a CEO, BrianDuperreault has proven his abilityto produce results and createshareholder value. We are delight-ed to welcome him to MMC.”

Mr Duperreault said: “I amhonoured to become the CEO ofMMC, a company that comprisesseveral of the world’s greatestbrands in risk and insurance serv-ices and consulting.

“I look forward to working withthe company’s talented executives.This is an institution with unri-valed resources and capabilities.My mission is to capitalise on thestrength of MMC’s operatingcompanies to deliver value toclients, employees and shareholders.”

From 1994 to 2004, Duperrault

was CEO of ACE, the Bermuda-based insurer MMC helped foundin 1985.

Duperrault, who maintainsproperty in Bermuda, will split histime mainly between Marsh’soffices in Bermuda and New York.Following his appointment, he hasstepped down as chairman ofButterfield Bank but remains

chairman of non-profit organisa-tions The Centre on Philanthropyand the Bermuda Institute ofOcean Sciences.

Under Duperreault, ACE’smarket capitalisation grew from$1.1 billion to about $19 billiontoday and its stock rose more thanfive-fold. ACE’s net premiums arecurrently around $12 billion.

[ 17 ]

PROFILE

Duperreault named CEO of MMCCHRIS GIBBONS ON THE BERMUDIAN WITH NO PLANS TO RETIRE

Brian Duperreault

ChoosePartnering for SuccessSuccess

Solutions for your business

Call 278-9936 or email [email protected]

For residential services, visit our

retail location at 10-12 Burnaby Street

Not only is Logic Bermuda's leading provider of long distance and Internet

services, we also offer practical solutions to your company's local and global

business challenges. Logic's Professional Services consultants bring expertise,

insight, and value to our customers by listening to their pain points and

applying a pragmatic approach to solving problems.Whether designing

a secure network, creating efficiencies through automation, or improving

business performance with our IT Governance Practice our aim is to bring

you business value in everything we do.

Call us today and let us know how we can help you.

q Application Development

q Data Management Solutions

q Systems Integration

q IT Governance Practice

q CIO/CTO Outsourcing

q Network Services

q Security Solutions

q Internet & Long Distance


Afew years ago, the words “cyberrisk” might have conjured upimages of spotty teenage com-

puter geeks hacking into corporatesystems for little more than brag-ging rights. Such attacks mighthave been irritating and embar-rassing, but in the long run notespecially damaging.

But, following several high-profile data breaches — mostnotably at US retail company TJXwhich is facing at least $256 mil-lion in costs after hackers swipedcustomer details from more than45 million credit and debit cards— a growing number of industriesare waking up to the real and far-reaching risks posed by theInternet and computer networks.

In addition to security risks totheir own operations — such as adenial of service attack that cancripple an online ordering system— businesses may be liable for lossof confidential data such as cus-tomer credit card information andhealthcare records which can besold or used to commit fraud. Theyface consumer claims and litigationfor breach of increasingly stringentdata privacy laws and at least 39 USStates now require companies tonotify every affected customerwhich, coupled with the costs ofreissuing credit cards, can cost mil-lions for a large retail chain.

Companies don’t even have tobe victims of computer hackerseither — good old-fashioned theftof physical property such as back-up discs, laptops and tapes can beequally damaging. And it’s not justimmediate financial losses thatworry companies — the damage totheir reputation and therefore theirlong-term viability is potentiallyeven greater.

However, organisations arefinding that many of these “cyberrisks” are not covered by tradition-al professional lines policies.Consequently there has been anincrease in specific cyber risk poli-cies and as liabilities increase —especially in the wake of the TJX

case — clients are increasinglylooking to the Bermuda market forsolutions.

David Friston, Specialty Ins -urance Manager for Bermuda-based Chubb Atlantic, said Chubbhad been involved in cyber cover-age since 2001, when it launchedCyberSecurity by Chubb forFinancial Institutions, a first partypolicy, followed in 2003 by Cyber -Security by Chubb LiabilityInsurance for Financial Instit -utions, a third party policy whichincludes disclosure injury, and lastyear a product for non-financialinstitutions.

“Demand is being driven by acombination of increased regula-tion and the requirement of disclo-sure, regardless of whether therehas actually been a loss sustainedby individuals,” he said. With theheightened media exposurebrought about by a data breach,institutions that might have previ-ously “battened down the hatches”and sorted out the problem them-selves are increasingly worriedabout reputational damage.

The computer data breach atTJX, the parent company ofAmerican retail giants TJ Maxxand Marshalls, is the largest todate in corporate history. In July2005, hackers used a poorly pro-tected local wireless network inone of its Miami stores to placesoftware on the company’s net-work to capture data from cus-tomer credit and debit cards.Undetected for 18 months, theystole details of more than 45 mil-

lion cards, using some of the datato create false credit cards, whichwere then used to buy and sell mil-lions of dollars worth of goodsfrom Wal-Mart and other majorretailers.

TJX has estimated the attackcould cost it $256 million in com-puter security fixes, lawsuits,claims and other settlements.However, the final cost could bemuch higher as a group of banksclaims more than 94 million creditcards were compromised and thecompany is also facing state andfederal investigations.

Explains Friston: “TJX isn’tunique in terms of the amount ofinformation it holds. The size ofthe databases that some of theselarge institutions hold is phenome-nal and that, coupled with the factthat we now have so much morefunctionality on the internetwhether it’s internet banking orthe purchasing of goods, thepotential is enormous from a lia-bility perspective.”

The key point about the TJXcase for the insurance industry wasthat it put a quantifiable figure onthe cost of cyber risk as well asmarking out some legal prece-dents.

“There has definitely been anincrease in interest and demand,primarily in the last six months onthe back of the TJX claims,”reports broker Mark Evans,Divisional Director (UK), WillisNorth America Bermuda. “One ofour producers in Boston was thebroker for TJX and rather thanhim having to cold call, he now hasclients calling him wanting theproduct. They have seen there’sdefinitely an exposure to lossesthat can have a significant impacton the balance sheet.

“Up until about a year ago, $50million was a big programme but at

the end of 2007, we put two $150million programmes together.”

In December, Allied World,which was one of the earliestexcess entrants into the market andhas been participating in cyberprogrammes since 2002, partici-pated with a variety of US andLondon carriers on cyber liabilityprogrammes including one majorUS retailer that purchased cyberliability for the first time as a directresult of the TJX case.

Lorene Phillips, ProfessionalLines Team leader at Allied World,said: “It is indicative that there isnot only an interest, but that inter-est is materialising into concretedeals. Companies purchasing alimit of liability greater than $50million would have been unheardof 18 months ago. Now it hasbecome more regular.”

David Friston, of ChubbAtlantic, said: “Institutions noware heightening risk managementin relation to mitigating losses as aresult of breaches, driven primarilyby concerns of reputational risk.”

“Breaches may have an impacton the bottom line and the stockprice so from that perspective it isgetting the attention of directorsand officers. Chief informationofficers are getting more attentionwithin organisations as these insti-tutions are increasingly relying onelectronic means to do business.”

At present, the Bermuda mar-ket is focused on excess liabilityfor cyber programmes, but Evanssays he would not be surprised ifsome companies move into thepotentially lucrative primary busi-ness. “It’s very much in the earlystages on the Island. At themoment we see US brokers try tomax out the capacity they can getfrom the US and come to us to tryand help complete the tower oflimits they need.

IN DEPTH

Cyber risk offers opportunityLOOKING TO BERMUDA MARKET AS LIABILITIES INCREASE

SpecialReport

by Chris

Gibbons

‘Institutions now are heightening riskmanagement in relation to mitigating

losses as a result of breaches’[ 18 ]


ANALYSIS

Strong balance sheets, continuedimprovements in enterprise riskmanagement (ERM) and gen-

eral earnings momentum through2007 have led rating agency A MBest Co to maintain a stable out-look in 2008 for the global reinsur-ance sector for the second consec-utive year.

Best noted: “The global rein-surance sector has benefited fromtwo years of moderate catastrophelosses and solid operating earnings.The capitalisation of the sectorand the majority of its participantsare currently healthy when just afew years back, many reinsurerswere struggling to find capital. Inlarge part, improved loss reserveadequacy is apparent for severalcompanies benefiting from thehard market years and intensifiedrisk management strategies.

“Though still nagging a handfulof companies, legacy issues fromsoft market years continue to sub-side. Nonetheless, with ratedeclines in both property andcasualty business lines, it is unlike-ly that current reserving levels canbe maintained or be relied upon toboost earnings in outward years.”

Best says that depending oncatastrophe activity, the sector ispoised for a profitable 2008 giventhat technical rates of most majorlines of business are still profitableto this point. Investment incomefueled by strong cash flow shouldalso support earnings. It believes2008 results will reflect more accu-rately current market trends asmargins are expected to moderate.Barring “a mega-catastrophe thatremoves enormous amounts ofindustry surplus from the market”,Best does not expect an improve-ment in pricing levels for sometime.

“The success factors for navi-gating these rough waters are forreinsurers to maintain underwrit-ing controls and standards todetermine pricing adequacy andmaintain discipline in a challeng-ing environment,” it noted.

“History indicates these are noteasy tasks to accomplish.”

It noted that capital manage-ment is a critical factor in manag-ing the market cycle, and whileshare repurchase programmes andincreased dividends have given asizeable portion of accumulatedearnings back to stakeholders,there is considerable pressure on

reinsurers to achieve targetedreturn on equity.

“Many carriers since have estab-lished diversified operating plat-forms, while newer formations havelooked to build underlying capabil-ities to manage the cycle and deploycapital,” said Best, adding that therewere likely to be further mergersand acquisitions in 2008.

Despite the improved positionof the reinsurance sector, Best saidchallenges remain in light of theincreased capacity of industry par-ticipants, new entrants and formsof capital.

“It is no longer easy to ignorethe reality of the capital markets asan alternative solution for primarymarkets.”

Best positive about global outlook

[ 19 ]

STABLE FORECAST FOR REINSURANCE SECTOR FOR SECOND CONSECUTIVE YEAR

Taking Care of the Lighthouse

Gibbs Hill Lighthouse has guided seafarers safely to Bermuda’s shores for decades. For over 50 years, Argus has also been committed to guiding businesses and individuals through the perils, by providing comprehensive insurance and retirement products.

Argus offers a full range of insurance products and financial services; we can help you to plan for the future, be financially secure and have peace of mind.

With the adoption of the parks at Gibbs Hill Lighthouse and St. David’s Lighthouse, Argus is working to improve the environment of Bermuda for future generations.

Taking Care of You

Health • Pensions • Life • Disability • Home • Property • Business Interruption Motor • Retirement Plans • Investment Services

12 Wesley St., P. O. Box HM 1064, Hamilton HM EX, BermudaTel: (441) 295-2021 • Fax: (441) 292-6763

e-mail: [email protected] • www.argus.bm

Customer Service Centre 298-0888


[ 20 ]

PEOPLE

CLIVE TOBIN STAYS ON, BUT IS SUCCEEDED BY DAVID DUCLOS Clive R. Tobin is to retire asCEO of insurance operations atXL CAPITAL LTD on April 1.He will be succeeded by David B.Duclos, currently the unit’sCOO. XL said Mr Tobin willremain with XL and concentrateon assisting the global insurer andreinsurer with strategic opportuni-ties and emerging markets. He alsowill become vice chairman of XL

Insurance (Bermuda) Ltd. XLCapital has also announced thatCelia R. Brown, Executive VicePresident and Head of GlobalHuman Resources and CorporateRelations, has joined its ExecutiveManagement Board. Ms Brownwas promoted to her current posi-tion in 2006. She oversees theCompany’s activities related toHuman Resources, Marketing,

Global Communications, PublicRelations and Corporate SocialResponsibility. XL INSURANCE,the global insurance operations ofXL Capital Ltd., has appointedDaniel Maurer as chief under-writer, middle market property &casualty for Continental Europeand Asia.

Bob Cooney, the former presi-

dent and CEO of Max Re, is backin business. The 53-year-old hasbeen appointed ManagingDirector of Aon Capital Marketsfor AON RE GLOBAL, theworld’s largest reinsurance brokerand integrated capital solutionsprovider of Aon Corporation.Cooney also will serve as ViceChairman of Aon Re Global –Bermuda, and will be based inBermuda. He will be responsiblefor originating capital market andfinancial advisory transactionsboth in Bermuda and in the UK.

ALLIED WORLD ASSURANCECOMPANY HOLDINGS LTDhas appointed W Gordon Knightas the President of US Operations,Distribution and Marketing. Hewill be responsible for expandingAllied World’s US insurance plat-form, including leading market-ing and distribution initiativesand assisting the managementteam with the growth of specialtyprogramme business. He will bebased in Allied World’s New Yorkoffice.

Global professional services firmTOWERS PERRIN has appoint-ed former PXRE COO GuyHengesbaugh as managingprincipal of its Bermuda reinsur-ance operation. Mr Hengesbaughwill be responsible for client-focused consulting within theBermuda market, including facili-tating the placement of businessand offering risk financing guidance.

Jeremy Cox has been appointedto the newly-created position ofDeputy Chief Executive Officer atthe BERMUDA MONETARYAUTHORITY. He will beresponsible for all supervisoryactivities conducted by theAuthority. Shanna Lespere hasbeen promoted to the position ofDirector, Insurance, Licensing andAuthorisations. Mesheiah Crock-well has been promoted to theposition of Assistant Director,Insurance, Compliance.

Changing chairs at XLBMA’s Cox, Lespere and Crockwell


From solid financial ratings, to superior customer service, to a strong globalpresence. Allied World Assurance Company is uniquely positioned to deliverthe insurance and reinsurance solutions you need, when you need them.

Our brokers want flexibility.Our clients want strength.

We deliver.

BERMUDA | BOSTON | CHICAGO | DUBLIN | LONDON | NEW YORK | SAN FRANCISCOwww.awac.com

Insurance coverage is underwritten by member companies of the Allied World Assurance Group. Coverage is subject to underwriting.Member companies may not be licensed in your state or jurisdiction. To find out if coverage is available, please contact your insurance broker.


DocHdl1OnPTR1tmpTarget - PwC

Documents

Transcript of DocHdl1OnPTR1tmpTarget - PwC