RESULTS & Q4 FLAGSTONE - PwC · 2015. 6. 3. · [email protected]: bermudamedia.bm. Printed in Canada....

AFTER LAST YEAR’S MUDDLES,what hope is there for this year's new and (hopefully) improved hurricane models? HemantShah of Risk Management Solutions says lessons have been learned but he adds that some clients remain better than others at comprehending modelling results. Page 19

FLAGSTONEOFF TOA FLYER

YEAR-ENDRESULTS &ANALYSIS

LONDONCALLINGTRUCE?

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BERMUDAINSURANCEQUARTERLY© 2006 Bermuda Media in association with

A p r i l 2 0 0 6

Q4BIQ16997B_Bermuda_Pg_ 4/12/06 1:01 PM Page 27

IPCRe is intently focused on specialty

reinsurance: property catastrophe. As well

seasoned and experienced specialists,

we are instrumental in helping our clients

navigate the dramatic changes they

face, while serving their policyholders

more effectively.

IPCRe has emerged with strength from the

extreme conditions of 2005 – a year like

no other – because we calculated skilfully

and drew on the formidable resources of

our exceptional team.

www.ipcre.bm

EXTREME CONDITIONSDEMAND EXCEPTIONAL ABILITIES.

16997B_Bermuda_Pg_ 4/10/06 1:08 PM Page 28

BERMUDA INSURANCEQUARTERLY

EditorCharles Barclay

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]: bermudamedia.bm.Printed in Canada.

Published four times a year In associationwith PricewaterhouseCoopers.Cover image courtesy of Getty Images

BIQVo l 2 , N o 1A p r i l 2 0 0 6

“This past year was theworst in history forinsured catastrophe lossesyet ACE finished it with acombined ratio under100%, an ROE of approx-imately 9%, and bookvalue growth of 7%.”

Evan Greenberg, President & CEO, ACE

“It’s always disappointing to report major lossevents; however, I am very proud that AXIS wasable to produce net income for 2005 of $90.1 mil-lion. We finished the year with $4 billion in totalcapital.”

John Charman, President & CEO,AXIS Capital

“The insurance industry, including Aspen, has agreat deal to learn from the hurricanes of 2004and 2005 and I am confident that Aspen is inthe vanguard of putting these new insights towork.”

Chris O’Kane, CEO,Aspen Insurance Holdings

“We [have] implementedkey adjustments to ourmodelling technologybased on the critical les-sons we learned and theinsights we developedfrom the 2005 storms.Coupled with the success-ful execution of our capi-tal plan early in the fourth quarter, [they] positionus to improve our performance in both good andbad years.”

Kenneth LeStrange, Chairman & CEO,Endurance Specialty Holdings

“We saw many opportu-nities in our catastrophereinsurance business thisrenewal season, andexpect to see more oppor-tunities in both catastro-phe reinsurance and indi-vidual risk over the courseof 2006.”

Neill Currie, CEO, RenaissanceRe

There’s no reason Bermuda’s reinsurance sectorshould not continue to flourish … providedit can meet the challenges posed by new cap-

ital trends shaping the industry. Regis Coccia,who edits the leading industry newspaperBusiness Insurance, said that the rush of capital tothe island since 2001 has been impressive but itcould potentially become an issue.

“The threat to Bermuda, if any, is going tocome from the exit of that capital. There hasbeen another tremendous influx of capital withthe Class of 2005 and the question after everywave of start-ups is: ‘Are they going to cut andrun at the first big loss?’ With Katrina, thehedge funds that came in after 2001 faced theirfirst big test. If there is a big exit of capital andeven, God forbid, another event like Katrinathat deals a painful blow to Bermuda, there willlikely be a shake-out and maybe a perceptionthat Bermuda is tainted.”

He added: “That’s no reflection on Bermuda.That’s the case in any market. At the moment,there are two trends happening at odds witheach other. There is a move towards investing inthese companies, perhaps with a short-terminvestment strategy to cash out and move on.However, the need for stability in insurance cap-

ital is much longer-term. You can’t base a suc-cessful insurer or reinsurer on a three or five-year plan; certainly not if you are writing any-thing with a tail.

“The challenge for Bermuda is maintainingthe needs of short-term investment and thelong-term goals of insurers. That’s not only achallenge for Bermuda, given the interest in thestart-ups, but also a challenge for every marketaround the world. That’s what insurance regula-tion is all about: ensuring solvency. It’s not aboutcreating a level playing field but making surethat claims get paid.”

Mr Coccia, who has been following theBermuda market since he started at BI 13 yearsago, added: “Internationally, Bermuda is veryrespected for its model for regulating capital andinvestigating where the capital is coming from.There is a suspicion in some countries — andamong less informed people in the US — thatan offshore domicile means less regulation and atax haven. That’s not the case. I think the morepeople know about Bermuda, the more theyrespect it and it’s a testament to its leadershipthat they have been able to attract not only cap-ital but a great deal of talent to the island.”

— Chris Gibbons

GUEST OPINION

THE QUOTES OF THE QUARTER

Capital punishment?

[ 1 ]

“So, we look to the next quarteras a time of healing.”

REGIS COCCIA, EDITOR OF BUSINESS INSURANCE, SAYS THE FLOOD OF MONEY COULD END UP HURTING BERMUDA

“The natural catastrophes of 2005 have ledto more attractive markets and … we areexecuting on these opportunities with afocus on maximising risk-adjusted returns.I believe that XL’s solid balance sheet, geo-graphic breadth and diversification of plat-forms will serve us well in 2006.”Brian O’Hara, President & CEO, XL Capital

“We adjusted ourrisk profile to meetmore stringent cap-ital requirementsin the industryand acted to takebest advantage ofthe new environ-ment … The chan-ges will result in reduced exposure toextremely large industry events per dollarof capital at risk.”

Anthony Taylor, President & CEO,Montpelier Re


NEWS REVIEW

Allied World Assurance Hold-ings (AWAC) has filed with theSEC to raise up to $400 million

in an initial public offering of com-mon shares. The company willeventually list on the New YorkStock Exchange.

The preliminary filing onMarch 17 did not specify howmany shares AWAC plans to sellor their price. Goldman Sachs willunderwrite the offering. The com-pany said it would use the proceedsto increase capital of subsidiariesand repay loans and also for gener-al corporate purposes.

AWAC, the last of Bermuda’s“class of 2001” start-ups toannounce an IPO, writes directproperty and casualty insurance aswell as reinsurance through itsoperations in Bermuda, the US,Ireland and Britain and currentlyemploys 230 people.

The company, rated “A” (excel-lent) by A M Best, recently report-ed a net loss for 2005 of $159.8million compared with earnings of$197.2 million in 2004. Its grosspremiums have risen from $922million to $1,560 million since itstarted. At December 31, 2005,AWAC had $6.6 billion in totalassets, $1.42 billion in sharehold-ers’ equity and a total capitalisationof $1.92 billion.

AWAC stated in its filing: “Webelieve our catastrophe losses fromthe devastating hurricane season of2005 were among the lowest as apercentage of June 30, 2005 bookvalue among all major publiclytraded insurance and reinsurancecompanies that commenced opera-tions in Bermuda in 2001 or short-ly thereafter.”

It added: “We believe our finan-cial strength represents a signifi-

cant competitive advantage inattracting and retaining clients incurrent and future underwritingcycles … We are not encumberedby asbestos, environmental or anyother pre-November 2001 legacyexposures.”

AWAC said it expects its prop-erty business to grow in 2006, driv-en by anticipated price increases inthe global property market follow-ing the 2005 hurricanes. It will con-tinue to focus on niche opportuni-ties in excess casualty, professionallines and healthcare liability busi-ness and diversify its product port-folio as new opportunities emerge.“We believe our focus on specialtycasualty lines makes us less depend-ent on the property underwritingcycle,” AWAC added.• Bermuda financial guaranty rein-surer RAM Holdings is planningto raise $250 million in an IPO.

PXRE Group, the Bermuda-basedproperty cat reinsurer, saw itsshare price plummet and suffered

ratings downgrades from leadingagencies after it raised its estimate ofpre-tax losses from HurricanesKatrina, Rita and Wilma by $281million to $311 million — or 64 to71% of shareholder equity as ofSeptember 30, 2005. PXRE said itnow expects hurricane-related lossesof $758 million to $788 million,about 71% higher than it had previ-ously forecast.

Within hours of the February16 announcement, A M Bestdropped PXRE’s financial strengthrating to “B++” (very good) from“A–” (excellent) and lowered thecompany’s senior unsecured debtto “junk” status. Standard & Poor’sdowngraded the company to“BBB+” from “A–” and also cut itssenior debt to junk grade. Thecompany’s share price dulyplunged 67%.

On February 22, the company

announced a net loss of $446.5million for the quarter endedDecember 31. Jeff Radke, PXRE’sPresident & CEO, said: “PXREremains financially sound and ableto meet all obligations to clients.We also have sufficient liquidity tomeet all currently foreseen needsand have taken a number of stepsto even further improve our liquid-ity in order to meet contingenciesthat may arise.”

He added: “ We are hopefulthat our financial soundness andstrong service track record will

allow us to continue trading withour clients and brokers.Nevertheless, more than 75% ofour current reinsurance clients, asmeasured by the premium volume,have the right to cancel their rein-surance contracts as a result ofeither the recent ratings down-grade or reduction of our capital,which … could cause a substantialloss in premium volume. We aretherefore continuing to explore arange of strategic alternatives forthe company.” PXRE has retainedLazards as financial advisors.

Both Best andS&P had loweredtheir ratings ofPXRE from “A” to“A-” last Septem-ber. Following thehurricanes and theinitial downgrades,PXRE completeda series of capital-raising initiatives,issuing preferred

and common stock to gain $474million in equity capital by lateOctober. PXRE also secured $550million of extreme event protec-tion from two collateralised catas-trophe bond deals in Novemberand December.

As a result of the losses, PXREhad an accumulated deficit of $527.3million at December 31, 2005.

Analysts say PXRE’s situationcould worsen if customers invokethose contract exit clauses. Also,some contracts require PXRE toput premiums it has collected in atrust to benefit clients if ratings fall.

Chris O’Kane, CEO ofBermuda-based Aspen InsuranceHoldings, which claims PXREowes it about $53 million fromhurricane events in 2004 and 2005,said his company may seek collat-eral to back the debt. He addedthat the situation was “anotherreminder of the power of the rat-ing agencies”.Steven Dreyer’s view: see page 20

Confident AWAC steps up

The storm surge that engulfs PXRE

IPO SEEKS $400 MILLION, CITING FINANCIAL STRENGTH AND GROWTH OPPORTUNITIES

AWAC President & CEO ScottCarmilani: advantaged andunencumbered

“Do you have one that says sorry for your recent losses”

[ 2 ]


16997B_Bermuda_Pg_ 4/7/06 10:42 AM Page 3

[ 4 ]

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[ 5 ]

NEWS REVIEW

WHY WE’RE NOTGOOD ENOUGHFOR BEST…A

M Best is extending its negativeoutlook for the Bermuda andUS reinsurance markets for

2006. The agency expects “few ifany rating upgrades or positive rat-ing outlooks” this year.

Although there were severalrating downgrades in 2005 andfew Bermuda reinsur-ers hold ratings withnegative outlooks, Bestbelieves “the underly-ing stability of thesemarkets remains ten-uous”.

Best claims the USand Bermuda reinsur-ance sectors remainsusceptible to pricingcompetition as invest-or expectations for double-digitreturns run high. “Should the cur-rently perceived market opportuni-ties in property not be significant-ly realised, the companies thatreceived much of the new capitalthat recently flowed into thesemarkets might be forced to findalternative strategies,” Best said.

“The markets have alreadydemonstrated that while propertyrate increases attained for January2006 renewals were favourable,they were nonetheless narrowlyfocused and limited to those coversaffected by recent losses. Casualtybusiness has seen little if any bene-fit from the hurricane losses in

2005. Should companies seek todiversify the new capital into casu-alty, it could trigger additionalsoftening for the casualty segmentas well.”

Best believes that another activestorm season in 2006 or furtherreserve development from the

2005 storms wouldbe material and mayhelp to prolong thehard property mar-ket, but at an addi-tional cost to earn-ings and capital.“The financial flexi-bility of some com-panies is alreadystretched with debtto capital for the

industry at an all-time high,” itstated. “While common equity haspreviously flowed into the marketwith relatively little resistance,[we] question if another year oflosses will dampen investors’appetites for a stake in insuranceand reinsurance holdings.”

Best said it will continue to takea rigorous approach in the evalua-tion of companies’ capitalisation andrisk management controls and willrequire more detailed information.

“Catastrophe models will con-tinue to be valuable tools for thequantification of risk, but not theonly barometer,” it added. “Man-agement will need to demonstrate

confidence in the dataand parameters employedthroughout the modellingexercise. Further, manage-ment needs to betterdemonstrate that under-writing and risk controlsare adequate to ensure thatthere is a clear understand-ing and controlled correla-tion with un-modelledexposures.”

Validus Re, one of the class of 2005start-ups, is off to a flyer withgross written premiums of $220million during the January renewalseason.

Chairman & CEO EdwardNoonan said: “Both submissionsand bindings exceeded our expecta-tions. To date, Validus Re hasbound business representing grosswritten premiums of $220 millionin our targeted property, marineand energy, and specialty lines.Having developed a business modelbased on conservative assumptionsregarding rate increase, we were

pleased with the pricing environ-ment. Additionally, we are encour-aged by the broader market accept-ance of the absolute total insuredvalue approach to risk and capitalutilisation that is the core premiseof our exposure management strat-egy.”

A Bermuda Class Four reinsurer,Validus is backed by more than $1billion in capital and an A M Bestrating of “A–” (excellent). Its leadinvestors are Aquiline Partners, aprivate equity investor run by for-mer Marsh & McLennanChairman Jeffrey Greenberg.

“ Yes, money talks — which means it can lie.”

Political risk specialists Sovereign RiskInsurance, launched in 1997 as a jointventure between ACE BermudaInsurance and XL Insurance (Bermuda),is now wholly owned by ACE and willwrite business solely for ACE.Sovereign’s agency structure, underwrit-ing team, limits and tenors will remainunchanged, according to a companyrelease.

Price Lowenstein, President & CEOof Sovereign, commented: “We verymuch appreciate XL’s support over thepast eight-and-a-half years and wishthem well in their emerging markets ini-

tiatives going forward. We are very excited about our new owner-ship structure and look forward to continuing to serve our clients’needs in emerging markets.”

Brian O’Hara, XL Capital President & CEO, said: “Our exitstems from a change in our strategy for assuming risk in emergingmarkets, and we believe this restructuring is a win for all parties.”

Sovereign gets sole owner

Price Lowenstein,President & CEO of Sovereign: “very excited”

‘The financial flexibilityof somefirms isalready

stretched’

Validation…

Max Re probeMax Re Capital is holding an internalinvestigation, with the assistance of out-side advisors, into three finite risk retro-cessional contracts written in 2001 and2003 to determine whether they were“properly accounted for”. In a state-ment, Max Re added that it had volun-tarily contacted the SEC on the issue.


[ 6 ]

NEWS REVIEW

Bermuda reinsurer OverseasPartners Ltd is in the finalstages of runoff after four years.

Creditors were given notice inFebruary to submit claims to thecompany’s liquidators by the end ofMarch. Shareholders voted infavour of OPL being closed downon January 31. The wind-up comeson the heels of OPL selling offmost of its operating assets, settlingmajor liabilities and returning some$1.16 billion to shareholders. As of

December 15, OPL’s shareholders’equity was $64 million. Investorsare unlikely to recoup more than$60 million when the companymakes its final distribution of capi-tal, according to a company state-ment. OPL’s board decided to quitthe reinsurance market in 2002after shareholders demandedgreater liquidity. OPL was set up in1983 as UPS’s reinsurer, and wasowned mainly by 98,000 past andpresent employees.

Love’slabourslost?A high-profile divorce isreportedly forcing JohnCharman, President & CEOof AXIS Capital Holdings, toretire at the end of 2008. Mr Charman founded theBermuda-based specialtylines insurer and treaty rein-surer in 2001 after a glitteringcareer at Lloyd’s of Londonand later at ACE.

Ranked 321st on theLondon Sunday Times RichList, Mr Charman is involvedin a heavily publiciseddivorce battle in the Englishcourts over his assets,reported to be about $261.7million. In late December, helost an appeal against a deci-sion to allow Beverley, hisBritish-based wife, access toDragon Holdings, a Bermudatrust fund. Meanwhile, Axisreported net income of $90.1million for 2005, down from$495 million the year before.

OPL in final throes

“Phillip, I was going to thank you, but, then, yours is a thankless job.”

John Charman: squeezedout, apparently, by hisdivorce proceedings

TALENT EXPANDS POSSIBILITIES

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A+ by A.M. BestAA by Standard & Poor’s


[ 8 ]

NEWS REVIEW

Many of the brightest and best inthe industry gathered for theWorld Insurance Forum at the

Fairmont Southampton hotel here.Some fascinating entries fromChris Gibbons’ forum notebook…

“The industry achieved its firstunderwriting profit in 20 years in2004. Is there room for improve-ment? Clearly!”

— Martin Sullivan, President& CEO of AIG

“Some of the mantras we follow inthis business seem self-evident tome. We set up the FranchisePerformance Directorate … tomake sure people would under-write for a profit!”

— Lord Levene, Chairman ofLloyd’s

“At RIMS in San Diego peoplewere saying the market conditionswouldn’t last and that it was allgoing to collapse … There’s some-

thing in the reinsurance and directinsurance industry where the basiceconomics of business have gotmissed out somewhere.”

— Lord Levene

“In a rising market, even monkeyscan underwrite.”

— Moderator Michael Buttduring a panel discussion

“Brokers today have to be profi-cient at a growing range of risk

[and that’s] not the DNA of everybroker. We have an educationalchallenge in the extreme.”

— Brian Storms, Chairman &CEO of Marsh Inc

“We should make sure our busi-ness, which is global, is supervisedaccordingly.”— Munich Re CEO Nikolaus von

Bombard, calling for greaterregulatory harmony

“How can you be objective as abroker when you have a 20% stakein a carrier?”

— Dr Bombard

“If there is a total vacuum in themarket, it is helpful for the brokerto help fill it and then step back.”

— Michael Butt in response toDr Bombard

“The models may fail here andthere but after each big loss youhave to recalibrate them. If youdo all that right and look backover 10 years, the cat businesswas good business. We had twohorrifying years but scientifi-cally and financially we canhandle it.”

— Dr Bombard on copingwith increasingly

large catastrophes

“It is a lot more difficult to predicthuman nature and politicians thannature itself.”

— Dr Bombard

“It was a disgrace that more wasnot done to prevent the damage[in New Orleans]. It’s not for us toput right but the industry is wellwithin its rights [to ask] why itwasn’t done.”

— Lord Levene

“Investigations should be carriedout surgically and, if there is anywrongdoing, … throw the book atthem. They should not be done ina public fashion that dispropor-tionately affects shareholders andpeople’s jobs.”— Howard Mills, Superintendent

of insurance, New York State

The sages of Southampton

addi

ngan

othe

rdim

ensi

on A market leader in commercialproperty insurance

• One of the top 3 property brokers on the Island

• Over US$100m of annual premium to the Bermuda markets

• Direct insurance and facultative reinsurance broker

• US and International Business

Established in 19884th Floor, Cedar House, 41 Cedar Avenue, Hamilton, HM12, Bermuda. Telephone (441) 292 4364

JLT Risk Solutions’ operations in Bermudaare carried out by: JLT Risk Solutions(Bermuda) Limited and JLT Risk SolutionsManagement (Bermuda) Ltd.

For further property information please contact Gareth Davies:

[email protected] (441) 294 4501


Standard & Poor’s has givenstart-up reinsurer Harbor PointRe an “A–” financial strength

rating. Harbor Point was launchedlast December as a spin-off fromChubb Re, the reinsurance arm ofChubb Corporation, HarborPoint’s lead investor, along withTrident III, a private equity fundmanaged by Stone Point Capital.The deal gave Harbor PointChubb’s reinsurance book of busi-ness and January 1, 2006 renewalrights with Chubb retaining liabil-ities for contracts prior toDecember 31, 2005.

S&P noted: “Harbor Point hassome unique advantages comparedwith other competitors in 2005,including offering ‘AA’ financialstrength to cedents for up to oneyear for property risks and up totwo years for casualty treaties via afronting arrangement with FederalInsurance Co, a subsidiary of

Chubb.” But it added: “These pos-itive factors are offset by the limit-ed track record in property catas-trophe business due to its parent’slack of appetite for additionalproperty exposure.”

S&P has also assigned ratingsto two other start-ups: an “A” toAmlin Bermuda and an “A–” toHiscox Insurance Co (Bermuda).

Meanwhile, S&P has con-firmed its “BBB” rating of the Aleagroup of companies and with-drawn it at management’s request.Alea Group Holdings (Bermuda)went into runoff late last year afterbeing downgraded. S&P said it“expects the Alea group to meet itspolicyholder obligations in full …Although there has been adversereserve development reported inrecent years, this is not expected toexhaust shareholder funds, eitherin the operating companies or atthe consolidated level.”

[ 9 ]

NEWS REVIEW

S&P giveth … and taketh awayBermuda executives will lead industrydebate on contract certainty at the RIMS2006 Annual Conference & Exhibition inHawaii. The topic — Contract Certainty:Imperative or Impossible Dream? — wassuggested by the Bermuda InsuranceDevelopment Council and will be present-ed on Wednesday, April 26 (8 to 9.30am).

Moderator Roger Gillett, President ofACE Risk Management International, said:“This subject is being debated throughoutall the world’s major insurance and reinsur-ance markets and it is hoped this sessionwill result in some identified steps for theimprovement in the industry as a whole.”

The panel will include DianeLabroador, Risk Manager for Intel

Corporation; lawyer Kim Wilkerson of Attride Stirling & Woloniecki;Henry Scully, President of Willis Bermuda; and David Cash, ChiefActuary & Chief Risk Officer of Endurance Specialty. For more RIMS information go to www.rims.org

Bermuda’s RIMS challenge

Roger Gillett:searching for important answersat RIMS


[ 10 ]

XL’s farther horizonsNEWS REVIEW

The history of Bermuda is the history of progress. Progress in the face of risk. Progress achieved by people with bold ideas and unwavering confidence.

We don’t come to work in the morning just to write policies. We come to work to have an impact by taking on risks that others won’t. This is what makes us different.

ACE was established in Bermuda in 1985 to provide excess liability and D&O cover-age when capacity was scarce. Today the ACE Group is one of the world's leading providers of insurance and reinsurance with offices in more than 50 countries and authority to do business in more than 140 countries.

ACE is in the business of working with global and national clients on a local level all over the world. We provide specialized coverages in marine, aviation, prop-erty, energy, directors and officers, construction, mortgage disaster liability, casu-alty, and accident and health.

We thrive on creating innovative ways to insure revolutionary ideas. That’s the reason people want to work with us. Risk does not scare us. It inspires us to work even harder.

Because we know that when we take on the responsibility of risk, our clients can take on the responsibility of innovation, accomplishment and change.

In a word, progress.

PROGRESS.NOW INSURED LOCALLY.

www.acelimited.com

Bermuda’s XL Capital has receivedapproval to open a representativeoffice in Beijing and has also signed

an agreement with Brazil’s Banco Itauaimed at creating a new insurance com-pany in Brazil.

According to XL, its Beijing office ispermitted to act as a liaison point as wellas conducting research and performingother non-income generating activities.It said the move “demonstrates XL’scommitment to the China market and

the company’s view of the market’s long-term potential in the areas of insuranceand reinsurance”.

President & CEO Brian O’Haracommented: “We recognise the need todevelop close ties and knowledge-exchange opportunities. Longer term,we see China as very important instrengthening our global presence tosupport our clients across XL’s threesegments of insurance, reinsurance andfinancial products and services.”

Commenting on the Brazilian move,Clive Tobin, Chief Executive of XL’sInsurance Operations, stated: “We lookforward to servicing the local needs ofour combined clients, as well as provid-ing them with access to products andservices across our global network. Thisis an important commitment for [XLand Itau], and I believe it positions uswell to meet the needs of clients todayand after the eventual opening of theBrazilian reinsurance market.”

Brian O’Hara: signifi-cant steps into Chinaand Brazil

Omega licenceLloyd’s insurer Omega Under-writing has been given a Class Threelicence by the Bermuda MonetaryAuthority for its Bermuda unit,Omega Specialty Insurance Com-pany. Omega said it plans to raisearound $150 million to set up itsnew Bermuda insurer and supportits existing Lloyd’s syndicate. TheBMA licensed three other insurersin January: two captive companiesand a second Class Three company,Stellar Reinsurance (FGI).

White Rock moveWhite Rock, Aon’s protected celland rent-a-captive managementunit, has set up its first segregatedaccounts company in Bermuda.White Rock Insurance (SAC)Bermuda has six cells and is licensedfor all classes of general and lifebusiness. Director Clive James saidthe flexibility of the Bermuda mar-ket for cells will enable White Rockto provide “a quick, simple, effectiveand cost-beneficial method of enter-ing the captive market”.

BIMA’s new teamPhilip Barnes, Managing Director ofAon Insurance Managers (Ber-muda), has been elected President ofthe captive managers’ professionalbody, the Bermuda InsuranceManagement Association. Alsoelected to BIMA’s executive boardfor 2006/07 were: Nick Dove(Quest), Rory Gorman (Marsh),Oliver Heyliger (Willis), PageRouse (Atlantic Security), John Neal(Symphony), Andrew McComb(Allegro), David Pickering (IAS)and Peter Willitts (Liberty Mutual).


[ 11 ]

Ratingsrule, OK?

ANALYSIS

Not surprisingly, Bermuda’s monoline cat companiescame off worst when the final figures for 2005 werecounted.Whether the pure catastrophe model is, as pro-

claimed by Robert Hiscox, Chairman of HiscoxBermuda — one of the new companies to set up shopon the island — “a dead duck” remains debatable butcertainly those businesses with a more diverse portfo-lio fared far better than monoline companies likeIPCRe, Montpelier Re and PXRE, which took huge— and in PXRE’s case, potentially fatal — hits in theworst year on record for hurricane losses.

Most existing companies have managed to recapi-talise successfully — the Benfield Group estimates53% of the $18.4 billion in new capital that flowed intoBermuda post-Katrina went to established companies— but for some, the one-two punch of 2004 and 2005was just too much. Rosemont Re closed to new busi-ness last October and sold its renewal rights to start-upAriel; downgraded Olympus Re no longer writes openmarket third party reinsurance; Alea is in runoff;PXRE and Quanta, which has quit the property catbusiness, may yet follow. No wonder Benfield headedits March 2006 Bermuda quarterly report “Shaken andStirred”.

The report, which tracks a group comprising theisland’s 16 major reinsurers, stated that 2005 profitswere wiped out by Katrina, Rita and Wilma, resultingin a net loss for the group of $2.8 billion comparedwith profits of $5.5 billion in 2004. Storm losses forthe group totalled $11.3 billion, equivalent to 24% ofshareholders’ funds at June 30, 2005. Eleven of thestudy group recorded year-end losses compared withjust one in 2004.

Benfield reflected: “The average return on equitysank to a negative 6.0% from a positive 13.1% in 2004… The aggregate combined ratio rose from 96.3% to118.0% in 2005, with just two companies [ACE andArch] reporting combined ratios below 100%.” Allthree monoline cat reinsurers had combined ratios ofmore than 200% with PXRE the worst at 282.9%.”

The January 2006 renewals saw robust priceincreases in lines most affected by the storms such as

property, marine and energy but a disappointingresponse elsewhere. However, Benfield expects rein-surance capacity to tighten for July 1 renewals andbeyond: “The recalibration of catastrophe models, ashrinking risk appetite for peak exposures, restructur-ing of coverage on a more restrictive basis and theincreased cost of capital are generally expected to exertfurther sustained upward pressure on pricing.”

The fact that funding for many of the 2005 start-ups was not completed until mid-December con-tributed to “muted demand from cedants, who gaveweight to existing relationships and proven credit rat-ings”, said Benfield, adding: “A degree of scepticismabout the security of the new markets was also evident

despite clean capital bases and the generous distribu-tion of ‘A’ grade ratings. Buyers in many cases took theview that whilst all ‘A-’ ratings are equal, some ‘A-’ rat-ings are more equal than others …The reactions of thenew companies to unfulfilled business expectationswill be an important point of vigilance as 2006unfolds.”See pages 12 and 13 for PwC’s exclusive market factsand figures

Diversify or die?PURE CATASTROPHE IS, WELL, CATASTROPHIC IN A YEAR TO REMEMBER

One of the most contentiousaftershocks of the 2005 stormsis the power now wielded bythe rating agencies. A M Bestand Standard & Poor’s down-graded many Bermuda-basedcompanies with several dippingbelow the “A–” bar now consid-ered essential to write manylines of business. Furthermore,both agencies have maintaineda negative outlook on theBermuda market and the rein-surance sector generally. Aleahas gone into runoff after down-grades left it unable to attract asuitable volume and quality ofbusiness. PXRE’s future wasthrown into doubt when its rat-ings, already cut in Q3, werefurther downgraded following itsQ4 results (details, page 2).Like PXRE, Quanta announcedit would be looking at “strategicalternatives”. Both companiesbelieve they can continue tooperate in business lines thatdo not require the magic “A–”level, and Benfield noted thatneither of them was “insolventor illiquid” at the time of thedowngrades and they remainconfident of meeting all currentobligations.

“Profits lately have been spirallingdownwards.”


[ 12 ]

ANALYSIS / PRICEWATERHOUSECOOPERSOPERATING RATIOS

INSURANCE RATINGS

ANNUAL LOSS RATIOS2005 2004 2003

ACE 74.5% 70.7% 64.6%Arch 67.2% 64.4% 63.9%Aspen 90.1% 58.7% 52.7%AWAC 105.7% 76.5% 65.3%Axis 80.3% 61.4% 51.1%Endurance 95.8% 57.4% 56.5%Everest Re 94.0% 74.4% 69.6%IPC 237.0% 60.8% 18.2%Max Re 98.0% 74.5% 74.5%Montpelier 178.0% 51.4% 23.3%PartnerRe 86.9% 65.4% 65.6%Platinum 87.8% 70.4% 54.7%PXRE 260.5% 73.5% 49.4%Renaissance Re 116.6% 81.9% 33.0%White Mtn 75.2% 67.8% 68.1%XL Capital 107.1% 68.6% 75.3%

ANNUAL EXPENSE RATIOS2005 2004 2003


ANNUAL COMBINED RATIOS2005 2004 2003


A M BEST RATING S&P RATINGMar 15, 2006 Nov 30, 2005 Mar 15, 2006 Nov 30, 2005

ACE A+ A + A+ A+Arch A – A – A – NRAspen A – A – A AAWAC A A NR NRAxis A A A AEndurance A – A – A – A –Everest Re A+ A + AA– AA–IPC A A A AMax Re A – A – NR NRMontpelier A – A – A – A –PartnerRe A+ A + AA– AA–Platinum A A NR NRPXRE B++ A – BBB– A –Renaissance Re A A A+ A+White Mtn A A A– A –XL Capital A+ A + A+ A+

Notes: NR — Not rated by S&P

2006 renewals� Strong rate increases were seen atJanuary 1, 2006 in business linesand geographic areas affected by therecent storms, and continue to beseen in peak zones. Rate increases inother areas were less than expected.The market is, however, expected tocontinue to harden throughout2006. The impact of start-ups wasgenerally seen as positive as aggre-gation constraints from existingplayers had caused an excess ofdemand over supply in peak zones.

Earnings� Bermuda reinsurers have beenhard hit by hurricanes and almostall reported losses for the year.� The aggregate combined ratio forthe group was 140.2% in 2005; it was92.8 % in 2004 (which itself includ-ed the impact of four hurricanes).The combined ratios reported by theReinsurance Association of Americawere 129.3% and 104.8% in 2005and 2004 respectively.� Monoline property catastrophecompanies (PXRE, Montpelier and

IPC) were especially affected.� XL Capital’s earnings wereadditionally impacted by a signifi-cant arbitration result.

Ratings� Both A M Best and S&P main-tained a negative outlook on thereinsurance market. They alsoadjusted their capital adequacymodels due to the increasing fre-quency and severity of naturalcatastrophes. Several Bermudacompanies had ratings downgradesor negative watches. Quanta andPXRE’s ratings went below “A–”.

Capital-raising activities� Following Hurricane Katrina,the established Bermuda reinsurersraised approximately $9.7 billion innew capital. Start-ups and sidecarsraised about $8.7 billion.

New entrants� Start-ups generally were capi-talised very late in the year and hadless impact on the renewal seasonthan expected.

Looking back, looking forward

2005 2004 2003

ACE 16,811 16,094 14,630Arch 4,015 3,668 3,226Aspen 2,093 1,586 1,307AWAC 1,560 1,708 1,574Axis 3,394 3,012 2,274Endurance 1,669 1,711 1,602Everest Re 4,109 4,709 4,574IPC 472 378 323Max Re 1,246 1,044 1,010Montpelier 979 837 810PartnerRe 3,665 3,888 3,625Platinum 1,765 1,660 1,198PXRE 542 346 339Renaissance Re 1,809 1,544 1,382White Mtn 4,602 4,792 3,823XL Capital 11,849 11,092 9,706

2005 2004 2003

ACE 11,748 11,110 9,727Arch 2,978 2,916 2,213Aspen 1,508 1,233 812AWAC 1,272 1,325 1,167Axis 2,554 2,028 1,436Endurance 1,724 1,633 1,174Everest Re 3,963 4,425 3,738IPC 453 355 299Max Re 1,039 918 727Montpelier 848 788 705PartnerRe 3,599 3,734 3,503Platinum 1,715 1,448 1,068PXRE 388 308 321Renaissance Re 1,403 1,338 1,116White Mtn 3,799 3,821 3,138XL Capital 9,366 8,582 6,994

ANNUAL GROSS PREMIUMS WRITTEN $M

ANNUAL NET PREMIUMS EARNED $M


[ 13 ]

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings (loss) per share ($)Q4 2005 Q4 2004 Q4 2003 Q4 2005 Q4 2004 Q4 2003

ACE 236 278 445 0.69 0.93 1.61Arch 101 107 84 1.34 1.45 1.22Aspen 30 72 55 0.33 1.01 0.88AWAC (24) 103 87 (0.08) 0.68 0.58Axis 233 181 160 1.47 1.09 0.97Endurance (52) 113 89 (0.80) 1.71 1.31Everest Re (162) 93 30 (2.63) 1.64 2.15IPC (75) 9 65 (1.28) 0.18 1.35Max Re (11) 87 36 (0.20) 1.82 0.76Montpelier (61) 102 100 (0.68) 1.53 1.46PartnerRe (42) 137 100 (0.76) 2.54 1.84Platinum (103) 50 50 (1.94) 1.03 1.03PXRE (448) 29 24 (8.45) 1.09 1.14Renaissance Re (210) 191 160 (2.97) 2.66 2.25White Mtn 33 165 196 2.82 13.48 5.75XL Capital (822) 288 (315) (5.51) 2.07 (2.29)

Net income (loss) attributable to common shareholders ($m) Fully diluted earnings (loss) per share ($)2005 2004 2003 2005 2004 2003

ACE 1,028 1,153 1,482 3.31 3.88 5.25Arch 256 317 281 3.43 4.37 4.14Aspen (178) 195 152 (2.40) 2.74 2.56AWAC (160) 197 288 (1.05) 1.30 1.92Axis 90 495 532 0.57 2.98 3.42Endurance (223) 356 263 (3.60) 5.28 4.00Everest Re (219) 495 426 (3.79) 8.71 7.74IPC (626) 139 261 (12.30) 2.87 5.40Max Re 7 134 121 0.13 2.75 2.84Montpelier (753) 240 407 (10.49) 3.55 6.05PartnerRe (86) 471 438 (1.56) 8.71 8.13Platinum (138) 85 145 (3.01) 1.81 3.09PXRE (705) 9 84 (21.65) 0.82 4.10Renaissance Re (281) 133 606 (3.99) 1.85 8.53White Mtn 290 419 281 26.56 39.92 23.63XL Capital (1,292) 1,126 372 (9.14) 8.13 2.69

DEC 31, 2005 DEC 31, 2004 DEC 31, 2003

BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE

ACE 36.53 53.44 34.61 42.75 31.56 41.42Arch 33.82 54.75 64.23 38.70 60.66 39.86Aspen 21.42 23.67 21.37 24.52 22.47 24.45AWAC 9.44 n/a 14.21 n/a 13.15 n/aAxis 23.59 31.28 21.20 27.36 18.48 29.28Endurance 28.31 35.85 30.40 34.20 25.74 33.55Everest Re 64.08 100.35 66.06 89.56 56.82 84.60IPC 25.39 27.38 34.47 43.51 32.49 38.90Max Re 20.69 25.95 20.45 21.31 17.82 22.50Montpelier 11.86 18.90 28.20 38.45 26.15 36.70PartnerRe 54.52 65.67 61.10 61.94 48.28 58.05Platinum 26.05 31.07 26.30 31.10 24.79 30.00PXRE 6.44 12.96 33.98 25.21 42.44 23.57Renaissance Re 31.51 44.11 37.22 52.08 33.16 49.05White Mtn 355.61 558.55 360.53 646.00 330.76 459.95XL Capital 47.19 67.38 55.70 77.65 50.51 77.55

Note: Book value has been calculated by dividing shareholders’ equity at Dec 31 by shares outstanding at Dec 31

KATRINA RITA WILMA TOTAL

ACE 597 156 250 1,003Arch 172 48 50 270Aspen 442 60 28 530AWAC 215 75 83 373Axis 575 280 100 955Endurance 485 90 115 690Everest Re 584 48 230 862IPC 616 84 113 813Max Re 99 13 40 152Montpelier 809 141 69 1,019PartnerRe 511 88 174 773Platinum 235 40 135 410PXRE 487 67 130 684Renaissance Re 504 69 314 887White Mtn 202 37 37 276XL Capital 628 145 247 1,020

COMPARISON OF BOOK VALUE & MARKET VALUE PER SHARE ($)

ANNUAL EARNINGS DATA

QUARTERLY EARNINGS (LOSS) DATA

2005 HURRICANE LOSSES $M (at March 15, 2006)


What sets Bermuda apart as aninternational business centre isnot so much its tax environ-

ment as its reputation, the island’sGovernor, Sir John Vereker, tolddelegates at the recent WorldInsurance Forum here. He added

that such a reputation was “hard tobuild but easy to lose”.

“Professionals want to workwhere their professionalism isrecognised, valued and respected.Managers want to work where thebusiness environment is pre-

dictable and honest. Shareholderswant their companies to be head-quartered in a jurisdiction widely

recognised as stable and clean.And policy holders want to be surethat their insurers are regulated inaccordance with best internationalpractice,” said Sir John. “AsGovernor, I take a close interest inhow Bermuda measures up toemerging international standards.All offshore entities must continueto satisfy external scrutiny. There isabsolutely no sign that the interna-tional scrutiny, sometimesamounting even to internationalhostility, of offshore financial cen-tres is going to abate. On the con-trary: it is going to intensify, asfinancial instruments becomemore complex, as the volume oftransactions increases and asfinance ministers become evermore concerned about moneylaundering, terrorist finance andglobal financial stability.”

He added: “Regulation is onlypartly preventative; it must also be,if necessary, punitive. The detec-tion, pursuit and prosecution ofwhite-collar crime, especially whereit crosses international borders, is areal challenge for all but the mostsophisticated jurisdictions. We inBermuda are determined to ensurethat we remain among those. Therewill be no cover-ups. Bermuda isthe wrong place for those who wantto do wrong.”

Sir John also mentioned thatdespite the unprecedented lossesfrom the storms of 2005, influx ofcapital into Bermuda indicated “themarket working as it should. Newcapital flowed in to an industry thatproved five years ago it could copewith the Twin Towers, and provedlast year that it could cope with NewOrleans. Far from posing a threat toglobal financial stability, this indus-try is a mainstay of it. And Bermudais and will remain at its heart.”

NEWS EXTRA

No hiding placeBERMUDA’S GOVERNOR VOWS CONTINUED ADHERENCE TO THE HIGHEST STANDARDS

[ 14 ]

Governor Sir John Vereker (centre) with Michael Butt, Chairman,World Insurance Forum and Chairman, AXIS Specialty, and MartinSullivan, AIG President & CEO


IN DEPTH

Among the familiar faces in thespate of Bermuda start-upsannounced in the last quarter of

2005 was that of David Brown, theCEO of property cat reinsurerFlagstone Reinsurance. British-born Mr Brown, who had beensuccessful enough in a similar posi-tion at Centre Re to retire in 1998at the age of 40, has investedenough in Flagstone to say thatreports of him and ChairmanMark Byrne putting up $30 mil-lion of their own money are actual-ly “on the light side”.

But why, when most people inhis position would willingly swapthe office for the golf course, didhe decide to return at all?

“The problem with being ayoung retired person in a place likeBermuda is that you end up doinga huge raft of pro bono and charitywork,” he explains. “I wasChairman of the Bermuda StockExchange and sat on a number ofboards, all of which was fun, butthree years ago Mark Byrne, who isa friend and neighbour, asked meto join him and it’s grown fromthere.”

Mr Byrne, a 44-year-oldIrishman who had formed hedgefund manager West End Capital in1998 and also owned Haverford, aClass III Bermuda insurance com-pany, was looking to expand thebusiness to attract outsideinvestors. In Mr Brown, who hadoriginally come to Bermuda 23years ago as an accountant withErnst & Young, he saw a partnerwith valuable skills that would

complement his own. “It was,” saysMr Brown, now an investor inboth West End and Haverford, “agreat opportunity to bring myskills to bear with Mark’s and cre-ate something bigger.”

Last year, West End formedRockridge Re, a Cayman-basedcompany, with Bermuda-basedreinsurer Montpelier Re. Chairedby Mr Brown, Rockridge offerscoverage solely to Montpelier, giv-ing it the capacity to write high-layer, excess of loss contracts.Messrs Brown and Byrne hadplanned to form a new property catreinsurer longbefore Katrinabut the stormsof 2005 createdthe urgent needfor new capaci-ty. “WhenKatrina hap-pened, it was a chance to get capi-tal and enter a business we bothliked anyway and with Mark’smathematical and technicalmodel-based background, theproperty cat business suits our skillsets wonderfully,” says Mr Brown.“We really would have liked tohave been in this business two orthree years ago but there wasn’t theready capital available.”

Mr Byrne, Chairman ofFlagstone and West End, adds:“We were already making very suc-cessful investments in insurancecompanies in the US and Caymanbut what changed with Katrinawas that suddenly there was a lotof capital that wanted to get into

the property cat business. Thecombination of the capital and ourinfrastructure allowed us to rampup a company very quickly. At thisstage, I think we’re probably morecompletely operational than justabout any of the new guys on theblock.”

And so far, so good. With over$725 million in initial capital andan “A–” (Excellent) rating, the pairsay Flagstone has got off to “a fab-ulous start”, although they won’treveal premium figures.

“We really don’t set ourselvespremium targets,” says Mr Brown.

“We’re looking at pricing andlooking at where we can deploy thecapital to make attractive returns.In this business, the premiumnumber varies greatly dependingon the kind of business you write,the layer you’re writing at andwhether you’re writing excess lossor pro rata. However, the marketacceptance of the launch ofFlagstone has been excellent.”Much of that, he says, is down toan experienced underwriting teamheaded by Guy Swayne, a formerLloyd’s and ACE Tempest Reexecutive, and Gary Prestia, theformer CEO of Alea’s NorthAmerican operations.

“Our senior underwriters have

been in business for more than 20years each and they targeted pro-grammes they’ve been used to sup-porting in the past and we’ve hadan 85 to 95% success rate,” MrBrown notes. “Although we didn’tget our rating until mid-December, we had already hiredour underwriting team and theyhad been making contact withclients and brokers so we hadalready seen a lot of submissionsand we already knew what we’dlike to write, given our capital andrating. It was a scramble then hav-ing done that to get all of ourauthorisations out there and get onthe business.

“Also, because the infrastructureis provided for the most part in theshort term by West End Capitaland Haverford, we weren’t runningaround having to find accountantsand lawyers. We had everything weneeded to start the business.” MrByrne says West End is rentingsome infrastructure, platforms andother resources to Flagstone, but isnot a direct investor. “The moneyinvested is from a good mix ofinvestors, primarily from privateequity investors with experience ininsurance and financial markets,including ourselves.

The duo forecast a promisingfuture, not only for Flagstone butalso their rival start-ups.However, as Mr Brown pointsout: “In Bermuda, we’re sofocused that sometimes we missthe point that the competition isnot the guys down the street. It’sa global market and Bermuda

PAVED WITHGOLD?

‘Our senior underwriters have targeted programmes they’ve been used tosupporting in the past and we’ve had an 85 to 95% success rate’

ALREADY, FLAGSTONE’S DAVID BROWN ANDMARK BYRNE REPORT ‘FABULOUS’ FIGURES

CORPORATEPROFILEBy Chris Gibbons

[ 15 ]


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now has about 40 to 50% of the worldproperty cat market. In many respects,we’re competing with what we think is abetter mousetrap against the old order.

“If anyone in the world today wants toplace a property cat programme, the firstplace they probably visit is Bermuda. If yousee the kind of people that we and I’m sureother companies have seen coming toBermuda in the last month, it’s the who’swho of the world’s primary companies whoare coming to Bermuda as the primary ormajor port of call. That didn’t happen 20years ago.”

Mr Byrne comments: “The potential sizeof the market for property cat reinsurance isexpanding at a very rapid rate because of thehigh levels of growth in the developingworld. What those countries often lack isthe robust legal systems that allow us to pur-sue reinsurance transactions or the availabil-ity of data to allow us to model the risk. But

as the data gets betterand we get more con-fidence in the legalsystems, we thinkthere are 20 morecountries where prop-erty cat reinsurancewill exist in 10 years. Ithink it’s possible formany participants todo well.”

For now, Flag-stone’s focus is at theattractive short tail

end of the market. “We have looked at andwritten some short-term casualty lines andwe think we’ll expand further into thoseareas, provided the market remains attrac-tive,” says Mr Brown.

Mr Byrne adds: “One of the nice thingsabout our mid-sized capital number is thatit allows us to easily double our capital andcontinue to participate without broadeningthe business plan. And if we find opportu-nity to broaden the business plan then Ithink we have people who’ve done innova-tive things before. We don’t need to thinkmore broadly to deploy $700 million to$1.5 billion. When we have $3 billion,then we’ll have to think about broadeningthe business plan!”

[ 16 ]

IN DEPTH

‘If you see the kind of people that we haveseen … it’s the world’sprimary companiescoming to Bermuda as the primary or major port of call’

Guy Swayne:instrumental inFlagstone’s greatstart


Despite literally thousands ofcolumn inches devoted to thetopic in recent months,

rumours of Lloyd’s demise are, toparaphrase Mark Twain, some-thing of an exaggeration, accordingto its Chairman, Lord Levene ofPortsoken. And he plays down anysuggestions of animosity betweenthe London and Bermuda marketsover the latter’s appar-ent continuing pros-perity at the expenseof its venerable 300-year-old rival.

“I don’t knowwhat all the fuss isabout,” he tells BIQat the World Insur-ance Forum inBermuda. “I cameback after Christmasand started readingall this stuff and Ithought, ‘What thehell is going on?’London and Bermuda have oper-ated together for a long time.Bermuda is the third largestinvestor in the Lloyd’s market andour market firms invest over hereas well so there’s a huge amount ofinterplay — it’s a collaborativejoint venture, if you like.

“It’s not a big fight. The mar-kets are inter-dependent and havebeen for a very long time. Do theycompete? Yes. Do they collaborate?Yes. Is that normal? Yes. Moremoney came into the Bermudamarket last year, so what? Whatdoes that prove? There are tremen-dous similarities between the two.There are parts of the business that

fit well here andparts that fit betterin London. If theLondon market was-n’t going anywhere,why would Bermudacompanies be amongour largest investors?If London didn’tthink Bermuda wasvery effective, whywould we have peo-ple investing moneyhere? To me it’s self-evident.”

Perhaps His Lord-ship is being slightly diplomatic.Certainly, the topic has been gen-erating plenty of heated debateelsewhere. Indeed, London-basedInsurance Day recently devotedfour pages to the issue, arguingthat there was still plenty of lifeleft in “the sick old man” of Lloyd’s

and that the “transatlantic upstart”could be facing a tricky period.

What is unarguable is the surgeof new capital, post-Katrina, echo-ing that of post-9/11 and post-Andrew 20 years ago, which hasconfirmed Bermuda’s position as aglobally important reinsurancecentre and one that is also attract-ing Lloyd’s talent like formerBermuda-sceptics Tony Taylor ofMontpelier and Robert Childs ofHiscox. Well-known Londonfirms Amlin and Hiscox wereamong those joining the Bermuda“class of 2005”.

Post 9/11, according toInsurance Day, Bermuda attracted

almost $16 billion of the $35.6 bil-lion in new global market capitalwhile post-Katrina, it raised$22.33 billion — albeit that muchof this was by existing firms toavoid downgrades — taking thetotal capital and surplus held byBermuda companies to $43 billion,much greater than London’s $15billion. From 1997 to 2004,Bermuda’s capacity rose 100%,compared with London’s 50% andthe compound growth in earnedpremiums in Bermuda was 23.3%,far outstripping London’s 3.8%increase, according to Aon.

As Mr Childs, Chief Under-writing Officer of Hiscox’sBermuda operation, told TheEconomist: “We cannot avoidBermuda. We’ve always needed tobe at the bazaar.”

Lord Levene doesn’t disagree,but points out: “Last year, wedeliberately reduced our capacitybecause we wanted to emphasisethe need to only write business

IN DEPTH

‘I startedreadingall this

stuff and thought:what the

hell isgoing on?’

If London wasn’t going anywhere, why wouldBermuda companies be among our largestinvestors? If London didn’t think Bermuda waseffective, why would our people invest money there?

[ 17 ]

LORD LEVENE* SEEKS TO RIDICULETHE FIGHT-TO-THE-DEATH SCENARIO

“Before we discuss destroying the competition, screwing our customers andlaughing all the way to the bank, let’s begin this meeting with a prayer.”

* Before joining Lloyd’s, Peter Levene was Vice Chairman of Deutsche Bank and Chairman ofBankers Trust International. He has also been the British Ministry of Defence’s Permanent Secretaryfor Procurement and Advisor to the Prime Minister on Efficiency & Effectiveness. Other major roleshave included the Chairmanships of the Docklands Light Railway and Canary Wharf. He served asLord Mayor of London in 1998/99, received his knighthood in 1989 and became a life peer in 1997.He is currently non-executive Chairman of General Dynamics UK, and on the board of J Sainsburyand the Haymarket publishing group.

‘

’


[ 18 ]

IN DEPTHthat was profitable and prevent peo-ple writing anything and everythingjust to increase their top line. SinceKatrina, Rita and Wilma, we’veincreased our capacity by about $2billion. Would I want it to beincreased any more than that? No.We pulled off what I think is ourgreatest achievement for a very longtime, which went completely unno-ticed: those hurricanes cost us $5.25billion net and what happened toLloyd’s? Nothing. If Lloyd’s hadhad a loss of $5.25 billion six orseven years ago, it would have beenout of business.

“Yes, it means we won’t make aprofit in 2005 but we won’t lose very

much either. That’s an enormousturnaround and we did that througha great deal of market discipline, sojust to keep throwing money interms of extra capacity is the lastthing we want to do.”

Lord Levene, 64, who hasrecently been elected to a secondthree-year term as Chairman, saysthe recent publication of the“Optimal Platform” plan, whilerecognising Lloyd’s need to be morecompetitive, was not, as some com-mentators insisted, in directresponse to recent developments inBermuda. “All it does is bringtogether a lot of the initiatives we’vebeen talking about for the last cou-

ple of years and put them into onedocument to show the marketwhere we’re going. The documentand Bermuda have absolutely noth-ing to do with each other. Bermudaisn’t even mentioned in there.” Withgood reason, cynics might argue.But Lord Levene dismisses talk ofnervousness in London. “I thoughtthe recent article in Insurance Daywas absolutely right and I agreewith what [editor Adrian Ladbury]is saying: what’s the big deal?”

But what does he make of devel-opments in Bermuda? “I think themarket’s stood up pretty well andthere’s a realisation out there thatrates are not moving upwards quite

as quickly as people thought but it’searly days yet. The two marketshave always worked closely togeth-er. The experience of one prettymuch mirrors what’s happening inthe other.”

Was he surprised at the decisionof Amlin and Hiscox and others tolaunch Bermuda start-ups? “Notreally. Other people have done it. Ifthey think that’s a good move fortheir business, why not?”

He acknowledges that Bermuda’slow taxation and regulatory infra-structure will always be an advan-tage. “I don’t think that’s going tochange in the short or medium termso we’ve just got to get on with it.On the other hand, we’re in a muchbigger international centre and peo-ple come there because of that —there’s a lot of experience there. Soinstead of keeping arguing about taxadvantages which I don’t think isgoing to be terribly productivebecause I don’t see any big change,we have to become more efficientand nimble to offset some of thosedifferences.”

Lord Levene says he is moreinterested — like Bermuda’s globalbrands ACE and XL — in expand-ing business into new markets suchas China, India and Brazil. “Herewe’re talking about carving up thesame cake into different shapes.There we are talking about a wholecake that didn’t exist before. I findthat very exciting. We’ve now gotapproval for a licence to operate inChina and we hope to have thatoperational by the end of this year.To suddenly have the opportunityto write reinsurance in what willshortly become the second biggesteconomy in the world — an econo-my which until 20 years ago didn’texist — is quite extraordinary.”

He sees Lloyd’s strengths con-tinuing to be its “brand, experienceand diversity, the fact that we are amarket speciality, as well as ourindividualism, reputation”. But hereadily admits: “We have a lot stillto do. We need to be more efficient,faster, less expensive and moreresponsive.”

‘Our marketshave alwaysworked closelytogether’

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Construction has already commenced on this prime office development whichwill provide over 20,000 sq.ft. of office accommodation on four floors. Thedesign of this state of the art building affords panoramic views of HamiltonHarbour from all floors.

The building also benefits from:

� state of the art building management systems� a full floor of parking for cars and motorcycles� an emergency generator capable of providing full redundancy for the entire

building in the event of a power outage� a card access and security system� 80 ft. of dock and water frontage.

Windward Place is likely to be one of the last waterfront office developments in Hamilton and consequently it’sdesign and specification has reflected this unique situation.

Windward Place will provide prospective tenants with first class office accommodation in a beautiful waterfrontsetting and consequently demand for this development is expected to be high.


[ 19 ]

IN DEPTH

How is your Katrina experiencebeing factored into the latestupgrade of your US andCaribbean hurricane models? We learned from Katrina that hur-ricane losses, when they reach acertain threshold, can start toamplify beyond what you wouldexpect and become a super catas-trophe, or super cat. The floodingof the city of New Orleans trig-gered a huge scale of regional dis-ruptions and civil exclusion —extended periods in which claimscould not be mediated. The ideathat when catastrophes get to acertain scale, you can start to getunanticipated consequences issomething that we need to thinkmore deeply about as modellers.

On the frequency side, the lasttwo seasons [Katrina was one ofseven hurricanes in 2004/05] havecrystallised that what we need tobe providing as modellers is not aview of risk just based on the long-term averages but a view informedby our best [calculation] of what isa likely pattern of activity over thenext five years. Post-Katrina, we’regoing to start providing a view ofhurricane risk informed by wherewe are in the hurricane cycle, withregards to sea surface temperaturesand the effect of climate on thosetemperatures and how these fac-tors might affect the frequencygoing forward. The implication isthat we will be raising our view ofhurricane activity by 30 to 50%.

What do you see as emergingrisks and how difficult are theyto model?Asian bird flu is a problem verywell suited to being exploredthrough the science of catastrophemodelling. You’ve got a tremen-dous amount of uncertainty andthere’s not a large amount of his-torical data, although there aresome historical events you can lookto, like the 1918 pandemic. A pan-demic can be broken down into a

series of logical questions – what isthe probability of genetic codereassortment through human-to-human infection? If there is infec-tion, how fast will it travel throughthe population, how lethal will itbe, how fast will the emergencydistribution of flu vaccine be? Youcan’t say for certain what theanswer is at any step but you canexplore them probabilistically andby parameterising a model througha combination of what data existsand expert scientific opinion. Weare building a full probabilisticglobal flu pandemic model and willbe using that to quantify life insur-ance-related losses initially andthen economic losses throughbusiness interruption and so on.

What other areas of insurancemight modelling techniques beapplied to?A concern within the industry isthe possibility of catastrophe aris-ing out of the civil justice system –mass tort, for example, withasbestos being just one example ofwhat could be a range of possibleadverse mass liability catastropheoutcomes. Catastrophe risk is real-ly the search for correlation andthat’s what we’re working on nowwith liability.

Some insurance figures feelthere is over-reliance on models. Do you agree?There are certainly companies thatwe have worked with who haveover-relied on models, and notfully understood their capabilitiesand limitations. They have linkedbusiness decisions to the model’soutput without appreciating that,in some cases, the models may not

align well with how they writetheir business; they may not evenmodel things that they insure. Onthe other hand, I’ve seen clientsuse models extremely appropriate-ly and use them extensively. Somepeople confuse the means with theend. Models are a way of exploringa problem, gaining insight andthen making an informed decision.The most effective users of ourmodels are insurers and reinsurers,because they have that mindset.“Talking” to your model is liketalking to the best group of expertsin the world. The trick is to listencarefully to those experts.

How involved is RMS with theBermuda market?We work with about 25 companies

on the island. Many were the classof 1992/93, class of 2001 and nowthe class of 2005, so Bermuda hasclearly become a major centre forthe provision of catastrophe capac-ity to the global marketplace. It’s avery large centre of our businessfocus and it’s not just Bermuda-domiciled companies doing busi-ness out of Bermuda: a lot of thebig global platforms are managedout of here and we do businesswith their operations throughoutthe world.

So Bermuda must be some-thing of a laboratory for you?Absolutely. A lot of our innovationcomes from interaction with ourBermuda clients. Our priorities areheavily influenced by what isimportant to this marketplace.Enhancements to our models areinfluenced by the feedback we getfrom here and we have come toview many of our Bermuda clientsin the same way they view us: askey partners and advisors.

Are you listening carefully?HEMANT SHAH* ON HOW TO MAKE YOUR MODELS WORK BETTER, AND OTHER MAJOR CONCERNS

“The hell with the past — I’d like to put the future behind us.”

* Hemant Shah is Founder & CEO of Risk ManagementSolutions, the world’s leading risk modeller, whose productsand services are used by more than 400 insurers, reinsurers,trading companies and financial institutions.Interview by Chris Gibbons


[ 20 ]

RATINGS NEWS

Steven Dreyer, the ManagingDirector & Regional PracticeLeader, North American

Insurance for Standard & Poor’s,has some bad news for those in theinsurance and reinsurance industrycomplaining about stringent stan-dards set by the rating agencies —they’re going to get a lot tougher.

Mr Dreyer, regularly named asone of the most powerful 100 fig-ures in North American insurance,criticises what he sees as the“almost juvenile fixation” of rein-surance companies who consideran “A-” rating as the minimumunder which they can do business.And he also takes a shot at otheragencies’ high ratings of Bermuda’srecent start-ups.

“We simply do not assign rat-

ings so that companies can dobusiness,” he says in an interviewwith BIQ. “What we’re trying toconvey is a range of financialstrength so to come out and saythey are all ‘A–’, which anotheragency has done, is a little mislead-ing. That suggests they are thesame, which they clearly are not.”In one instance, he claims, a

Bermuda company was given an“A–” rating even though it had notappointed a CEO at the time.

By mid-February, S&P hadassigned ratings to only three ofthe Bermuda start-ups — Amlin(“A”) as well as Hiscox and HarborPoint (both “A–”) — although, asMr Dreyer points out: “They arenot start-ups for real; they have

some pedigree to them and a con-nection to business that’s alreadythere … We’ve always been willingto look at start-ups but we’ve notbeen willing to assign ‘A–’ ratingsor higher if the company … justhas a pile of capital.”

There is a growing perceptionthat rating agencies have growntoo powerful and become, in effect,

Nine out of ten bags of

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of Hamilton contained an

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you and save you money.

Download our research

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call us on 29-shred (74733).

Post-it notes.Used printer cartridges.

Next year’s business strategy.

Standard gets even higherPOOR RE/INSURERS DON’T GET MUCH SYMPATHY FROM RATINGS CHIEF, THOUGH. CHRIS GIBBONS REPORTS

Steven Dreyer rates Bermuda’s captive marketaround “BB” or “BBB” with most of the reinsurancestart-ups in the “BBB” range.

“The established players, especially the post 9/11start-ups, seem to have acquitted themselves well.There have been some hiccups with cat losses butfor the most part they have recovered well.

“Montpelier is a great example of a company thattook a very serious body blow last year but appearsto have rapidly replaced lost capital and, like manycompanies, is making adjustments with sidecar com-panies and so on, to not only survive but prosper. I’dgive the established group of companies an ‘A/A+’rating.”

PRAISE FOR MONTPELIER


[ 21 ]

S&P has concerns about price adequacy, says Mr Dreyer. “We looked at the recent catastrophic events as windows of opportunityfor reinsurance pricing across the board to improve. It appears that isnot happening in any meaningful way. We haven’t got to the pointwhere it makes us negative on the industry or that prices are woefullyinadequate but from a financial strength viewpoint, we’d feel better ifpricing was a little firmer on a broad basis, not just on New Orleansproperty risk!

“We’re also a little nervous when you put that less-than-robustpricing together with a lot of hot money that’s come into theindustry through the start-ups as it may make the investment timehorizon shorter. We’re concerned that the 3-5 time horizon thatthe hedge funds and private equity people have may becomeeven shorter.”Steven Dreyer of S&P says

downgrading need not be fatal

de facto regulators. Mr Dreyer saysS&P “bristles at the moniker ofregulator. We are performing a dif-ferent function. I think some con-fusion has arisen out of two things:one, some rating agencies havebeen less rigorous in denying a‘regulatory’ role. For example, Iread a comment from one ratingagency, when assigning ratings to abunch of start-ups, that one of theconsiderations in assigning thoseratings at ‘A–’ was that those com-panies needed that ‘A–’ rating totransact business. We should besaying: ‘This is what the rating is;whether they can transact businessor not is for the market to decide.’

“The second thing is that themarket has sort of made us regula-tors by ceding to us this responsi-bility that, ‘OK, if it’s “A-” then it’sacceptable and if it’s not, then it’sunacceptable.’ It’s not what we’retrying to convey. It’s over-simplis-tic and it’s really not in their bestinterests, although it gives themsomeone else to blame if things gowrong!”

Mr Dreyer claims fear of down-grading is also often exaggerated.“I would be very surprised if acompany couldn’t function with a‘BBB’ rating, assuming they do allthe things that they are setting outto do in replacing capital, and soon. SCOR and Converium are twoexamples of companies that havebeen downgraded but have sur-vived and they are doing not justproperty but long-tail business aswell.”

S&P changed its rating criterialast year from a single event-basedapproach to an aggregate one. MrDreyer says: “That approachserved us a lot better in 2005 asKatrina, Rita and Wilma occurred.It was not perfect because the for-mer and new approach rely on theoutput of commercial modellingagencies or the internal models runby the insurers themselves. If theyare underestimating the risk, thenwe’re going to be underestimatingthe risk, too.” That situationshould improve, he expects, asmodels are upgraded.

The price is wrong

‘I’d be surprisedif a companycouldn’t functionwith a BBB rating’


“T en years ago, if you hadasked the average Londonmarket drone who wouldbe running the market today,

they may well have profferedJohn Charman, Tony Taylor,Henry Keeling and Rob Childs.Where are they now? In

Bermuda or taking the Bermudacoin.”

—Adrian Ladburyin Insurance Day

“If you think that Hiscox set up inBermuda opportunistically andsolely to take advantage of thehardening cat market, then I’d sug-gest you think again.”

—Alex Letts, CEO of RI3K, in awidely reported speech to theInsurance Institute of London,

warning Lloyd’s of its urgent needto reform

“London is still a pre-eminentcentre for international reinsurancebut on issues of cost, process effi-ciencies, service standards, tax andregulation, it is in danger of losingout to other jurisdictions, mostnotably Bermuda’

—Insider Quarterly, spring 2006

“People used to think of Bermudaas an offshore tax haven. But, intruth, for our industry Bermudahas become a knowledge centre,first and foremost.”

—Ed Noonan, CEO & Chairmanof Bermuda Class Four start-up

reinsurer Validus

“Typically if your spouse takes allyour money, you’d need to keep onworking, not stop. I don’t know ifthere is some legal or financial rea-son why he couldn’t work past theend of 2008 but I don’t get it.”

—Analyst Cliff Gallant ofinvestment bankers Keefe,

Bruyette & Woods, quoted inInstituionalInvestor.com, was one

of many left scratching theirheads over John Charman’s

decision to resign from AXIS inalmost three years’ time

“Some might argue that offshorelocations always pose a threat ingood times but fall away when thecycle turns and the world becomesmuch tougher … But there issomething about the scale of the

[ 22 ]

MEDIA WATCH

Bermuda hogsthe headlinesTHIS ISLAND IN THE MIDDLE OF NOWHERE IS SUDDENLY SOMEWHERE RATHER SPECIAL

Winslow Homer’s whimsicaltake on Bermuda, circa 1901

Promoting the best of race relations, race awareness, workforce representation and fair and equal access to opportunity.

Are you a part of the CURE? www.cure.bm

Bermuda’s surveyed workforce has over 27,000 employees, closely representing the country’s racial population.Black people represent about 55%. White people represent 34%. Yet, Black people hold only 27% of those senior and executive level jobs.

Help us to promote equality of opportunity in the workforce. Mentor and Train. Personally challenge discrimina-tion. Advocate for members of all of Bermuda’s racial community to be fairly represented in the workforce.


Bermuda challenge this time that ought to benoted by anyone with a concern for the long-term health and prosperity of the Londoninsurance market.”

—Anthony Hilton’s City Commentcolumn in the London Evening Standard

“Bermuda’s key to success now is its ability toquickly raise capital. Twenty-five years ago,the London market looked down onBermuda, calling it a second-class market.Now it’s something to be reckoned with.”

—Andy Barile, insurance consultant andformer Bermuda reinsurer, quoted in The

Royal Gazette, Bermuda

“The competitive threat from Bermuda wasacknowledged … by Lloyd’s itself, whichunveiled a new strategic plan (belatedly, saysome) to counter rival centres. Lloyd’s is notalone: Germany and Switzerland, two othergiants in reinsurance, are watching Bermudaclosely too.”

—The Economist

“The pure catastrophe model is a dead duckas far as we’re concerned. You’ve got to havea balanced book.”

—Chairman Robert Hiscox, in Reactions,on Hiscox Bermuda’s business plan

[ 23 ]

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A full service international business law firm

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

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

Email: [email protected]

Lynda Milligan-Whyte & Associates is a fullservice international business law firm withattorneys who have over 20 years of experi-ence in practicing corporate/commerciallaw in Bermuda and internationally particu-larly in company and trust formation,insurance registration, mutual fund regu-lation, civil litigation/insolvency matters andcorporate governance/government compli-ance areas.

The law firm was founded by Lynda Milligan-Whyte, J.P., the former U.B.P. GovernmentLeader in the Bermuda Senate.

BARRISTERS & ATTORNEYS

Trott & Duncan20 Brunswick Street, Hamilton

PO Box HM 2094Hamilton HM HX

Telephone: (441) 295-7444Facsimile: (441) 295-6600

Email: trott&[email protected]: www.td.bm

Contact: Kim N. Wilson, JPTrott & Duncan provides a comprehensiverange of legal services. The firm blends aninnovative approach to the practice of lawwith over 150 years of combined legalknowledge and experience. The firm’s clientbase spans Bermuda, Europe, the UnitedStates, the United Kingdom, the West Indiesand Canada.

Willis (Bermuda)Limited

The Vallis Building, Third Floor58 Par-la-Ville Road

Hamilton HM 11, BermudaMailing Address: P.O. Box HM 1995

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Services: Willis (Bermuda) Limited areinsurance brokers for all classes of interna-tional insurance and reinsurance, specialis-ing in casualty, property, directors & officers,and financial reinsurance.

“When a regulator makes allegationsand leaks [them] to the press and youhave no way of responding, becauseyou have no access to documents andbesides which, once he’s leaked [them]to the press and got the headlines,what have you got to do after that?You’re essentially going to be ham-mered in the press.

“That’s disgraceful in our country...It’s just outrageous. It violates everyprecept of law that we have. And thepress has been somewhat complicit,by accommodating him doing that. [It’slike saying:] ‘Bring the guilty guy in,we’ll give him a fair trial.’

—Former AIG chief HankGreenberg hitting out at New York

Attorney General Eliot Spitzer in aninterview with Business Insurance

A HANKERINGFOR JUSTICE

‘Lloyd’s is not alone.The Swiss andGermansare watchingBermudaclosely too’

Contact:Delroy Duncan, FCIArb., JP

Trott & Duncan provides a comprehensiverange of legal services, including a widerange of corporate, insolvency insuranceand reinsurance services. The firm blendsan innovative approach to the practice oflaw with over 150 years of combinedlegal knowledge and experience. Thefirm’s client base spans Bermuda, Europe,the United States, the United Kingdom,the West Indies and Canada.


16997B_Bermuda_Pg_24 4/12/06 1:58 PM Page 1

Foremost it takes discipline. Global insurers and reinsurers who can go the distance must be able to consistently overcome the unexpected. At Allied World Assurance, we can and we do.We strive to write reliably profitable business because we recruit professionals of exceptional talent. We maintain an A rating because we are financially strong. And we continue to grow because our customer relationships are built on service and mutual benefit. In property,casualty and reinsurance, Allied World Assurance is the kind of company you want on your side.

It’s about strength,control and speed

ALLIED WORLD ASSURANCEBermuda Boston Chicago Dublin London New York San Francisco

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RESULTS & Q4 FLAGSTONE - PwC · 2015. 6. 3. · [email protected]: bermudamedia.bm. Printed in Canada....

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