Best Reports on Bermuda’s Challenges; Torus’ O’Donohoe Comments on Diminished Role

By Charles E. Boyle | December 12, 2011

A special report from A.M. Best highlights the “challenging conditions” facing Bermuda’s insurance and reinsurance market, despite what Best described as “resilient financial results despite challenging conditions that include heavy catastrophe losses.”

As of Sept. 30, 2011 the Bermuda/insurance market was posting an underwriting loss, and “appears poised for meager bottom-line profit in 2011,” said Best. “However, the market has weathered pressure on its capital base from devastating 2011 catastrophe losses, a prolonged soft market and low investment returns, positioning companies for a potentially difficult yet promising renewal season.”

Best singled out the following “key findings” in its report:                                 — Elevated global catastrophe activity and increasingly conservative cat models have rewritten the risk equation, especially for U.S. primary companies; meanwhile, reinsurers are rethinking pricing and capital requirements amid growing demand for capacity.
 – Catastrophe pricing has improved in certain loss-hit regions, but some companies are reducing exposures rather than pursuing greater market share.
 – Casualty classes appear to have hit bottom as deteriorating investment yields hinder economic profitability on longer tail classes of business.
 – Both primary and reinsurance companies have been harvesting favorable loss-reserve development from casualty business written in the early 2000s, but this flow of earnings is running dry, and a market turn for casualty business seems to be nearing.
 – The market’s annualized return on equity (ROE) for the first nine months of 2011 was -0.8 percent, but adding back 6.7 points of favorable loss-reserve development drives the accident-year combined ratio to 114.5 and puts the ROE well under water.

While Best’s report describes the state of the market, there may be deeper concerns on the horizon for Bermuda. In a recent interview with the IJ    Dermot O’Donohoe, Chief Executive of Torus International, gave his views on the current condition of the Bermuda market, and where it might be heading.

Although Torus – the holding company – is domiciled in Bermuda, its operating companies are located mainly in Europe and the U.S. It more or less typifies a number of companies that are located on the island. In that regard O’Donohoe said “we are reviewing that position to see whether in the longer term if we want to maintain that status”

Torus decision will follow on the heels of a number of re/insurance companies that have either moved their corporate domiciles, or shifted a large amount of their operations from Bermuda – mainly to continental Europe, Ireland, the U.S. and the UK.

O’Donohoe singled out “market conditions” as the principle reason for the shift, indicating that “a lot of the Bermuda companies set up in Bermuda because they felt it was a favorable regulatory regime.” Bermuda’s regulators largely welcomed new companies. They were for the most part “settled in Bermuda to deal with a particular market situation that tended to be focused on providing capacity in an area where there was market demand,” he said.

“So, with a small number of people and a large amount of capital, you could effectively set up an operation – typically a reinsurance operation, or a small insurance operation – and you could sit in Bermuda and write the business.”

He explained that “what’s happened now, both with the issue of ‘FET’ [foreign equalization tax] from U.S. insurance, who want to buy policies from Bermuda carriers, and, I suppose, the whole uncertainty over the tax future of Bermuda, relative to U.S. carriers; plus the changing market conditions” have raised question about a Bermuda presence.

“Now you have London and the other major insurance centers; there’s ample capacity for all the clients, so it’s [Bermuda] less attractive for all the product lines; plus it’s a pretty expensive place to have an operation and to maintain people. So, in fact there’s less demand for a lot of the core products that Bermuda offers, other than certain special lines, where maintaining a small team in a tax efficient location still makes sense.”

Bermuda has in effect been hit by the ongoing trends towards a worldwide economy. “More and more the companies have also become part of global operations, O’Donohoe said. “In other words their own success has spawned their expansion elsewhere, and, as a result the original Bermuda base becomes an increasingly smaller part of their overall operations.

“Even in our own case, we don’t write excess casualty there any more, we’ve sort of exited that, and, following so many ‘cats’ this year, we’ve exited catastrophe reinsurance out of Bermuda, and for the most part opened a ‘play’ with Montpelier  [Re],” and otherwise “exited  catastrophe reinsurance full stop.”

Torus did take on some catastrophe coverages when it bought Broadgate’s Lloyd’s syndicate, But O’Donohoe said they were “much smaller” than the ones Torus had operated. It does still write some reinsurance out of Bermuda, “mainly treaty, but much smaller. Our Bermuda presence is pretty modest now. With all the other  areas of operation we have in London, Zurich, Amsterdam, Paris, Cologne in Europe, and in New Jersey, Chicago, Houston and Atlanta, we’re in the markets now. We’re not as dependent upon wholesale distribution to bring your business to you at a single location.”

O’Donohoe’s description of Torus’ changes relative to Bermuda over the last three years [it was founded in 2008] may well be part of a larger trend, which would diminish the island’s role in the global re/insurance industry’s operations. But, Bermuda has been resilient in the past, and it may well find ways to compensate for its changing position.

Souces: A.M. Best and IJ interview

 

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