A new report on the Bermuda reinsurance market published by Fitch Ratings says that the Bermuda re/insurance market continues to lead the way as the convergence of the reinsurance market and capital markets persists. Many of the islands re/insurance groups are involved in the provision of alternative risk transfer solutions which leverage capital markets capacity, or are increasingly transforming themselves into risk and reinsurance asset managers.
Generally, Fitch see the Bermuda reinsurers as well capitalised and note that they comfortably withstood another year of sizable insured catastrophe losses in 2012. Hurricane Sandy is viewed as an earnings and not a capital event for the group of 17 large publicly traded re/insurers that Fitch follows. Sandy will create a sizable hit to the companies fourth quarter earnings but Fitch said the re/insurers will still report an improved combined ratio of around 95% for 2012, compared to the 107% reported in 2011.
The reports comments on the convergence market and asset management ambitions of Bermudian re/insurers are of most interest. Fitch says that Bermuda continues to lead the way in the convergence reinsurance sector as both a provider and user of forms of alternative risk transfer to supplement the traditional balance sheet. Alternative reinsurance structures common among the Bermuda reinsurers are catastrophe bonds, collateralized quota share reinsurance vehicles or sidecars, as well as asset managers investing in insurance-linked securities and reinsurance-linked investments.
The net result of Bermuda’s continued leadership in this market has been the gradual transformation of a number of reinsurers into risk asset managers, seeking to leverage third-party investors capital for underwriting purposes and to profit from reinsurance premiums. There has also been a focus on asset management to maximise the more traditional investment returns which has seen some firms partnering with, or buying stakes in, more traditional asset management vehicles.
Hedge fund reinsurers have continued to be a feature of the Bermuda reinsurance market in 2012, with several starting up with the goal of leveraging lower risk reinsurance premiums within the asset management side of their business. Fitch believes that the test for these hedge fund reinsurers will be their staying power and ability to manage both underwriting and asset event exposures over the entire market cycle.
Reinsurers continue to look to alternative risk transfer as a complementary and tactical form of additional capacity which they can flexibly utilise without straining their capital reserves or increasing aggregate catastrophe exposures beyond sensible levels. Capacity provided by structures such as catastrophe bonds and sidecars continues to grow and look a more permanent feature of the reinsurance market. Bermuda holds a strong position as one of the domiciles of choice for Special Purpose Insurers, of which many are cat bond issuance vehicles or sidecars as we wrote in an article yesterday.
Fitch notes that as these structures become regarded as a more efficient and flexible way to acquire and manage additional capacity it does not expect Bermuda to see a a repeat of the class of 2005 wave of startup reinsurers forming. The reinsurance market is now well able to expand capacity as and when needed using fully collateralized reinsurance vehicles negating the need for more complex full reinsurer startups.
Fitch believes that the sidecar vehicle will continue to be leveraged as a way to take advantage of underwriting opportunities after major industry losses from catastrophes, particularly for property catastrophe retrocession. They provide a structure which allows the sponsoring entity to leverage both their own and third-party capital to opportunistically provide reinsurance capacity at the time the market requires it to take advantage of pricing.
Fitch list a number of sidecar transactions from the 2012/13 year which we repeat here with links to more detail on each sidecars launch where we covered it:
|Sponsor||Transaction||Capital||Date of launch||Major other investors|
|RenRe||Upsilon Re||$74m||January 2012||–|
|Lancashire||Accordion Re||$75m||February 2012||Additional capital raise|
|Alterra||New Point V||$210m||June 2012||Stone Point Capital LLC (Trident V L.P.)|
|Lancashire||Accordion Re||$250m||June 2012||Renewal of facility|
|Validus||AlphaCat Re 2012||$70m||June 2012||Serengeti Asset Management|
|RenRe||Timicuan Reinsurance III||$55m||June 2012||–|
|Lancashire||Saltire Re I||$250m||November 2012||–|
|Alterra||New Point V||$247m||November 2012||Increase in capital|
|RenRe||Upsilon Re II||$185m||January 2013||–|
|Argo||Harambee Re||N/A||January 2013||–|
|Validus||AlphaCat 2013||$230m||January 2013||Serengeti Asset Management|
|Everest Re||Mt. Logan Re||$250m||January 2013||–|
A number of Bermuda re/insurers have formed an asset management subsidiary or invested in an independent asset manager in recent months, as they seek to get new inflows of capital from third-party investors to put to work in underwriting or investing in risk. These asset managers focus on catastrophe or ILS funds, investing the raised third-party capital in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS or cat bond instruments.
Fitch recognises the diversifying source of income that these ventures provide the re/insurers, with fee based income on top of some premium profit to be made. Bermuda reinsurance firms which have recently made this step include; Allied World acquiring a stake in Aeolus Capital Management, Lancashire launching Saltire Management, Montpelier Re launching Blue Capital Management and Validus with the AlphaCat Fund.
Hedge fund backed reinsurers which formed in the last year include; Third Point Reinsurance Co. Ltd. backed by Third Point LLC, Kelso & Co and Pine Brook Road Partners; PaCRe Ltd. backed by Paulson & Co. along with Validus; and S.A.C. Re Holdings Ltd. backed by S.A.C. Capital Advisors and Capital Z Partners III LP.
The report from Fitch also contains a look at the financial status of the group of 17 Bermudian re/insurers that it follows. Fitch says that despite the impact of hurricane Sandy on fourth quarter earnings the ratings agency has a generally positive outlook on the sector, particularly on the use of convergence structures and recognises the leading role Bermuda plays in this area of the reinsurance market. You can access the full report from Fitch via this press release.