A wave of mergers and acquisitions is starting to sweep the reinsurance business with attention particularly focused on Bermuda, writes Garry Booth. A string of transactions within weeks of one another includes Renaissance Re acquiring Platinum last year, followed by the mergers of XL with Catlin and now Partner Re and Axis.
PartnerRe’s acting CEO David Zwiener told Bermuda’s Royal Gazette newspaper there’s plenty more to come for Bermuda: “We are probably in the middle innings… It's probably going to accelerate more in the coming months, as the pressure on some of the smaller players becomes more acute…”
PartnerRe and Axis, whose global headquarters are in neighbouring buildings in the Waterfront development on Pitts Bay Road, expect to cut costs by around $200m. XL put a similar number on the cost savings it expected to achieve.
It is an anxious time for anyone working in a Bermuda reinsurer, from the clerical staff upwards. Everyone’s asking, who’s next on the list? Montpelier, Aspen, Everest Re, Validus Re?
But what’s driving the urge to merge on Bermuda and where will it leave the island in the global reinsurance scheme of things?
A problem for many Bermuda companies is that they lack geographic diversification and are too often, too dependent on once profitable property cat business.
Bermuda companies still rely on North America for premiums and have not kept pace with growth in emerging markets, especially in Asia. In 2013 about half of the gross premium going into Bermuda came from North America, compared to barely 10% from Asia-Pacific; 19% came from continental Europe.
Property and property-cat business continues to dominate the business mix, with casualty accounting for only 13% and professional liability around 8% for example. (In fairness, according to a recent survey by Deloitte, excess liability, general liability, and professional liability have been gradually contributing more to Bermudian (re)insurers’ top line growth.)
Meanwhile, third party capital continues to eat into Bermuda companies’ core cat business with commoditised ILS products driving down the price of the traditional product as well.
Some Bermuda companies have responded by taking steps to add alternative capital into the product strategy mix. But they run the risk of becoming what banking consultants call “dumb pipes that are disintermediated from their customers”.
In any case, even rate starved third party capital investors want a return and its becoming increasingly clear that margins in commoditised cat risk are not as mouthwatering as they once were.
It’s possible that these market convulsions could underline the potential of so-called disruptive reinsurers in Bermuda. The business model of hedge funded backed companies like Watford Re and Hamilton Insurance isn’t driven by high prices in property cat business because it is an investment play. But these companies continue to run a sort of political risk in that it is still unclear how long the US tax authorities will leave open the necessary loophole that keeps them in business.
So it is hard to know what the future holds for Bermuda – the domicile - if its reinsurance constituency does keep shrinking as a result of the big changes happening in the wider world of risk transfer. What’s certain is that there are many other offshore (as well onshore) domiciles snapping at Bermuda’s heels, from Dubai to Guernsey, Cayman to Puerto Rico.
What Bermuda really needs is the catalyst to reinvent itself again as the world’s insurance laboratory. In the past that’s usually happened as a result of a major market correction or event: first with the liability and D&O capacity drought of the mid-Eighties that led to the creation of Ace in 1985 – and then the spike in property cat prices in 1993 after Hurricane Andrew that led to the formation of reinsurers like Partner Re.
At a time of such abundant capacity in the world’s insurance markets it’s hard to envisage a repeat of either of those scenarios rescuing Bermuda. After 30 years of riding high, that must be a real worry for the island and its ever adaptable workforce.