Front Page

Reconfiguring the Market

In review of the Bermuda market, our discussion has been broken into four sectors as follows:

Excess liability insurers

In 1997, excess liability insurers felt the effects of rate declines in their respective product offerings, and have also felt pressures on top-line growth due to either increased attachment points, aggregate limit reductions or the decline of prepaid multi-year programmes. To counter these trends, excess liability insurers ACE and EXEL have diversified into short-tail property lines via acquisition as ACE acquired Tempest Reinsurance in 1996, and EXEL acquired Global Capital Reinsurance in 1997. In addition, access to Lloyd's has provided both ACE and EXEL a strong foothold in the London market and product diversification. Conversely, Starr Excess Liability Insurance (which is now 100-percent owned by American International Group) as with other excess insurers, remains committed to its core product.

Other routes of product diversification by some excess insurers as a means of sustaining premium growth have been through product line extensions and strategic alliances. Aside from restructured policy terms or changing the attachment points, contracts are being developed that encompass financial or speciality risk covers by combining the principles of finance and insurance. Such contracts provided by this segment cover exposures that are difficult to place due to limited capacity or inadequate pricing by traditional insurance markets. Strategic alliances have also been formed in an effort for some excess liability insurers to enter new markets and establish new production sources while increasing product diversification through alternate routes. Such alliances have provided underwriting capacity to niche markets for such lines as, but not limited to, multi-line reinsurance, specialty insurance, political risk, financial and finite reinsurance, and financial guaranty risks. With the overabundance of monetary and intellectual capital proffered by some of this segment's members, Standard & Poor's believes that such financial risks products will provide a new client and market base for those excess insurers offering such products.

Gross excess liability writings declined 22 percent in 1997, although the companies that reported for this segment showed premium growth of 8 percent to $1.6 billion in 1997. Other liability lines showed a modest increase, and to some degree, the figure for 1996 is overstated due to multiple year premiums. However, the clear absence of growth in these lines probably accounts for some of the impetus towards acquisitions by some players in the market. Net income of $1.3 billion for the 1997 year of account remained strong and did not exhibit signs of a significant near-term impact caused by the current rate environment. Despite risk portfolio acquisitions and product development, some excess insurers had compensated for core product deterioration through a change in the mix of investments held with a greater emphasis on equities or derivatives usage. For 1997, ACE and EXEL combined accounted for 86 percent of the segment's reported net income with totals of $461 million, and $677 million, respectively.

With the growth in net income and additional capital scale gained through high stock prices, capital and surplus continued to increase. Based upon 1997 results, excess liability insurers accounted for $6.8 billion in capital and surplus with ACE and EXEL accounting for 75 percent of that combined total. Thus the effort to diversify either through product development, acquisitions or strategic alliances, has provided excess liability insurers he means of providing attractive returns to its shareholders. However, Standard & Poor's believes that because of efforts to expand into shorter-tailed lines of business, most excess liability insurers in 1998 will not be able to sustain the high return levels achieved in past years.

Finite reinsurers

During 1997, finite reinsurers or those companies offering such products also felt the effects of the soft traditional market and declining rates. Development and innovation of financially oriented products were either contemplated or offered in an effort to increase top-line growth. In addition, new market entrants added to competitive pressures as more traditional reinsurers established alternative risk-transfer units or strategically aligned themselves with entities that provided finite risk underwriting capabilities. However, through it all, Bermuda remained the premiere arena for finite risk reinsurance.

Considered a finite staple, Centre Solutions (Bermuda) (formerly known as Centre Reinsurance (Bermuda)) continued its finite market dominance with $1.6 billion in gross writings that accounted for 62 percent of the finite segment's $2.6 billion reported gross premium volume for 1997. However, other segment participants have gained market acceptance through their respective teams and are also looking to diversify their respective product portfolios and geographic market presence.

To remain competitive against both traditional and non-traditional reinsurers, as well as Lloyd's, some finite reinsurers have been granted larger lines of capacity by supportive parents in order to structure larger risk contracts with comparable premiums paid. In addition, Bermuda finite reinsurers have begun to capitalise on the offering of financially oriented products. Risk-management strategies have become more sophisticated and with the continued rate cycle decline, are beginning to encompass asset protection. Also, deregulation in various global sectors, foreign currency movements and their respective effects on profit margins have provided the finite reinsurers an avenue to prospective new markets encompassing risk securitisation.

With finite risks, gross premium volume can suffer volatile highs and lows from one reporting period to the next due to the premium associated with the type of risk covered. With finite covers still being priced to exposure and pricing trends exhibiting rate declines of 10 to 20 percent, competitors offered traditional coverages at much cheaper terms which made it difficult for finite reinsurers to compete on a profitable scale. Standard & Poor's believes that although premium volume and underwriting profits for finite reinsurers will continue to fluctuate, Bermuda's disciplined underwriting practices will properly price to the risk rather than competitive rates.

Finite premiums demonstrated surprising strengths across the Bermuda sector in 1997 with premiums reported up 82 percent over the $1.4 billion reported for 1996. Partially due to ample gross writings, net investment income earned was $625 million for 1997 which, aside from Centre Solutions' portion of $397 million, was largely due to Stockton Reinsurance Ltd. reporting $150 million. For 1997, net income was $486 million and contributed to capital and surplus growing to $3.9 billion for this segment. Centre Solutions dominates this segment accounting for 58 percent of the segment's committed capital, and was ranked third out of the top 10 Bermuda survey participants for capital and surplus.

Property catastrophe reinsurers

Still young by anyone's definition, the "Bermuda Cats" are changing their stripes. From creation of the eight Bermuda Cats in the aftermath of Hurricane Andrew in 1992, the companies have dwindled down to six as of year-end 1997. Feeling the impact of a declining rate environment, with rates annually falling roughly 10 to 15 percent and up to 20 percent for certain areas in 1997, the property catastrophe reinsurers responded through disciplined underwriting practices which reduced aggregate limits and resulted in non-renewal of some poorly-priced programmes. However, as shareholder demands for strong returns place pressure on operational results, the companies are left with three choices: capital management through share repurchase, dividends or extraordinary dividends; be acquired, or; acquire an operation that would diversify products offered.

Of the original eight, only International Property Catastrophe (IPC), LaSalle Re, Partner Re and Renaissance Re remain as stand-alone entities with Global Capital Re and Tempest already absorbed by larger companies. Mid Ocean, as the third-largest Bermudian provider of property catastrophe reinsurance in 1997 (property catastrophe Writings accounted for only 27 percent of its 1997 book) and CAT Limited, the fourth, are also expected to be merged with EXEL and ACE, respectively, during 1998. Partner Re is also a major player within the property catastrophe market with gross premiums written of $194 million, ranking second for 1997. However, as a result of the parent's acquisition of French reinsurer Societe Anonyme Francaise Reassurance (SAFR) in 1997, this line now accounts for only 41 percent of the group's gross writings portfolio versus 97 percent in 1996.

Due to a lack of significant catastrophic events coupled with a continuing soft rating environment, some property catastrophe reinsurers has a decline in gross premium volume up to 17 percent in 1997, while two entities had single digit increases. As reported, this segment's gross premiums declined by 43 percent to $664 million in 1997. However, successful diversification efforts have exaggerated the decline with the largest cat writers not reporting here. Bermuda's total cat reinsurance premiums declined to a more moderate 13 percent when PartnerRe, Mid Ocean and XL Global Reinsurance Co. writings were added to the total. In addition, with minimal claim activity throughout 1997, consolidated losses and LAE incurred were only $114 million and accounted for a consolidated loss ration of 18.1 percent (excluding Mid Ocean and PartnerRe results).

Without significant storm activity, underwriting books remained profitable as indicated by the $392 million underwriting gain for 1997. Investment income remains strong at $130 million as the group's invested asset base consisted primarily of high-quality fixed income securities with investment strategies operated under prudent guidelines. As such, net income for 1997 was $476 million.

Standard & Poor's believes that because of the continuing soft market and acquisitions of property catastrophe reinsurers, the remaining mono-line property catastrophe reinsurers will be pressured more so in 1998 to actively manage their capital structures in order to remain attractive to investors.

Captives

The foundation of the Bermuda insurance and reinsurance market, captive insurance remains the most active insurance niche in the Bermuda community. Of the many captives listed in the 1998 survey, two have an accounting in the Bermuda top-10 charts. By either forming a new captive, or through utilisation of rent-a-captives, many insureds (corporations or insurance companies) have taken charge of their own risks (self-retention) even as current traditional and non-traditional rate environments soften. For 1997, approximately 60 new captive insurers were formed in Bermuda as risk-management teams continue to find justification for retaining increased risk despite generally low premiums. Self insurance allows an organisation to establish a risk-management programme within its own underwriting and investment guidelines, which can be less vulnerable to insurance market fluctuations and can remove potential credit risk associated with insurance providers. For 1998, Standard & Poor's believes that the captive market should continue to grow as more corporate industries and insurers continue to construct personal risk-management strategies for their specific organisational needs.