Talk Of Bermuda’s Death ‘Premature’
Business commentators have concluded the classic Bermuda re/insurance model could well be extinct, says a leading industry journal. Or have reports of its death simply been greatly exaggerated?
Following the recent sale of Bermuda’s Ariel Re, ”The Insurance Insider” today [Mar. 8] points out in an editorial that the entire class of 2005 start-ups on the island are now either publicly-quoted or have been sold by its original owners.
In the wake of the catastrophic 2004-2005 hurricane seasons, the re/insurance industry recapitalised itself with a deluge of new companies based in Bermuda.
The companies listed here were formed in late 2005 or early 2006 to replenish the industry’s reinsurance capacity.
Companies in the Bermuda Class of 2005 were:
- Amlin Bermuda– $1 Billion
- Ariel Re– $1 Billion
- Arrow Capital Re — $500 Million
- CIG Re — $450 Million
- Flagstone Re — $750 Million
- Harbor Point — $1.5 Billion
- Hiscox — $500 Million
- Lancashire Insurance — $1 Billion
- New Castle Re — $500 Million
- Omega Specialty — $170 Million
- Validus– $1 Billion
But the magazine points out the Class of 2005 had to deal with a radically different set of global economic circumstances than the first wave of reinsurers which set up shop in Bermuda in 2001 and concluded “we think that such talk [of the Bermuda model's demise] is premature.”
“In our business there are always likely to be circumstances under which a hefty cash deposit at the Bank of Bermuda, a clean balance sheet and a class 4 licence are all you need to succeed — it’s just that the circumstances and investor expectations will have to be different for this to occur,” said the magazine.
The full “Insurance Insider” editorial appears below:
With this publication’s revelation of the sale of Ariel Re to Goldman Sachs late last month, the entire class of 2005 is now either publicly-quoted or has been sold by its original owners.
It is therefore an opportune time to take stock of how the class has performed versus expectations.
Time was “the Bermuda model” worked something like this: market dislocation gives a window of opportunity; entrepreneur raises capital and exploits the opportunity to the full with a view to growing book value; then after around three years original investors sell out for a multiple to book.
If book value doubles and the multiple hits 1.5x then everyone triples their money — not bad for three years’ work.
So what went wrong with the class of 2005?
With hindsight, the class of 2005 didn’t have as a clear-cut an opportunity to make hay as other previous classes. For example, in 2005 the opportunity was confined to cat and the group of new companies was born into a world nearing the peak of a financial boom.
This meant that non-franchise building capital was freely available to prop up surviving incumbents in the form of equity, subordinate debt, sidecars and many flourishing forms of insurance-linked securities [ILS].
As a consequence, the unprecedented cat events of 2005 only hastened the impairment and eventual demise of four incumbent franchises — and none of these a major player. So rather than replacing tainted old brands with new ones the class added to the number of competing franchises in existence.
But if the class of 2005 was born in less auspicious circumstances than its siblings, it certainly fulfilled its side of the bargain on earnings – the money came rolling in the benign 2006 and 2007 years. It was just when the exit door arrived that once again the collective timing was off — the 2008 global financial crisis stripped our sector of its premium to book and it has been a long struggle back ever since.
This led the class to focus on maximising earnings and return on equity, rather than growing book and franchise value. Before it was bought Ariel had returned more than its original investors’ stakes by way of special dividends.
The disappointment is simply that the icing on the cake in the form of the value for the heart and soul of the firm was not as sweet as it might have been in the past.
Other commentators have predicted that the rise of disposable capital vehicles and the ILS sector will mean that there is unlikely to be a future class of company formations following a major market dislocation.
We think that such talk is premature. In our business there are always likely to be circumstances under which a hefty cash deposit at the Bank of Bermuda, a clean balance sheet and a class 4 licence are all you need to succeed – it’s just that the circumstances and investor expectations will have to be different for this to occur.
And let us not forget that there is an exception to every rule — naysayers should be reminded that the firm with the highest premium to book valuation in our sector is class of 2005 stalwart Lancashire!
Let’s hope he’s right.