Blacklisting not an issue for insurers – yet
Bermuda’s blacklisting by the European Union will not have an impact on the re/insurance industry — provided the island comes off the list next month, as the Bermuda Government expects.
That is the view of analysts from credit ratings agency Fitch Ratings, who visited the island this week.
“Long term it could be significant, if it’s not resolved, but it sounds like it’s expected to be resolved next month,” Brian Schneider, senior director, insurance, for Fitch, said in an interview.
“I don’t see any negative repercussions in the near term. The fact that Bermuda has Solvency II equivalency — and that doesn’t seem to be threatened — gives approval to the Bermuda model. So it was a bit unusual to see them take this step to blacklist Bermuda.”
Bermuda’s insurance regulation earned “third-country equivalence” with the EU’s Solvency II insurance regulations in 2016. Equivalence allows international insurance groups based on the island to compete on a level playing field in the EU.
The EU put Bermuda on its list of countries deemed to be noncooperative on tax matters last month, because of a “drafting error” in Bermuda’s economic substance regulations. David Burt, the Premier, said Bermuda is compliant with the EU’s demands and expects the island to be removed from the list when EU finance ministers meet next month.
US tax reform is another external threat that the island’s flagship industry has been dealing with. Changes that slashed US corporate tax rates and at the same time levied taxes on premiums ceded from the US to non-US affiliates of international re/insurance groups were introduced at the start of last year.
Jim Auden, managing director, insurance at Fitch, said the impacts were largely structural.
“We’ve seen international groups, not only from Bermuda, ceding less premium to affiliates,” Mr Auden said.
“Folks have adapted to it. I’m not aware of anyone who lost business because of it. It’s largely been a matter of restructuring.”
Mr Schneider said Bermudian companies had responded well to the changes.
“They shifted some of their business to other jurisdictions but also retained more business in the US,” he said.
“The ability to move the capital around is something that Bermuda companies value.”
The Bermuda re/insurance landscape has changed dramatically in recent years with a series of mergers and takeovers, leaving fewer companies.
At the same time, capital markets money has flowed into the industry in the form of insurance-linked securities such as catastrophe bonds, dampening price increases after catastrophic events.
Market conditions will continue to drive consolidation, said Mr Schneider, who would not be surprised to see more big deals announced this year, as companies seek scale, larger client bases and diversification.
Capital market activity is a major driver of M&A, Mr Schneider said.
“There’s a lot of capital supply and although demand is rising, it’s not enough to really tap into all that capacity,” he said. “So there’s not a lot of pressure on pricing.
“We’ve seen capital being reloaded by some of these capital markets vehicles, but also companies have been better capitalised than we believe they were ten or 15 years ago.”
While high stock valuations, relative to book value, were something of an inhibitor of dealmaking right now, Mr Schneider said there were still several re/insurers who could attract a premium multiple.
“To that extent that companies find a good strategic match, I think they’d be willing to pay 1½ times to two times book value,” Mr Schneider said.
Mr Auden suggested that some of the remaining stand-alone companies were not keen to sell up.
“Typically, it’s not an industry in which hostile bids have been successful,” Mr Auden said. “So you need willing sellers and right now there’s an imbalance of willing buyers and sellers.”
While the ILS market, with Bermuda at its centre, continues to thrive, Mr Schneider said the catastrophe losses of the past two years, which triggered some cat bond losses, had curbed the enthusiasm of some investors.
“It’s not clear yet whether the capital markets completely understand what they’re getting into,” Mr Schneider said. “Certainly they’ve been tested in the last couple of years and we’ve seen a bit of a pause in the ILS market from January.
“We’ll have to see how that plays out and the big one will be the June renewals, when we see the Florida book, which represents more than half of the property-cat premium in the world.”
“Even if alternative capital does pause a bit this year, we believe it will still continue to grow its share of the reinsurance market.”
Mr Schneider said most re/insurers had chosen to partner with third-party capital and exploit its advantages, such as a lower cost of capital and the ability to transfer risk off a reinsurer’s balance sheet, while creating the opportunity to earn fees.
Mr Schneider said there are good reasons to believe that Bermuda will remain a global re/insurance hub, with its ace card being the regulatory environment.
“Working with the Bermuda Monetary Authority is something that companies find is much easier than dealing with the large number of US regulators,” Mr Schneider said.
“We’ve seen some new companies being formed in Bermuda, not the large companies we would have seen after large events in the past, but more specialty type companies which find Bermuda to be attractive from a regulatory perspective.”
He added: “Bermuda will always continue to have its place in the industry. There’s a lot of expertise.
“For example, look at a company like RenaissanceRe, which remains a Bermuda company and they make it very clear they want to remain one.”
In the past, waves of new companies after a major loss were normal for Bermuda, as occurred after Hurricane Andrew in 1992 and the 2001 terrorist attacks on the US. The expanding role of alternative capital makes it unlikely that this will ever happen again, Mr Schneider said.
However, in the event of a major market dislocation, Bermuda would again be the place for new capital to congregate, Mr Schneider believes.
He said: “If we did see a megacatastrophe and a $200 billion type loss, then Bermuda would still have the structure in place to be able to recapitalise things.”
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