Fitch director: ‘Bermuda stands to gain from having greater regulation’

By added on 12/09/2012

Bermuda provides a stronger regulatory environment for insurers than the Cayman Islands and is likely to benefit from its quest for Solvency II equivalence, reports the Royal Gazette.

That is the view of Fitch Ratings senior director of insurance, Brian Schneider, who suggested that lax regulation is not attractive to companies, particularly at a time when the global trend is towards higher regulatory standards.

Earlier this year, Cayman Premier McKeeva Bush stated plainly that he wanted to lure Bermuda’s reinsurers to his jurisdiction.

But this year’s three hedge fund-backed start-ups — Third Point Re, SAC Re and Pac Re — chose to launch their operations in Bermuda and that, said Mr Schneider, supports the view that the Island remains attractive to reinsurers, even as it ramps up its regulatory regime to match the Solvency II standards due to take effect in the European Union in 2014.

“Long term, I would expect the regulatory environment to become higher hurdle around the globe, so I think a higher level of regulation will ultimately be seen as a positive for companies looking to go to market,” Mr Schneider said in an interview in Monte Carlo at the 2012 Reinsurance Rendezvous

“On a net basis, I think Bermuda stands to gain from having greater regulation. If you look at, for example the Cayman Islands, there would be concerns for anyone starting up there that within a couple of years, you might be vulnerable because areas like the US might look to change the rules to get more taxes out of them, for example.

“As a company, you don’t want to be viewed as being in a regulatory environment that’s poorly managed. I think Bermuda’s done a good job of balancing it to keep up with the latest regulation.

“Testament to that is the three hedge-fund backed reinsurers who all set up in Bermuda. There’s still the perception that the Bermuda market has got a lot of positive factors.

“That may help it to attract new business, though the form of it may be a bit different from what we’ve seen in the past. The Class of 2005 looked very different from the hedge fund-backed reinsurers, but the commonality is that they all went to Bermuda.”

Traditionally reinsurers invest their pools of capital in securities regarded as low risk, such as sovereign bonds and investment-grade corporate bonds, while taking the big risks on the underwriting side. Hedge funds take greater risks in search of greater returns, while the new start-ups have all declared their intention to underwrite very conservatively. Mr Schneider said it remained to be seen how this approach would work out.

“They’ve brought in some pretty knowledgeable people, John Berger at Third Point Re being one, people who have had experience running successful reinsurance operations,” he said.

“They seem to have set their operations up to take on less insurance risk than you would normally expect at a company. You would hope they’ll have the tools and the talent in place to manage both sides of it.

“It remains to be seen how they will do. In our experience you don’t really know what to expect on the underwriting side, until you see big industry losses coming through.”

Mr Schneider was speaking after he took part in a Fitch Ratings press briefing.

One of the views expressed was that the reinsurance industry was “ripe for consolidation” and that size really does matter. For a company to have strength in the global market, Mr Schneider suggested that it needed shareholders’ equity of at least US$4 billion.

Bermuda reinsurer Validus Holdings will hit this level on completion of its planned takeover of Flagstone Re.

“I think the smaller companies are really feeling the pressure to consolidate,” he said. “Just one or two years ago, it seemed like US$3 billion [in shareholders’ equity] was the magic number, as we heard when Alterra was formed from the merger of Max Capital and Harbor Point.

“But given what we’ve seen more recently with the Flagstone deal, maybe US$4 billion is the new level. A lot of the successful companies in our ratings universe are at that US$4 billion and higher level. That’s viewed as a better level for a secure, long-term franchise. Validus has been quite aggressive in getting to that level and is now at a much higher level of capital than the other 2005 start-ups.”

Scale gives companies greater pricing power and the ability to leverage their talent and relationships, he added.

The fact so many companies are trading well below book value has dampened merger activity.

But Mr Scheider expects to see acquisition opportunities for companies like Bermuda-based run-off specialist Enstar Goup, which acquires companies and insurance portfolios that have stopped writing new business.