Bermuda reinsurers flock to Lloyd's

Montpelier Re’s announcement that it is about to start trading at Lloyd’s through its new syndicate, Montpelier Syndicate 5151, is the latest move by a Bermuda firm to tap the 320-year-old market.

Set up in December 2001 to take advantage of soaring premiums after 9/11, Montpelier Re has remained until now a classic Bermuda reinsurer focusing on property and casualty lines of business.

But it was caught short after Hurricanes Katrina in 2005, reporting close to $1bn in losses. After this, the company said it was re-evaluating its catastrophe exposures and set up sidecar Blue Ocean to provide it with further retrocessional capacity.

Incredibly, after its massive Katrina losses, Standard & Poor’s did not downgrade the firm and it retained its “A-” rating. S&P said it believed the company would continue to take material steps to reduce the inherent volatility of its book of business.

Montpelier’s foray into Lloyd’s should help the company diversify its book of business and thereby reduce its catastrophe exposures. It is not the first time in recent months that Bermuda shorts have set up shop in the market.

Mergers & acquisitions are another means of obtaining access.

In May, Talbot Underwriting confirmed it was being bought-out by Class of 2005 reinsurer Validus. This had followed months of speculation and the presence in London of numerous senior Bermuda executives, rumoured to be on a due diligence.

Other start-ups had been tipped as frontrunners for the lucrative acquisition, including Ariel Re, which was also set up in Bermuda in 2005.

Ariel chief executive Don Kramer has been open about his bid to access the Lloyd’s market. “For non-traditional reinsurers, Lloyd’s is a great place to be,” he explains. “It can offer you instant access to the world’s markets. The AIGs and the likes don’t need Lloyd’s, it is the Bermuda companies that do something different that want to be there.”

That Bermuda players are showing such an interest in Lloyd’s is something of a reversal of fortunes. In recent months a number of Lloyd’s insurers – including Hiscox, Kiln and Omega – have redomiciled from London to Bermuda, adding fuel to the debate that expensive London was losing out to the low-tax island.

Common reasons given for Lloyd’s current attractiveness are its recent upgrade from “A” to “A+” by S&P. At the time of the upgrade S&P gave the market a clean bill of health, citing the Lloyd’s “unstoppable momentum”.

The resolution of Equitas (with phase 1 of its transaction with National Indemnity successfully completed) has also breathed new life into the market and was undoubtedly a massive driver behind the market’s upgrade.

For Bermuda companies the ongoing pressure to diversify has its challenges.

Bermuda reinsurers, with their typically monoline US property catastrophe focus, are no longer the business model favoured by the rating agencies. New laws in Florida, which have reduced business opportunities in this important market for Bermuda, have also encouraged them to seek new business elsewhere.

These pressures have been particularly intense for the most recent wave of start-ups in Bermuda. But most are cash rich after last year’s benign hurricane season and now have the financial backing to go after new M&A opportunities or to set up new ventures in other markets.

In 2006, 16 of the largest Bermuda companies made combined full-year profits of $11.6bn (according to the Benfield Bermuda Quarterly).

“Everybody knows if you didn’t make money in 2006 there was something wrong with you,” says Robin Spencer-Arscott, chairman of XL sidecar Cyrus Re.

The real challenge will be to diversify into profitable lines and geographies at a time when capacity has returned to the market and many of their contemporaries are vying for the same business.

The Lloyd’s market has great potential for insurers and reinsurers seeking to diversify their books. Not only is it a well-established and respected market, capital requirements are comparably low and it provides access to a broad geographical spread of business. n