What is the biggest issue facing Bermuda's firms now?
I see two issues – the shrinking market in the US and Europe, which is impacting all global reinsurers, and a changing regulatory framework, primarily in Europe.
With the likes of Flagstone Re and XL Capital redomiciling to Luxembourg and Ireland respectively, do you expect to see more firms leaving Bermuda and is this trend a concern?
Each company makes an individual decision as to the location of its holding company. I don’t believe that any CEO would be influenced by what others might do in that regard.
The reinsurance industry has been hit by the most expensive first quarter catastrophe losses on record, can the market withstand an above-average hurricane season?
Our industry has matured over the years. In general, market players see the value in diversification and practice good risk management. There is also an abundance of capital. All of these factors contribute to the industry’s ability to withstand and respond to an above-average season.
With virtually the entire reinsurance industry trading well below book value, are there concerns about reinsurers’ ability to replenish equity capital following a major catastrophic event?
If there is an event presumably valuations will increase due to the prospect of rising prices. The worry would only be if the capital markets were frozen due to its own issues, rather than because of a major cat event per se.
Does Bermuda get unfairly valued by investors? Why do you think this is and what can be done about it?
I think the insurance and reinsurance industry get unfairly valued by investors. The discrepancy between the economic reality and the apparent perception of investors is certainly wider than any other industry I am aware of.
I think we – reinsurance executives - need to do a better job of promoting the industry as a whole; we’re too busy trying to differentiate ourselves from each other. It also doesn’t help when the regulators are trying to place us in the same bucket as the banks. I make the clear distinction between the banking industry and the insurance industry – there is no systemic risk in the traditional re/insurance market. The resilience of our industry in the aftermath of the recent financial crisis supports this. There is a fundamental strength and resilience of the non-life re/insurance model and it is up to us all to make that case.
Extreme catastrophe losses in the first quarter of 2010 failed to halt declining reinsurance rates on June 1 renewals. What is your outlook for rates for the rest of the year and January 1 2011?
There is always commentary about price movements in the marketplace but little commentary about what the underlying profitability of the business is. The fact of the matter is that, in many lines of business, loss trends and loss emergence has been quite muted now for a number of years and priced profitability has been at acceptable levels. What we’re currently anticipating is a flat market with high single digit profitability with pockets of opportunity in some lines and geographies.
With growth prospects limited because of falling prices and reinsurers sitting on excess capital, is more consolidation involving Bermuda firms inevitable?
The growth problem is not “excess capital” and resulting “falling prices” as much as it is exposure shrinkage. In any event, I believe that companies will look to become larger, better diversified and balanced to withstand stagnant profitability in the industry which could be with us for a while.
There appears little chance of a Class of 2010. How would you expect capital to flow into the market in the aftermath of a large catastrophe?
Unless it’s a 1-in-50 or 1-in-100 year cat, I would expect that the private equity and hedge funds would look to the existing players to manage their risk capital rather than start up new reinsurers.
With both tax and regulatory reform on the table in the US and Europe, could Bermuda be disadvantaged in terms of international accounting standards or international regulatory regimes?
As a result of the leadership of Matthew Elderfield at the Bermuda Monetary Authority in the past few years and now Jeremy Cox’s return to the CEO position, I think our regulatory regime in Bermuda is as good as anywhere in the world. I don’t think we have much to worry about from a purely technical standpoint as we move closer to the EU and its system reform. The only concern would be whether politics end up playing a role in the move towards mutual recognition and group supervision.
Do you forsee changes in how the US treats Bermudian firms in terms of tax? How will this affect the Bermuda market?
I don’t foresee massive changes that would impact the Bermuda model significantly. Bermuda continues to have advantages not just around tax. It would certainly cause some economic friction but I don’t think it would destroy the fundamental reason companies are in Bermuda.
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