As one of the leading domiciles for alternative risk transfer outside of the US, Bermuda has become somewhat accustomed to posting positive end-of-year results...
As one of the leading domiciles for alternative risk transfer outside of the US, Bermuda has become somewhat accustomed to posting positive end-of-year results. Although 2014 carried on this tradition of success, much of the headlines were stolen by the apparent rush for insurance-linked securities (ILS). During the year in question, Bermuda was the domicile of choice for 57 percent of ILS transactions conducted worldwide.
From a standing start in 2009, the island’s ILS sector has grown exponentially, with nearly $16 billion listed on the Bermuda Stock Exchange (BSX) at the end of 2014. With the value of ILS reaching record levels in 2014, BSX president and CEO Greg Wojciechowski claims that a number of other jurisdictions are now trying to win more market share. As a result, Bermuda faces strong competition from newcomers such as Malta, Gibraltar and Puerto Rico, as well as from the more established players such as the Cayman Islands, Guernsey and Dublin.
Wojciechowski says that the record level of ILS listings on the BSX in 2014 underscored the island’s position as the premier jurisdiction in the world for the setup, listing and support of ILS structures. In total, the BSX saw a 5 percent increase in its ILS listings from 77 in 2013 to 118 in 2014. Meanwhile, the value of these securities grew to $15.91 billion from $9.71 billion from the same period in 2013.
“Bermuda has proven time and again to be an innovative environment that encourages the growth of all forms of ILS—from cat bonds to sidecars and collateralised reinsurance vehicles,” says Wojciechowski.
In October 2009, the Bermuda Monetary Authority (BMA) amended existing insurance legislation and brought in new standards for insurers, making the setup of special purpose vehicles a more straightforward process.
Brad Adderley, partner at Appleby in Bermuda, comments: “The regulatory framework and the operational infrastructure in Bermuda offers institutional investors a level of comfort that no other jurisdiction can provide. The island’s deep experience and longevity in supporting the ILS sector has contributed to Bermuda becoming a centre of excellence and the jurisdiction of choice for the ILS market.”
According to Aon Benfield Securities, $8.03 billion of property catastrophe bonds were issued in 2014—the highest ever figure in the history of the sector. In addition, there has been a record amount of collateralised reinsurance capacity put to work (reaching $36.2 billion by 30 June 2014), which was up approximately 23 percent from the $29.4 billion seen a year earlier.
By 31 December 2014, there was a total of 762 securities listed on the BSX. Included in the new listings in 2014 were several additional variable rate notes and programmes from Alamo Re, Azora Re, Citrus Re, Gator Re, Golden State Re II, Kilimanjaro Re, Kizuna Re II and URSA Re.
“Maintaining liquidity in the ILS sector is hugely important to sustaining this growth, and in this regard the BSX has since 2009 been very helpful,” adds Paul Schultz, the CEO of Aon Benfield Securities.
“The listing of catastrophe bonds on the BSX has become an efficient, well regulated process, and the exchange has proved itself in being able to house the expertise necessary to satisfy the demands of both our clients and ILS investors.”
Aside from the record annual issuance, 2014 has witnessed several further records being established in the ILS sector, according to Aon. This includes a record Q2 issuance total of $4.5 billion across 12 catastrophe bond transactions, a record H1 issuance total of $5.9 billion, and a record value of catastrophe bonds on-risk—which stood at $22.7 billion as of 30 November 2014.
The year also saw a new record established across other forms of collateralised reinsurance capital. As of the end of June 2014, collateralised reinsurance capacity, excluding catastrophe bonds, had reached a record $36.2 billion, compared to $29.4 billion in 2013 and just $7.7 billion in 2009.
Schultz claims that that 2014 has been characterised by “more than just largesse”.
“We have taken positive steps to expand the scope of the ILS offering by structuring innovative deals to address new perils, new territories, and new currencies, as well as making ILS solutions more accessible to smaller firms and those companies wanting to structure smaller transactions.”
“Our outlook for the ILS sector for 2015 remains highly positive, and we anticipate that the capital inflows and strong pipeline of opportunities seen in 2014 to continue.”
Bermuda will host its third ILS Bermuda Convergence event in 2015, which brings together leaders from the alternative reinsurance, convergence and the ILS marketplace.
As well as the lucrative new frontiers that Bermuda has explored in the past year, the BMA also registered 89 new insurance entities in 2014, made up of 65 new insurers and 24 new intermediaries.
Shelby Weldon, director of licensing and authorisations, states: “The most significant area of growth in 2014 was in our long-term (life) sector, with four new Class E insurers, five Class C insurers, and one Class A insurer establishing in Bermuda during the year. This compares to six long-term registrants in 2013—three Class C insurers, two Class B insurers and one Class A insurer.”
Class E licence holders are the largest of Bermuda’s long-term insurers, each required to have total assets of more than $500 million. The new Class E insurers commenced business with more than $2 billion of assets.
“An influencing factor in the growth of our long-term sector was the National Association of Insurance Commissioners granting conditional qualified jurisdiction status to Bermuda in December 2013,” Weldon continues. This status allows reinsurers from a particular domicile to reinsure US risk on a non-discriminatory basis and benefit from reduced collateral requirements. In December 2014, the NAIC granted Bermuda full qualified jurisdiction status, which became effective on 1 January.
In addition to the 10 long-term insurers, 16 new captives, 11 new commercial insurers writing general business and 28 special purpose insurers registered during 2014.
Both captive and commercial registrations remained moderate during 2014, according to Weldon, a though the BMA has granted approval to an additional 22 captive and commercial insurers—which the authority anticipates will formally register in Q1 2015.
In terms of the beneficial ownership of the new insurers, the US was the most significant jurisdiction, with Bermuda and Europe second and third, respectively. Two new insurers from Latin America and two captives from Canada were also among the new registrants in 2014.
Weldon says: “The 2014 registration activity continues to demonstrate Bermuda’s global position as a leading alternative risk transfer marketplace. We remain the global leader in both captives and ILS and our international reinsurance sector remains one of the world’s top reinsurance markets.”
