Bermuda reinsurers recover $6 billion in capital

After losing nearly US$8.4 billion in after-tax losses during this year’s hurricane season, the Bermuda reinsurance market has already recovered almost US$6 billion in capital, a Moody’s report of 14 Bermuda-based reinsurers has found.”Through Nov. 4, 2005, the 14 companies included in our study have issued nearly $6 billion of equity, debt and hybrid securities since Hurricane Katrina replacing approximately 71% of [third-quarter] catastrophe losses [in 2005],” the ratings agency’s report found.The companies cited in the report include Ace Ltd., XL Capital Ltd., the Everest Re Group Ltd., PartnerRe Ltd., RenaissanceRe Holdings Ltd., Arch Capital Group Ltd., as well as Aspen, Axis and Endurance, among others.Nevertheless, Moody’s does fire a warning shot across the bow of the Bermuda reinsurers. The report notes it has at some point downgraded seven out of the 13 rated companies.Also, says Moody’s: “While investors have repeatedly shown their willingness to provide new capital to the Bermuda market following market dislocations brought about by severe catastrophes such as Hurricane Andrew, the events of Sept. 11, 2001, and the losses sustained from Hurricanes Katrina and Rita, it should not be assumed and is not assumed by Moody’s that investors will continue to recapitalize firms that suffer large losses.”At some point, investors may well ask why should they reward companies with fresh capital when risk-adjusted returns on capital may not be sufficient, given the volatility created by the occasional (or not so occasional) large catastrophe loss.”Moody’s notes that following the recent hurricanes, new start-up companies have been or are in the process of being formed in order to capitalize on future market opportunities. “Financial investors, most of whom typically have short-term investment horizons, have partnered up with existing players or industry participants to form new companies, which are estimated in total to add more than $5 billion in new capacity,” the report notes.Going forward, insurers are likely to review their risk management strategies, Moody’s says. “Of particular importance will be the evaluation of risk assessment models including the re-examination of (1) fundamental occurrence frequency assumptions, (2) quality control of underlying risk exposure information, and (3) the ability to quantify and aggregate the totality of exposures faced by the enterprise.”