Bermuda 2005 start-ups face tough market conditions

The 2005 class of Bermuda reinsurance start-ups will face much tougher market conditions, is writing less diverse property risks, and is more reliant on short-term, high return investment money than their predecessor Bermuda start-ups in 2001, according to a special report by the Fitch ratings service.
In its special report on the “Bermuda class of 2005,” Fitch analyzes the market conditions that prompted the 2005 start-ups of several Bermuda reinsurers, creating more market capacity after massive damages caused by 2005 hurricanes. It then compares these market conditions to those that existed when Bermuda reinsurers started up in 2001.
Based on its analysis, Fitch predicts the 2005 class of Bermuda reinsurers will face a tougher struggle than the 2001 class.
“When comparing the class of 2005 to its predecessor classes, three primary differences stand out,” Fitch said in its report, posted online. “First, Fitch believes that market conditions faced by the class of 2005 will be less favorable than those enjoyed by its predecessor classes.
“While most indications are that premium rates on property exposures in hurricane-prone areas increased significantly in the January renewal season, Fitch believes that the mid-term sustainability of these increases is questionable and that rates on most other lines will continue to experience downward pressure.
“This contrasts with market conditions that existed for predecessor classes, especially the class of 2001, when premium rates increased significantly across a broad spectrum of business lines in a time frame that was roughly concurrent with the class’s formation.”
Second, notes Fitch, “the class of 2005 has a more narrow focus on property business, especially property/catastrophe (CAT) and offshore marine and energy risks.
“Fitch views this as a natural situation given the events that led to the class’s formationi.e. very large property/catastrophe-related lossesand a corresponding lack of broad-based rate increases across other business lines.”
Finally, Fitch notes, “a third difference between the class of 2005 and its predecessor classes is that hedge funds and private equity investors represent an even larger proportion of the class of 2005’s initial investor base than they represented of its predecessor classes’ investor bases.
“Fitch attributes this to these investors’ increasing prominence in recent years and to the desire of more traditional start-up investors, such as brokers and insurance companies, to eliminate potential conflict-of-interest and governance issues.”
What impact does the above have on the credit-worthiness of the Bermuda Class of 2005? “Fitch believes that each of these differences has a negative effect on the Class of 2005’s credit profile relative to those of its predecessor classes,” the rating agency notes.
“Fitch’s expectation for less favorable mid-term market conditions will make it more difficult for members of the Class of 2005 to match the near-term financial results and complicate profitability levels and capital formation achieved by predecessor classes.”