New Bermuda reinsurers face challenges, report says

The more stringent capital requirements of ratings agencies post-Katrina will challenge the ability of new Bermuda reinsurers to generate attractive financial returns, according to a new study by Benfield Group Ltd.
“Most business plans [of the new reinsurers in Bermuda] indicate projected returns on equity in the range of 12-19%, compared with the 20-25% targeted by many of the new entrants post-9/11,” the report states.
In total, the new reinsurers are expected to raise a combined capital base of between US$7-9 million, according to the Benfield Bermuda Quarterly Report entitled ‘Capital Carousel.’ But the new Bermuda reinsurers seeking capital in the wake of Hurricanes Katrina, Rita and Wilma will face several challenges if they intend to open for business on Jan. 1, 2006.
“As at 9 December 2005, only Amilin Bermuda Ltd., Hiscox Bermuda Ltd. and New Castle Re had completed their funding and were thus ready to accept risk,” the report noted. “In most other cases, the raising of capital was contingent upon either the assignment or binding indication of a satisfactory rating, typically ‘A-,’ from [Standard & Poor’s] or A.M. Best.
“With the ratings agencies under pressure from existing clients to resolve the various outstanding CreditWatch and review positions, the new companies may find themselves waiting until the proverbial last minute for the capital trigger. Infrastructure and staff are also a potential issue. Facilities are also in limited supply.”