Bermuda


Bermuda’s ILS industry seen staggering growth over the last five years, but is the servicing infrastructure adapting fast enough to support it?

It may be the uncontested home of the catastrophe bond, but the sunny domicile of Bermuda is never one to rest on its laurels. Now, its insurance-linked securities (ILS) business is hitting new heights, too.

In 2009, the Bermuda Monetary Authority (BMA) relaxed its insurance legislation, increasing flexibility for special-purpose insurers and paving the way for a more diverse set of catastrophe bonds to flourish.

From this standing start six years ago, the ILS market has grown at an impressive pace. By the end of 2014, Bermuda was home to 57 percent of the world’s ILS, with €16 billion’s worth listed there.

A comparison of 2013 to 2014 alone is notable, as ILS issuances more than doubled in 12 months. At the end of 2013, there were 77 bonds listed, compared to 118 at the end of 2014. In monetary terms, $9.71 billion became $15.91 billion.

According to an Aon Benfield review, such significant increases are not reserved just for the ILS market. Last year was also a record-breaker for the wider catastrophe bond market, with $8.03 billion of property catastrophe bonds domiciled in Bermuda. On top of that, in June 2013 there was a record amount of $36.2 billion in collateralised reinsurance capacity in the market, a 23 percent increase on the $29.4 billion on the same date a year earlier.

According to Greg Wojciechowski, president and CEO of the Bermuda Stock Exchange (BSX), this success in the Bermudan market is down not just to its speciality in insurance, but also to the innovation in processes in the island’s financial sectors in general, and its seamless acceptance of changes to the global and local marketplace.

He says: “Bermuda is an excellent example of a jurisdiction that has an innovative and forward looking approach in respect of servicing its clients and creating business solutions for its global clientele.”

“As the market began to change the way it sought capital, Bermuda’s firms and ancillary support services quickly noted the trend and adapted to meet the needs of this developing trend. The success of Bermuda’s adaptation is clearly evidenced by the deal flow attracted to Bermuda and the quality level of service—and the reputation of this service—for this highly specialised area of the industry.”

As usual, being properly prepared has been the key, but not only in a practical sense. Equally important has been the willingness of the market to accept changes, and this is where the BSX has played a key part.

Wojciechowski points out that, as BSX is responsible for issuing regulations around the conduct and information dissemination responsibilities of bond issuers, it has had to make “minor tweaks” in order to accommodate the influx of ILS.

He says: “These tweaks have been widely accepted by the market and the BSX has emerged as a global leader in the listing of ILS vehicles including and, most notably, catastrophe bonds. Of the nearly 750 listed securities, over 100 are ILS-related.”

This is a trend that’s only on the increase, according to Aon Benfield. As part of its Q2 2014 analysis, it predicted that over the next five years the relationship between the reinsurance market and investors seeking returns will only become more complex, more diverse and, more importantly, more profitable.

Bryon Ehrhart, CEO for Aon Benfield in the Americas, said at the time of the release of the analysis: “This maturing relationship will incorporate around $150 billion of catastrophe bonds, sidecars, collateralised reinsurers and hedge fund managed insurance and reinsurance companies. Reinsurers will have a more consistent value proposition for insurers because they will have incorporated the accretive alternative capital.”

Such confidence in the continuation of positive trends in ILS has been infectious. Some service providers have set up new processes to accommodate the bonds, while many other supporting firms have, like CSX, simply had to tweak their services to cater to the bonds.

Wojciechowski says: “As the ILS asset class quickly evolved, many support entities in the industry assessed how they could be involved in supporting its growth. Bermuda’s regulators and the BSX focused on this development to make sure that the regulatory framework was suitable applying a risk-based approach to oversight commensurate with the demographics of the investor and consumer.”

“Attorneys and audit firms already very familiar with the industry were able to provide support, investors set up Bermuda vehicles and operations, and administrators shifted focus to be able to support structures that invested in ILS transactions and vehicles.”

In the past year, however, other jurisdictions, such as Malta, Gibraltar and Puerto Rico, have invested in their ILS programmes, having noticed the success in Bermuda.

While Wojciechowski insists that innovation is the key to staying ahead of the curve, the relatively minor changes in the services industries beg the question of whether the Bermudan market is doing enough to really cash in on its reputation.

He maintains, however, that the island is already showing signs of change, and this is only the beginning. With its international prominence in the sector, and the longevity that it boasts, Bermuda has seen much more drastic changes to the market than a mere shift in securities asset class, and it is more than equipped to give ILS the boost that it needs. What’s more, the move towards ILS is likely to give the whole jurisdiction a lift.

“The ILS asset class has attracted the interest of professional and institutional investors given investment attributes of these vehicles. Investors have established a presence in Bermuda as this market deepens,” says Wojciechowski.

“In some instances dedicated fund structures have been created as ILS investment vehicles. These structures play to and leverage the long-standing expertise of Bermuda’s infrastructure and top-tier service providers that have for many years supported the international fund sector.”

“It’s a testament to the depth of experience of Bermuda’s fund industry support providers. They saw the opportunity to support the ILS asset class and were able to innovate and create service platforms for this growing sector.”

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