results & q1 are theybiq q1 15 17227a_biq_q1_qx5 6/20/06 1:12 pm page a1. there is an artful...

STARK WARNING A Florida pine forest laid almost bare by a hurricane reflects the unequal challengethe industry faces in seeking to financially manage the utterly uncontrollable andincreasingly unpredictable. Eve of Destruct ion , page 2

ARE THEYGOLDENOR ROTTEN?

ALL THERESULTS &ANALYSIS

SINGING THERED, WHITEAND BLUES

11

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BERMUDAINSURANCEQUARTERLY© 2006 Bermuda Media in association with

J u l y 2 0 0 6

Q1BIQ15

17227A_BIQ_Q1_Qx5 6/20/06 1:12 PM Page A1

There is an artful balance in property

catastrophe reinsurance between acting

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OPPORTUNITY IN THE EXTREME.

17227A_BIQ_Q1_Qx5 6/20/06 1:12 PM Page A2

BERMUDA INSURANCEQUARTERLY

EditorCharles Barclay

Art DirectorPaul Shapiro

Contributing EditorChris Gibbons

Director of MarketingLissa Fisher

PublisherIan Coles

Published by Bermuda Media, Suite310, The International Centre, 26Bermudiana Road, Hamilton HM 11,Bermuda. Postal address: PO Box HM2032, Hamilton HM HX, Bermuda. Tel:292-7279 Fax: 295-3189 Email:[email protected]. Web: bermudamedia.bm.Printed in Canada.

Published four times a year In associa-tion with PricewaterhouseCoopers.

Cover image courtesy of Getty Images

BIQ “While certain of ourbusinesses are undergrowth pressure, we havegrowth opportunity in otherareas.”

— Evan Greenberg,President and Chief

Executive Officer of ACE

“The catastrophe modelling and risk manage-ment enhancements we implemented followingthe hurricanes of 2005 position us very well toachieve strong returns for our shareholders.”

— Endurance Specialty Chairman and CEOKenneth J LeStrange

“There is a greater awareness of and sensitivity toboth frequency and severity of catastrophic activ-ity, again reflected by increased client retentionscombined with robust pricing, as well as moreconservative risk management and enhanced riskselection methodology, which we at IPC continueto adopt and develop. We remain watchfullyoptimistic.”

— Jim Bryce, President and CEO of IPC Re

“A low level of large lossactivity, as shown by a21% annualised operatingreturn on beginningshareholders’ equity [and]we continue to generatesubstantial realised gainsin our equity portfolios,leading to an annualisednet income return on equity of 29%.”— PartnerRe President and CEO Patrick Thiele

“Our net income and combined ratio returned toacceptable levels … our net loss reserve positionon the 2005 storms was stable … [and] we suc-cessfully launched Blue Ocean Re, through whichwe now participate alongside third party capital inproperty retrocessional business.”

— Anthony Taylor, Chairman and CEO,Montpelier Re

“I believe we will see continuing robust P&Cmarket conditions and returns as renewals pro-ceed through the remainder of the year.”— XL Capital President and CEO Brian O’Hara

Top industry regulator JeremyCox, veteran executive RobertSteinhoff and PartnerRe under-

writer Meredith Head have beenhonoured by the BermudaInsurance Institute. Mr Cox,Supervisor of Insurance at theBermuda Monetary Authority, wasnamed (Re)Insurance Person ofthe Year; Mr Steinhoff, recentlyretired as head of the InsuranceAdvisory Council (IAC), receiveda Lifetime Achievement Award;and Ms Head became Young(Re)Insurance Person of the Year.

Mr Cox won for “his overallcontribution to Bermuda’s robustand practical regulatory environ-ment, which ensures the high stan-dards and good corporate behav-iour that contribute to theBermuda insurance market’s suc-cess”.

The BII added: “Mr Cox is wellknown and immensely respected asa regulator worldwide. His experi-ence and guidance have directed

the BMA’s influence and ongoinginput to international regulatorydevelopments… He representsBermuda at international regulato-ry meetings and brings back toBermuda important perspectivesto ensure that our jurisdictionremains at the forefront of the(re)insurance industry.”

According to Mr Cox, regula-tion requires a careful approach:“The challenge is to strike theright balance between maintainingan effective regulatory frameworkwhile avoiding requirements wherethe cost burdens imposed on theindustry are out of proportion tothe resulting public benefits.”

Mr Steinhoff, an accountantwho was KPMG’s Senior Partnerhere for almost two decades,recently retired as chair of the IACafter seven years, having served theorganisation in various capacitiesfor 25 years.

The BII stated: “He workedtirelessly, quietly and largely

unrecognised by many in theinsurance industry, in ensuringthat Bermuda was a domicile ofchoice for captives and commercialcarriers.

“Mr Steinhoff ’s wise counseland leadership at both the IACand the Bermuda MonetaryAuthority [where he is DeputyChairman] have been invaluable,with the result that the changes toBermuda’s regulatory model havetaken place in a calm, measuredfashion, ensuring that Bermudamaintains compliance with inter-national standards without ad-versely affecting the market condi-tions that have proved so successfulin attracting new business and newcapital to Bermuda.”

Meredith Head is VP ofUnderwriting and Assistant Man-ager at PartnerRe, having joinedthe firm in 1997 as a graduate ofWarwick Academy here, Seven-oaks School in England, and sub-sequently Tufts University in

Boston. While working, she re-ceived her MBA in RiskManagement from the College ofInsurance. Her BII award citationread: “Meredith’s determinationand commitment to learning isreflected in her career path atPartnerRe, which has moved herrapidly into a senior underwritingand management role.”

Describing her as a positive,focused young professional and anindustry role model both inBermuda and abroad, the BIIadded: “Meredith has activelyencouraged the professional devel-opment of others through a varietyof roles including her sponsorshipand support of Bermudian internsat PartnerRe.”

THE GOOD NEWS

THE QUOTES OF THE QUARTER

Meet Bermuda’s finest

[ 1 ]

JEREMY COX, ROBERT STEINHOFF ANDMEREDITH HEAD SCOOP TOP AWARDS

V o l u m e 2N u m b e r 2J u l y 2 0 0 6

Jeremy Cox, Robert Steinhoffand Meredith Head: in their different ways, all three arehelping to ensure Bermuda’sfuture as a major (re)insurancecentre

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NEWS REVIEW

The property-casualty insuranceindustry, still reeling from theeffects of last year’s record $58

billion losses, is likely to seeinsured losses almost double in2006. This gloomy outlook camefrom Robert Hartwig, Senior VicePresident and Chief Economistfor the Insurance Information In-stitute.

Noting the increase in intensityand frequency of storms, MrHartwig quoted Colorado StateUniversity projections of an 81%chance of a major hurricane hittingthe US coast and a 195% increasein tropical storm activity this year.

Meanwhile, the National Oc-eanic and Atmospheric Admin-istration is predicting up to six

major hurricanes forming duringthe Atlantic hurricane season. Itprojects an 80% chance of anabove-normal hurricane seasonand only a 5% chance of a below-normal season. NOAA expectsbetween 13 and 16 named tropicalstorms, between eight and 10 ofwhich will grow into hurricanes,and four to six that will be majorhurricanes. However, the forecastdoes not predict a repeat of lastyear’s record season.

Leading cat modelling firmRisk Management Solutions,which has an office in Bermuda,has released a new catastrophe riskmodel that incorporates a five-yearforward-looking view of hurricanefrequency.

RMS believes that risk over thenext five years is best representedby “landfalling hurricane activityrates that are higher than the long-term historical average. Higherhurricane activity in the Atlantic isstrongly linked to increased seasurface temperatures, and is likelyto persist for at least the next fiveyears, as determined by extensiveRMS research on climate variabil-

ity, climate change, historical hur-ricane activity patterns and hurri-cane clustering research.”

RMS added: “The new modelalso reflects extensive claimsresearch and analysis of buildingperformance as well as an expand-ed methodology to assess ampli-fied losses that can occur in severecatastrophes such as HurricaneKatrina.”

ACE has reached an $80 millionsettlement with New York

Attorney-General Eliot Spitzerover bid-rigging and accountingcharges. And in a public apology,the company said it had reformedits business practices and pledgedto support further legislation in theUS to promote transparency andeliminate bid-rigging.

ACE, which still faces lawsuitsfrom other US states and the SEC,acknowledged that “certain of itsemployees violated both acceptablebusiness practices and ACE’s ownstandards of conduct by engagingin behaviour that includedimproper bidding practices andcertain ‘finite reinsurance’ transac-tions. ACE apologises for this con-duct.”

Under the settlement, ACE willpay $40 million to policyholderswho bought or renewed excesscasualty policies through insurancebroker Marsh between January 1,2002 and September 30, 2004.Also, it will pay a total of $40 mil-lion in fines for improper conduct

to state authorities in New York,Connecticut and Illinois.

Howard Mills, head of the NewYork Insurance Department, saidhe was “pleased that ACE hasagreed to compensate policyholderswho were harmed by the company’sactions and reform the way inwhich they conduct their business”.

Included in the settlement doc-ument are quotes from an email byan unnamed ACE senior executivedetailing a scheme in which ACEwould knowingly put in a losingbid to provide insurance coverageto create the illusion of a competi-tive process.

The settlement also detailed sixcases where ACE used improperfinite reinsurance to create falseappearances of risk transfer to bol-ster its own financial results andthose of its clients.

Eighty million apologies

FORECASTS ARE WINDIER AND WETTER WITHINCREASED FEARS OF ‘AMPLIFICATION’

[ 2 ]

Eve of destruction

All about us…The Bermuda insurance market has revamped its website toprovide a comprehensive portal to the island’s more than 250insurers, reinsurers, brokers and captive managers. Visitors towww.bermuda-insurance.org can search the site by companyname or type of coverage or company as well as find Bermudapublications, information on Bermuda regulations and detailson how to form an insurance company or captive. It also listslocal conferences and seminars and overseas events at whichBermuda will be represented. A section on the home pageindicates which companies have recently updated information.

XL spin-off XL Capital is to spin off part of its ownership in its financial guaranty insurance and reinsurancesubsidiaries in a $100 million IPO. In documents filed with the SEC, Security Capital Assurance, the holding compa-ny for New York-based XL Capital Assurance and Bermuda-based XL Financial Assurance, said about 35% of itsshares would be offered for sale. Security Capital had $244.9 million in net premiums written in 2005 and a 69.7%combined ratio. Security Capital’s shares are expected to be listed on the New York Stock Exchange.

“At this point, it’s not yet classified as a hurricane —it’s still being called a raindrop.”

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[ 5 ]

NEWS REVIEW

TOO LITTLE, TOO LATE FOR PXRE?E

mbattled Bermuda-based property reinsurer PXRE is heading closer torun-off and now faces a lawsuit alleging that management concealedthe true magnitude of losses from the 2005 hurricanes. The complaint

— filed by law firms Murray, Frank & Sailer and Schiffrin & Barroway inthe US District Court in Manhattan — names PXRE, its President andCEO Jeff Radke and former CFO John Modin and alleges that they failedto disclose that the severity of its losses from hurricanes Katrina, Rita andWilma would result in lowered financial strength and credit ratings.

In February, PXRE announced it was increasing its estimated lossesfrom the storms by between $281 million and $311 million to a total of$758 million to $788 million. As a result, the major agencies droppedPXRE’s financial strength rating from A– to B++ or worse and its stockplummeted more than 48%.

PXRE, which posted a $698.2 million deficit for 2005, is also accusedof hiding the losses in order to complete a $114 million share offering, andlater raise more than $350 million. In April, PXRE asked agencies towithdraw their financial strength and claims paying ratings of the compa-ny and its operating subsidiaries. Mr Radke said: “In the period since thedowngrades, we have found that operational ratings below the critical Acategory provide little value for a reinsurer.”

PXRE announced net income of $41.6 million for Q1, 2006, comparedwith $22.7 million in Q1, 2005, but Mr Radke conceded the resultsweren’t sufficient. “Given [the] rate of cancellations and our limited abili-

ty to renew our existing reinsurance contracts and underwrite new reinsur-ance contracts, we expect to see significant decreases in net premiumsearned in future quarters.

“We are continuing to explore potential strategic alternatives [includ-ing] the sale of PXRE, the sale of all or certain of our assets, mergers withone or more companies and the acquisition of smaller companies thatwould provide diversifying lines of business, share repurchases and [more].However, our board … may determine that the best option is to placePXRE’s reinsurance business into run-off and eventually commence anorderly winding up of PXRE.”

He added, however, that “PXRE remains financially sound and able tomeet all of its obligations to clients. We also have sufficient liquidity tomeet all currently foreseen needs. Our financial results for the quarterunderscore this fact. Most significantly, we did not experience any adversedevelopment on our reserves for the 2005 hurricanes during the quarter.”

“This is the part of capitalism I hate.”

AIG prepares to sellIPC sharesBermuda reinsurer Max Re Capital

has said it will have to restate finan-cial results between 2001 and 2005to correct problems identified in aninternal accounting probe. Thereview studied three separate finiterisk retrocessional contracts writtenin 2001 and 2003. The restatementwill cut 2005 net income by $0.4million, increase 2004 net incomeby $1.6 million, decrease 2003 netincome by $2 million, and reduce2001 net income by $14 million.Figures for 2002 will be unchanged.

Earlier, Max Re was warned thatits securities could be delisted byNASDAQ for failing to file a Form10-Q for Q1, 2006.

Still, ratings agencies seemedunperturbed. Fitch said it “does notconsider these events thus far tobe material to Max Re’s ratings.The company initiated the investi-gation internally and voluntarily con-tacted the SEC. Furthermore, MaxRe has not to date received anysubpoenas or information requestsrelated to finite risk reinsurance.”

XL has been voted the best under-writer in Bermuda by a Reactionsmagazine online poll. It topped theoverall underwriters’ list while XL Reheaded the best reinsurance under-writers’ list. XL was voted secondto ACE in the best insuranceunderwriters’ category.

XL Re topped nine of the 13reinsurance categories, includingD&O, property and casualty, andwas voted top in six of 10 “quali-ties” categories while XL headedinsurance categories in productrange, capacity and working rela-tionships.

Meanwhile, Arch was votedthird best overall underwriter andsecond best reinsurance under-writer with RenRe just behind it.AWAC was rated the third bestinsurance underwriter.

Reactions noted that while theisland’s insurers and reinsurers weresmall by global standards,“Bermudian firms consistently out-perform their rivals in insurance cen-tres such as the US and Europe”.

AIG has given notice that it intends to exercise its demand registrationrights to register for sale up to 15.397 million — or 24.2% — of

the common shares it owns in Bermuda-based IPC Holdings in a pub-lic offering. While agencies affirmed IPC’s ratings following the April19 announcement, Standard & Poor’s said the outlook was negative.

AIG was the sponsoring shareholder of IPC in 1993 and has sinceprovided IPC with investment management, administrative andother services. A company bulletin said “these aspects of AIG’s busi-ness relationship with IPC are intended to continue following thesale.” Also, George Cubbon, President and CEO of AmericanInternational Company, intends to remain an IPC director.

The company stated: “AIG does not provide financial support toIPC, and the sale of AIG’s share ownership will not affect IPC’s cap-ital structure, financial condition or policyholders. The sale of AIG’sownership should provide more flexibility to IPC in managing itscapital, including potentially through share repurchases.” IPC’s bye-laws prohibit share repurchases that would result in AIG having 25%ownership of common shares and, with certain exceptions, othershareholders having 10%.

“Our financial condition remains healthy and our balance sheet,through our recent capital raising efforts, is strong,” stated IPCPresident and CEO Jim Bryce. AIG’s President and CEO MartinSullivan commented: “We look forward to continuing our successfulbusiness relationships with IPC, including as one of its clients.”

Max minimisesthe damage

It’s better inBermuda

17227A_BIQ_Q1_Qx5 6/20/06 1:16 PM Page 5

[ 6 ]

NEWS REVIEW

Both ACE and XL haveannounced plans to expandinto the US life business. ACE

has acquired an inactive companyof The Hartford Financial ServicesGroup called Hart Life Insurancewhile XL has bought Servus LifeInsurance, which is to be renamedXL Re Life America. ACE said itwould market life reinsuranceunder the name ACE TempestLife Re after regulatory approvals.

It bought Hart Life for its licencesin 49 states and Washington, DC.

“Our entry into the US lifereinsurance market comes at a timewhen primary companies are look-ing for financially secure capacity,and a reinsurer that truly under-stands their business,” said BarryJacobson, President of ACEInternational Life. “We believe ourcompany provides US primarywriters with a new reinsurance

choice that will serve their needswell.” ACE Tempest Life Re USAwill be led by Ronald Colligan,President and Chief OperatingOfficer.

XL Re Life America will offerreinsurance capacity for individuallife reinsurance and in-force port-folios on a yearly renewable termor coinsured basis as well as indi-vidual reinsurance capacity on afacultative underwriting basis. XL

Re Life America is led byPresident and Chief ExecutiveOfficer Andy Batley. A M Best hasassigned a financial strength ratingof A and an issuer credit rating ofA to XL Re Life America, bothwith stable outlooks.

According to Robert Douglas,CEO of XL Re Life, this “is not aventure into uncharted territory.We will employ the same under-writing capability and disciplinethat we have successfully exercisedin both the UK and Bermuda. It isa natural progression for our busi-ness and, I believe, for US lifeinsurers a welcome addition to thereinsurance market.”

Since its inception in 1999, XLRe Life’s operations have grown tomore than $6 billion in assets withteams now based in Stamford,London, Bermuda and Paris.

Sirius moveBermuda-based WhiteMountains Re Group is tosell its Sirius America sub-sidiary to an investor groupled by Lightyear Capital.White Mountains will take anequity interest of approxi-mately 18% in the acquiringentity. White Mountains Retook on Sirius America in2004 as part of its acquisi-tion of the Sirius group. SiriusAmerica is a Delaware-domi-ciled primary underwriter ofprogram specialty insurance.The transaction, which issubject to regulatory andother conditions, is expectedto close during the summer.

RAM Holdings became thelatest Bermuda-based com-pany to go public when itsshares began NASDAQ trad-ing on April 27 under the tick-et symbol “RAMR”. The firmspecialises in financial guaran-ty reinsurance. In May, RAMreported Q1 income of $6.6million, up 5.6% on 2005.

Life is good for Bermuda’s Big Two

RAM’s debut

TALENT EXPANDS POSSIBILITIES

www.maxre.bm

P R O P E R T Y & C A S U A LT Y I N S U R A N C E / R E I N S U R A N C E L I F E & A N N U I T Y

A.M. Best’s A - (Excellent) Fitch A (Strong)

At Max Re, we've recruited some extraordinary talent to

drive our business. From offices in Bermuda and Ireland,

we underwrite a wide range of Property and Casualty

Reinsurance and Insurance transactions, as well as Life

and Annuity Reinsurance. Expanding the possibilities with

innovative risk control, focused expertise and new

approaches to established convention.

17227A_BIQ_Q1_Qx5 6/20/06 1:19 PM Page 6

[ 7 ]

NEWS REVIEW

Hello, goodbyeA

fter just three years in business, Bermuda-based QuantaCapital Holdings is putting most of its specialty insuranceand reinsurance business into run-off.The decision includes the run-off of all Quanta’s remain-

ing US specialty lines, as well as its Bermuda reinsuranceoperations, and its Quanta Europe subsidiary. The remain-ing US specialty insurance lines placed into run-off consistof the programme business including HBW, professionalliability, environmental, fidelity and crime, and structuredproducts.

The move follows previous exits from property, casualtyand marine and aviation reinsurance, technical risk propertyinsurance, surety, trade credit and political risk insurance.

Quanta said Liberty International Underwriters willacquire the renewal rights of Quanta US Holdings’ environ-mental liability business and may hire certain key staff in thisbusiness line.

The company’s Lloyd’s syndicate and environmental con-sulting business, ESC, are not in the run-off plan and will con-tinue to seek new business. Quanta said it may also considerthe sale of the company or some or all of its remaining busi-ness lines.

Quanta was downgraded to B++ from A– by A M Bestafter announcing huge losses from last year’s US hurricanes.

Validus Re has entered into a collateralised quota share retrocession agreement withrecently-formed Bermuda sidecar reinsurer Petrel Re under which Petrel willassume a 75% quota share of certain lines of marine and offshore energy reinsur-ance contracts underwritten by Validus for 2006 and 2007. Other lines of businessare expected to be retroceded over time, said Validus. Paul Manders and PaulRoberts, who are responsible for the global marine and energy classes of business atValidus, will oversee the underwriting. Petrel is backed by investment funds man-aged by First Reserve Corporation, a private equity firm specialising in energy.Bermuda’s golden eggs? Page 15

“Except for the bit where the tyrannical CEO is shot, this is the bestannual report you’ve ghost-written, Madge.”

Petrel deal

17227A_BIQ_Q1_Qx5 6/20/06 1:21 PM Page 7

[ 8 ]

NEWS REVIEW

London insurance executiveshave intensified calls forBritish Government action to

cut red tape and taxes to makethem more competitive withBermuda and other offshorecentres.

“We need some help. Other-

wise, I’m afraid our insurance mar-kets will go the same way as ourmanufacturing industry — off-shore,” Dane Douetil, ChiefExecutive of Brit Insurance, told arecent industry conference.

“A number of my counterpartssay they would bring business back

to London at the drop of a hat ifthe tax rate was to be around 10%,”he added.

Robert Hiscox, Chairman ofHiscox, which established aBermuda operation last year, toldthe same conference: “It wasthought by a mandarin somewherethat if [London] had the best reg-ulated insurance market in theworld, it would attract businessfrom throughout the world. Well,that hasn’t happened.”

London pleads for help

Established in 19884th Floor, Cedar House, 41 Cedar Avenue, Hamilton, HM12, Bermuda.

Telephone (441) 292 4364www.jlt.bm

JLT Risk Solutions’ operations in Bermuda are carried out by: JLT Risk Solutions (Bermuda) Limited andJLT Risk Solutions Management (Bermuda) Ltd.

For information on the healthcare professionalliability solutions available in the Bermudamarket, please contact David Spear:[email protected], Tel (441) 294 4524

Insurance/reinsuranceInsurance/reinsuranceexperience across theexperience across theentire sectorentire sector

Innovative insuranceInnovative insurancesolutions atsolutions atcompetitive ratescompetitive rates

HealthcareSolutions

Montpelier Re is to get a $100 million investment from New Yorkprivate equity firm W L Ross & Co.Montpelier said Ross will buy 6.9million common shares ofMontpelier at $14.50 each. WilburRoss, the eponymous firm’sChairman and CEO, will beappointed to Montpelier’s board.

In for $100m

AXA realignsA consortium of internationalinvestors led by Stone PointCapital, one of the main groupsbehind the formation of Bermudastart-up Harbor Point last year, is toacquire AXA Re in January 2007.The investor group has formedParis Re Holdings, which will havean initial capitalisation of approxi-mately $1.5 billion to assume theongoing business of AXA Re.

JUNE 27US Securities Laws DemystifiedBermuda Insurance Institute,Hamilton441-295-1596 or www.bii.bm

JULY 11Life Reinsurance: The OtherBermuda MarketBermuda Insurance Institute 441-295-1596 or www.bii.bm

SEPTEMBER 17–20Second Annual BermudaCaptive ConferenceFairmont SouthamptonHotel, Bermudawww.bermudacaptive.bm

OCTOBER 11–1320th International ReinsuranceCongressFairmont Hamilton PrincessHotel, Bermudahttp://tinyurl.com/s4rrw

NOVEMBER 2Goldman Sachs Asset Manage-ment’s Annual Conference forBermuda ReinsurersFairmont Hamilton PrincessHotel, [email protected]

To include your event, [email protected], with “BIQCalendar” in the subject line.

WHAT’S ON

Enstar is born Bermuda-based insurance management companyCastlewood Holdings is to merge with the Enstar Group, of which it is cur-rently a partly-owned affiliate. The new company, to be called Enstar Group,will be headquartered here. Castlewood’s Dominic Silvester will be CEO.

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[ 10 ]

Even their bad times are goodRATINGS NEWS

AMBest has affirmed the finan-cial strength rating of A+and the issuer credit rating

of AA– for the reinsurance operat-ing subsidiaries of Bermuda-basedEverest Re Group. The outlookfor all ratings is stable. Best said theratings reflect Everest Re’s strongtrack record of generating fav-ourable earnings despite interimsetbacks from significant industryevents. Everest Re suffered almost

$1.8 billion in catastrophe-relatedstorm losses between 2004 and Q12006, but has maintained a 10-yearaverage return on equity of 11%.

Standard & Poor’s has affirmed theA counterparty credit rating onBermuda-based reinsurer PartnerRe, but changed its outlook fromstable to negative. The revision“reflects PartnerRe’s operating capi-tal adequacy, which remains below

expectations for a AA– rating, at anestimated 121% as of March 31,2006, as measured by S&P’s capitaladequacy model”. Although thegroup’s capital adequacy was“likely to improve throughout theyear through retained earnings,PartnerRe’s current capital adequa-cy places it in a weaker than expect-ed position relative to the upcominghurricane season”. S&P has alsoaffirmed its AA– counterparty

credit and financial strength ratingson Partner Reinsurance, PartnerReSA and Partner Reinsurance of US,and its AA– financial strength rat-ing on Partner Re Ireland Insurance(collectively PartnerRe).

Best has assigned a financialstrength rating of A– and an issuercredit rating of A– to CastlePointRe. The outlook for both ratings isstable. The ratings reflect Castle-Point Re’s strong risk-adjusted cap-italisation, historically profitablecore book of businesses assumedfrom its sponsoring company, TowerGroup Companies, and experiencedmanagement team. CastlePoint Reis a wholly-owned subsidiary ofCastlePoint Holdings, a Bermuda-based holding company that wasrecently capitalised with $265 mil-lion of equity raised in a privateoffering. CastlePoint Re will oper-ate as a Bermuda-based reinsurancecarrier providing quota share rein-surance coverages to the insuranceoperations of Tower. The companyalso plans on offering third partyquota share reinsurance and expectsto assume business related to spe-cialty programs.

Best has assigned a rating of A– toACE INA Holdings’ $300 million30-year 6.7% senior unsecurednotes. The notes are guaranteed byACE INA Holdings’ ultimate par-ent, ACE Limited, and are beingissued under the company’s existingshelf registration. Proceeds from thecurrent offering will be used torepay $300 million of 8.3% seniornotes maturing on August 15, 2006.The rating outlook is stable.

Best has upgraded the financialstrength ratings to A– from B++ ofThrough Transport MutualInsurance Association and itswholly owned UK subsidiary,Through Transport MutualInsurance Association (EurAsia).The two companies trade collec-tively as TT Club. Best has alsoupgraded their issued credit ratingsto A– from BBB+. The outlook forall ratings is stable.

SOME SAY A SINGLE TECHNOLOGY FAILURE COULD STOP PRODUCTION.

SOME SAY FAILURE TO ADAPT COULD CLOSE THE BUSINESS.

WE SAY POWER ON.

17227A_BIQ_Q1_Qx5 6/20/06 1:26 PM Page 10

[ 11 ]

The $100billionquestion

ANALYSIS

The floodwaters may have long ago receded fromdowntown New Orleans but, as the first anniversaryof Hurricane Katrina approaches, the effects of the

storms of 2005 continue to wash over Bermuda.At the time of writing, Quanta had placed much of

its specialty insurance and reinsurance business intorun-off, and PXRE was perhaps not far behind. Bothcompanies, battered by two consecutive years of heavystorm losses, were effectively hamstrung by ratingsdowngrades.

The Benfield Group, in its annual review of pricingtrends, said the ratings agencies “appear to be mount-ing something of a rearguard action to convince thereinsurance market that BBB range ratings are stillsecure investment grade [but] PXRE and Quanta haveseen their franchise seriously impaired as they paid theprice of falling over the A– precipice”.

Benfield noted that Bermuda’s companies havereacted to the devastating effects of the 2005 storms by“reducing their appetite, changing their catastrophemodels and underwriting assumptions, and increasingreinsurance and retrocession protection”. Q1 thus sawcontinuing trends in sidecars and catastrophe bonds ascompanies sought new sources to replenish capital andways of smoothing earnings.

All of which seems to be finding favour with theall-powerful ratings agencies. For example, Standard &Poor’s recently revised its outlook on the global rein-surance industry to stable from negative, stating thatreinsurers were in a strong financial position despitethe string of large hurricane losses in 2005.

However, it said reinsurers still faced challengessuch as reduced retrocessional capacity and the poten-tial for increased catastrophe losses.

“The industry has managed the massive losses ofthe 2005 hurricane season and is enjoying the profitsand healthy balance sheets that have resulted from acontinued hard market,” said S&P credit analystSimon Marshall.

S&P added: “The sector is benefiting from animproved operating environment, with the chroniccyclicality of the past likely to reduce and improve-ments in regulation, risk management, and transparen-

cy all having a positive impact. Strong pricing was afeature of the January 2006 renewals, and the benefitsof having a global, diversified portfolio were also evi-dent. The financial impact of the hurricanes was great.The influx of $7.4 billion in new capital from start-upsin late 2005 was a compensatory factor, but the newcompanies formed have served to dampen the hardmarket.

“Another challenge for the industry is the squeezeon retrocession capacity, although this is partly offsetby the increased availability of alternative methods ofrisk transfer such as ‘sidecars’, catastrophe bonds, andother forms of securitisation. Although the stable out-look reflects the current, predominantly stable nature

of ratings on reinsurance companies, Standard &Poor’s recognises that the industry is in a dynamic stateand the reverberations of the hurricanes will continueto be felt in the April and July renewals.”See pages 12 and 13 for PwC’s exclusive market facts and figures

Survivors gather strengthBUT DOUBTS REMAIN AS 2006 HURRICANES START TO THREATEN

Credit analyst Laline Carvalho atratings agency Standard &Poor’s said: “Improvements inmodelling, underwriting andpricing are bound to follow thecatastrophe losses of 2005, butwhether these will be sufficientto drive down volatility remainsto be seen.”

We may find out sooner thanlater. Colorado State Universityclimatologists William Gray andPhilip Klotzbach predict nineAtlantic hurricanes for the 2006season — five of them intensein Categories 3, 4 or 5. Theprobability of a major US hurri-cane landfall is estimated at55% above average.

And ratings agency A MBest, in a recent special reporttitled “Shake, Rattle and Roar”,said the build-up of populationand real estate development inhighly vulnerable areas meant itwas only a matter of timebefore insured property lossestopped $100 billion from oneevent or a combination ofevents in one year.

“When the waters subside, the problem’sgoing to be mould.”

17227A_BIQ_Q1_Qx5 6/20/06 1:27 PM Page 11

[ 12 ]

Q1 ANALYSIS / PRICEWATERHOUSECOOPERSOPERATING RATIOS

INSURANCE RATINGS

QUARTERLY LOSS RATIOSQ1 2006 Q1 2005 Q1 2004

ACE 61.2% 63.4% 60.5%Arch 61.5% 61.0% 60.7%Aspen 57.7% 54.8% 40.6%AWAC 66.7% 73.6% 66.4%Axis 56.6% 55.0% 51.5%Endurance 56.8% 57.4% 53.4%Everest Re 68.4% 66.4% 67.4%IPC 25.4% 46.3% 16.2%Max Re1 71.6% 70.5% 79.8%Montpelier 38.7% 44.1% 24.2%PartnerRe 60.0% 68.5% 62.9%Platinum 60.1% 57.8% 50.5%PXRE 23.1% 55.9% 26.3%Renaissance Re 28.2% 66.9% 36.2%White Mtn 62.6% 64.8% 62.9%XL Capital 63.9% 64.3% 61.1%

QUARTERLY EXPENSE RATIOSQ1 2006 Q1 2005 Q1 2004


QUARTERLY COMBINED RATIOSQ1 2006 Q1 2005 Q1 2004


1 Restated quarterly data not publically available for 2004

A M BEST RATING S&P RATINGMar 31, 2006 May 15, 2006 Mar 31, 2006 May 15, 2006

ACE A+ A + A+ A+Arch A – A – A – A–Aspen A – A – A AAWAC A A NR NRAxis A A A AEndurance A – A – A – A –Everest Re A+ A + AA– AA–IPC A A A AMax Re A – A – NR NRMontpelier A – A – A – A –PartnerRe A+ A + AA– AA–Platinum A A NR NRPXRE B++ NR3 BBB– NRRenaissance Re A A A+ A+White Mtn A A A– A –XL Capital A+ A + A+ A+

Notes: NR3 — Not rated by AM Best NR — Not rated by S&P

Renewals● Renewals in January and Marchhave shown that the stronger priceincreases are mostly linked to catas-trophe “peak zone” business lineswhere there is less capacity avail-able. Other lines showed muchmore moderate rate increases.● The market is now watching tosee what happens with the key Julyrenewals, particularly in Florida.● The impact of the additionalcapacity provided by the newentrants to the market is expectedto be seen more throughout the restof 2006.

Earnings● Although most reinsurersshowed strong earnings, in manycases premium numbers were flat oreven down on prior years, due to ageneral climate of careful under-writing in light of the increasedcapital requirements associatedwith catastrophe cover.● There were almost no catastro-

phes in the quarter, as well as gen-erally favourable development onprior year reserves, which helpedoffset adverse some developmenton KRW.● The use of sidecars to provideretrocessional cover to the reinsur-ers on cat exposures has proceededas planned.● Included in ACE’s earning wasan $80 million charge related tosettlement of Spitzer investigations.

Ratings● Both Best and S&P maintain anegative outlook on the reinsurancemarket in general.● PXRE and Quanta both suf-fered rating downgrades in the firstquarter, and PXRE requested thatthe major credit rating agencieswithdraw their financial strengthand claims paying ratings of thecompany and its operating sub-sidiaries.● Quanta has now placed virtuallyall of its business into run-off.

An air of caution and expectancy

Q1 2006 Q1 2005 Q1 2004

ACE 4,511 4,543 4,418Arch 1,168 981 1,010Aspen 679 804 640AWAC 498 505 500Axis 1,165 1,199 1,044Endurance 571 702 721Everest Re 1,055 1,048 1,225IPC 236 206 210Max Re 256 456 440Montpelier 225 306 333PartnerRe 1,373 1,446 1,554Platinum1 – – 491PXRE 121 125 107Renaissance Re 748 694 780White Mtn 1,229 1,254 1,109XL Capital 3,243 3,524 3,5731 Quarterly GPW not provided

Q1 2006 Q1 2005 Q1 2004

ACE 2,805 2,877 2,587Arch 762 697 708Aspen 403 379 306AWAC 309 324 338Axis 634 626 471Endurance 420 438 416Everest Re 1,022 1,006 1,055IPC 87 82 84Max Re 160 308 199Montpelier 131 181 191PartnerRe 833 896 893Platinum 344 411 321PXRE 77 79 69Renaissance Re 352 302 308White Mtn 901 955 832XL Capital 1,819 1,899 1,724

GROSS PREMIUMS WRITTEN $M

NET PREMIUMS EARNED $M

17227A_BIQ_Q1_Qx5 6/20/06 1:27 PM Page 12

[ 13 ]

Net income attributable to common shareholders ($m) Fully diluted earnings per share ($)Q1 2006 Q1 2005 Q1 2004 Q1 2006 Q1 2005 Q1 2004

ACE 489 437 447 1.46 1.46 1.53Arch 130 116 87 1.71 1.57 1.26Aspen 62 70 85 0.59 0.98 1.18AWAC 98 64 89 0.65 0.43 0.59Axis 195 152 167 1.19 0.95 1.00Endurance 103 96 101 1.45 1.45 1.47Everest Re 168 167 126 2.57 2.93 2.22IPC 58 44 74 0.86 0.91 1.52Max Re 73 38 42 1.15 0.75 0.86Montpelier 40 75 109 0.44 1.11 1.59PartnerRe 185 103 141 3.21 1.84 2.59Platinum 74 73 55 1.16 1.49 1.10PXRE 40 19 27 0.54 0.69 1.18Renaissance Re 179 44 169 2.49 0.62 2.38White Mtn 96 176 96 8.89 16.24 9.36XL Capital 459 443 452 2.56 3.18 3.25

Net income attributable to common shareholders ($m) Fully diluted earnings per share ($)2006 2005 2004 2006 2005 2004

ACE 489 437 447 1.46 1.46 1.53Arch 130 116 87 1.71 1.57 1.26Aspen 62 70 85 0.59 0.98 1.18AWAC 98 64 89 0.65 0.43 0.59Axis 95 152 167 1.19 0.95 1.00Endurance 103 96 101 1.45 1.45 1.47Everest Re 168 167 126 2.57 2.93 2.22IPC 58 44 74 0.86 0.91 1.52Max Re 73 38 42 1.15 0.75 0.86Montpelier 40 75 109 0.44 1.11 1.59PartnerRe 185 103 141 3.21 1.84 2.59Platinum 74 73 55 1.16 1.49 1.10PXRE 40 19 27 0.54 0.69 1.18Renaissance Re 179 44 169 2.49 0.62 2.38White Mtn 96 176 96 8.89 16.24 9.36XL Capital 459 443 452 2.56 3.18 3.25

Q1 2006 Q1 2005 Q1 2004

BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE

ACE 37.60 52.01 34.70 41.27 33.24 42.66Arch 37.24 57.74 66.60 40.04 59.91 42.10Aspen 21.83 24.66 22.06 25.21 20.13 25.75AWAC 9.83 n/a 10.96 n/a 13.90 n/aAxis 24.34 29.90 21.14 27.04 19.72 29.55Endurance 29.04 32.55 31.08 37.84 27.57 35.54Everest Re 65.73 93.37 66.59 85.11 60.19 85.44IPC 26.36 28.05 34.61 39.28 34.08 39.39Max Re2 20.61 23.80 20.77 23.53 18.96 22.60Montpelier 12.34 16.30 21.76 35.15 27.90 37.24PartnerRe 55.18 62.09 60.44 64.60 51.48 56.45Platinum 26.69 29.10 27.12 29.70 26.42 32.05PXRE 6.97 3.27 24.99 25.65 43.47 27.94Renaissance Re 33.61 43.62 37.06 46.70 38.88 52.00White Mtn 358.56 594.50 363.12 608.50 351.62 524.50XL Capital 47.10 64.11 55.82 72.37 53.32 76.04

1 Book value has been calculated by dividing shareholders’ equity at March 31 by shares outstanding at March 312 Restated quarterly data not available for 2005 and 2004

Q1 2006 Q1 2005 Q1 2004

ACE 12,157 9,970 9,397Arch 2,750 2,289 2,010Aspen 2,079 1,529 1,393AWAC 1,479 1,649 2,092Axis 3,645 2,962 3,007Endurance 1,924 1,883 1,763Everest Re 4,266 3,756 3,365IPC 1,679 1,677 1,649Max Re1 1,224 964 867Montpelier 1,100 1,378 1,770PartnerRe 3,179 3,328 2,769Platinum 1,578 1,173 1,143PXRE 504 715 613Renaissance Re 2,416 2,638 2,741White Mtn 3,872 3,913 3,181XL Capital 8,491 7,815 7,363

1 Restated quarterly data not available for 2005 and 2004

COMPARISON OF BOOK VALUE & MARKET VALUE PER SHARE ($)

CUMULATIVE EARNINGS DATA

QUARTERLY EARNINGS DATA

SHAREHOLDERS’ EQUITY ($M)

17227A_BIQ_Q1_Qx5 6/27/06 7:18 AM Page 13

The man credited with trans-forming ACE from a smallBermuda company into a glob-

al insurance powerhouse hasretired but will continue to act as anon-executive Chairman.

Evan Greenberg, President andChief Executive Officer of ACELimited, spoke “with great emo-

tion” of Brian Duperreault’s “lega-cy of extraordinary leadership andvision that is evidenced today bythe company’s strength and vitali-ty. On behalf of all our directorsand employees, past and present, aswell as all of our shareholders, Iwant to thank Brian for his enor-mous contribution to ACE.”

Mr Duperreault, 58, joinedACE in 1994 as Chairman,President and Chief ExecutiveOfficer following more than 25years of service with AIG. He wasgiven a mandate to diversify thecompany from a Bermuda special-ty carrier into a premier globalinsurance organisation. Following

a clearly articulated strategy ofgrowth through acquisition anddiversification, he oversaw theemergence of the ACE Group ofCompanies as one of a handful oftruly global property casualtyinsurers and reinsurers.

In May 2004, he presided over asuccessful management transitionplan, permitting him to focus onhis role as Chairman, providingboard leadership as well as repre-senting ACE in key areas such asstrategy and government relations.

Key acquisitions completedduring his time included TempestRe and Lloyd’s managing agenciesMethuen and Ockham (1996),Westchester Specialty (1998),CAT Limited and Tarquin plc(1998), and CIGNA P&C andCapital Re Corporation (1999).

Highly respected for hisapproachable management style aswell as his leadership and businessacumen, Mr Duperreault hasalways been active in communityaffairs, preferring to get personallyinvolved rather than merelydonating.

A former Chairman of theCouncil Partners, which raisedfunds for drug and alcohol abuseprevention and treatment pro-grammes, he is now Chairman ofthe Centre on Philanthropy andcommitted to transforming it intoa leader of the island’s third sector.

PROFILE

ACE’s guiding hand lets goBRIAN DUPERREAULT SEEN AS A FINE LEADER OF A REMARKABLE ENTERPRISE

[ 14 ]

Brian Duperreault: presidedover the creation of a world-class business

‘He’s highlyrespected for

his managementstyle as well

as his businessacumen’

Office Accommodation131 Front Street

Located at the eastern end of Front Street, this prestigious new 65,000 sq. ft.office development by F&E Holdings Ltd, will be completed and available foroccupancy in mid 2007.

131 Front Street will provide state of the art office accommodation in abuilding whose design and specification will make it a ‘stand-out’ amongst itspeers.

Ideally situated at the ‘gateway’ to the city, 131 Front Street will provideClass A office accommodation on a site benefiting from frontages on ReidStreet and Front Street. With six floors above Front Street, this building willprovide panoramic views of the City and Hamilton Harbour.

Primarily designed to provide quality office accommodation, some retailspace is available at the Front Street entrance and a gymnasium/health club will

be located in the basement. In recognition of anticipated client requirements, parking for cars and motorcycles isprovided with access to the parking floor directly off Reid Street.

The design incorporates a central atrium to permit the unrestricted passage of natural light from a transparentcupola on the roof of the sixth floor all the way to the ground floor on Front Street.

State of the art building systems have been specified including a generator capable of providing more than suffi-cient emergency power for the entire building in the event of a power outage. A card access system will also beprovided to restrict access to each of the floors or designated areas as necessary.

For further information and details of available floor area and lease rates please contact:Zane DeSilva at 236-3011 (bus) or 505-3011 (cell) or Dave Woodward at 236-3011 or 534-9489 (cell).

Windward PlaceThis prestigious new waterfront office development by Broadway Holdings

will be available for occupation by tenants in May 2007.Construction has already commenced on this prime office development which

will provide over 20,000 sq.ft. of office accommodation on four floors. Thedesign of this state of the art building affords panoramic views of HamiltonHarbour from all floors.

The building also benefits from:

● state of the art building management systems● a full floor of parking for cars and motorcycles● an emergency generator capable of providing full redundancy for the entire

building in the event of a power outage● a card access and security system● 80 ft. of dock and water frontage.

Windward Place is likely to be one of the last waterfront office developments in Hamilton and consequently it’sdesign and specification has reflected this unique situation.

Windward Place will provide prospective tenants with first class office accommodation in a beautiful waterfrontsetting and consequently demand for this development is expected to be high.

17227A_BIQ_Q1_Qx5 6/20/06 2:32 PM Page 14

IN DEPTH

The new Bermudian sidecars aredriving a trend in reinsurancefollowing the industry-chang-

ing storms of 2004 and 2005. XLCapital, Arch, Montpelier andRenaissance are among the busi-nesses that have formed sidecarcompanies accounting for morethan 7%, or $2 billion-plus, of thecapital raised post-Katrina.

XL and Highlands Capitalformed Cyrus Re with a capitalisa-tion of $500 million to handleproperty cat business from XL;Arch Capital sponsored FlatironRe, a $256 million company, toexclusively handle property catquota share from Arch Re; andMontpelier formed Rockridge Rewith West End Capital to assumeits high-layer, short-tail risk, andthen Blue Ocean Re to handleMontpelier’s retro book. Rock-ridge and Blue Ocean are Cay-man-based and are capitalised at$91 million and $300 millionrespectively.

CastlePoint Holdings was

formed in March as part of a $256million strategic relationship withNew York-based commercial linesinsurer Tower in a quota sharereinsurance agreement.

RenaissanceRe and post-Kat-rina Bermuda start-up Validus arethe latest companies to join thetrend. Under a quota-share agree-ment, RenRe will cede 80% of thepremium from specific, mainlyFlorida-based, property catastro-phe business to Starbound Re-insurance, a sidecar with capitalisa-tion of $125 million. Validus hasentered into a collateralised quotashare retrocession agreement withPetrel Re, a new Bermuda-basedsidecar which will assume a 75%quota share of certain lines ofValidus’s marine and offshoreenergy reinsurance contracts for2006 and 2007.

Sidecars, or special purposevehicles, are not new — PXRE setup P-1 Re, the first in Bermuda, in2002 — but post-Katrina they area useful tool whereby a company

can offload its most volatile riskswhile improving the quality of itscapital and, critically, maintain itsall-important rating. And becausethey are effectively providing coverthrough a separate company, side-cars also allow a reinsurer to tapinto expanding market opportuni-ties and continue writing high-riskpolicies without their earningslooking like, well, a hurricane justripped through them.

The Benfield Group, in its B10annual review of the reinsurancemarket, commented: “The sponsorreinsurer can benefit from thearrangement since it nominallyremains in the market for volatilebusiness such as retrocession,whilst passing the business and itsassociated risk and capital loadingsoff its balance sheet to the sidecar.The advantage of this arrangementmay, however, be offset by the highcapital charges from unrated rein-surance recoverable they acquire.”

As George Reeth, Presidentand Deputy Chairman of Validus

Re, said in announcing the PetrelRe deal: “We view this initiative asa strategic part of Validus Re’sbusiness plan. This deal allows usto leverage our resources moreeffectively while at the same timemanaging our net exposures.”

However, Benfield believesmost sidecars will likely be short-term operations, comparing themwith the Lloyd’s quota share dealsof 2002/3 as syndicates scrambledfor capital to take advantage ofpost-9/11 market conditions. “Atypical arrangement employs amulti-year quota share of theselected short-tail lines of a rein-surer’s book to the sidecar. Itremains to be seen how long thephenomenon of the sidecar willlast, but the flexible and oppor-tunistic nature of the sidecars maycontribute less to potential futurecompetitive pressure as the struc-tures could be turned off more eas-ily when markets turn down.”

According to Colm Homan, aPartner at PricewaterhouseCoopers

GOLDEN EGGS?OR DOES SOMETHING SMELL NOT QUITE RIGHTABOUT SIDECARS, ASKS CHRIS GIBBONS

[ 15 ]

Sidecars are not without their own risks, of course. PwC’s Colm Homansays: “The most significant disadvantage to the reinsurer is that they are

ceding business when the rates are at their highest but may not have thesame amount of protection available when rates start to drop. To counter-balance this, reinsurers will often include some form of profit commissioninto the reinsurance agreement to ensure that if the business is profitable,they have not given away all of the profit.

“Another potential disadvantage is the capping of business that the rein-surer can write in certain areas, irrespective of rates. If the quota shareagreement with the sidecar restricts the total policy limits that can be writtenby the reinsurer to available capital / collateral in the sidecar, then the rein-surer may have contractual restrictions from writing further business, even ifit felt that the pricing would support taking a larger exposure.”

The biggest drawback for investors, he says, is that the nature of theinvestment itself is high risk. “If there is significant storm activity, thechances of a significant if not total loss of capital are reasonably high. In theevent of loss activity, the exit strategy for the investors is less clear and mayinvolve protracted commutation negotiations.”

Some analysts see the sidecar trend as a sign that appetite for risk isdiminishing among some reinsurers, whom they accuse of acting more

like brokers, taking a fee for offloading the risk to someone else. Whateverhappened, they ask, to robust balance sheets and diligent underwriting thatwas committed to risk and could withstand heavy claims without slidinginto run-off?

In a recent editorial, Cyril Tuohy, managing editor of Risk&Insurance, wasespecially blunt: “What’s really going on is that the industry’s suffering froman identity crisis. It’s torn between serving its original function to provideclients [with] peace of mind and long-term security, and the pressure ofloosely regulated investors and players interested only in short-term gains.”

He said it conjured up images of “a James Bond gimmick where thesidecar passenger pushes a button to allow the sidecar to break away fromthe motorcycle, as the operator waves bye-bye to the hapless motorcyclistwho’s headed for the cliff.

“What to do? Do what any levelheaded British secret service agentwould do. Keep your eyes on the road, stay focused on the reasons clientsturned to you in the first place and ditch the sidecar.”

Easy riding now, but… DOUBT AND DERISION

17227A_BIQ_Q1_Qx5 6/20/06 1:29 PM Page 15

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in Bermuda, the key benefit for investors isthat, unlike investment in the sponsoringreinsurer, they are isolated from exposure toadverse development on existing lossreserves. “This has made them popular withexisting investors in Bermuda-based compa-nies who would like a ‘clean start’ for anyadditional capital they are injecting into themarket. It also appeals to private equity andhedge fund investors who may not have anycurrent investments in the sector but want tocapitalise on the expected positive pricingenvironment while having a straightforwardexit strategy in the event that the contractsare loss free.”

He added: “The volume of sidecar incor-porations that we have seen is at least partlyrelated to the ease of set-up for Bermudareinsurance companies. Regulatory approvalto establish the sidecars is often obtained injust a couple of weeks, which allows them tobe fully functioning before the key hurricanerenewal season.

“In many respects, sidecars are quite simi-lar to the other forms of new capital that havebeen injected into the Bermuda market thisyear. They are hoping to make opportunisticreturns from strong pricing in dislocated mar-kets (in particular, property catastrophe cov-erage due to last year’s record storm activity).What is different about sidecars is that theytypically (but not always) have a much short-er time horizon than traditional capitalproviders, in some cases as short as one or twoyears with any coverage for additional years atthe option of the sidecar.”

That has led to some analysts dubbingsidecars “disposable reinsurers”, but MrHoman noted: “The fact that so many rein-surance companies have started to work withsidecars is a clear indication that the market-place sees them as a useful tool to reduceearnings and capital volatility.

“By their nature, many of the sidecars areresponding to short-term dislocation in themarket to make super-normal profits. Thecyclical nature of the insurance and reinsur-ance industry means that those super-nor-mal profits will not always be available and,as such, the long-term future for any of theindividual vehicles would certainly be calledinto question.

“Based on their popularity in the currentproperty cat market, however, it is safe toassume that as long as the industry continuesto be cyclical, we should expect to see someof the current crop return and further newentrants in future hard markets.

“A by-product of the current sidecar ini-tiatives which we may see in the future ismore investment into the insurance andreinsurance sector by the private equity andhedge fund investors as they start to build upfamiliarity with the industry through theirparticipation in the sidecar arrangements.”

[ 16 ]

IN DEPTH

17227A_BIQ_Q1_Qx5 6/27/06 7:10 AM Page 16

Acontroversial US tax movecould mean an exodus of USexpats, and force Bermuda-

based companies to contemplaterelocation or hiring more execu-tives from elsewhere.

Americans working in placeslike Bermuda, where housingallowances are routinely offered tooffset the high cost of living, willbe most affected by the new law. Itstops Americans working abroadfrom deducting $80,000 plushousing costs from their tax decla-rations to the IRS. Although itadjusts the exclusion for inflationto $82,400 for this year, it raisestaxes by adding arcane provisionson how the exclusion is calculated,and sharply increases tax liabilityon investment income.

The sudden changes have out-raged American expats and drawncriticism in the media.The New YorkTimes said: “The law effectivelyforces many overseas Americans intohigher tax brackets by imposingcomplex new requirements for calcu-lating the value of housingallowances and then taxing theallowance at the lowest rates.Americans in no-tax or low-tax juris-dictions with high housing costs, likeBermuda, will be hit hardest.”

There are nearly 5,000 Am-ericans in Bermuda, and they playa key part in (re)insurance.

“We’ve gone from being rev-enue neutral to bearing a disparateburden from a US tax perspective,”said Rick Irvine, an American whois Tax Partner with Pricewater-houseCoopers in Bermuda. Headded that Americans in Bermudawere being unfairly penalisedbecause most Bermuda-basedcompanies operated a “use it orlose it” housing allowance policywhich means employees cannotpocket any extra cash.

As one American Assistant VPof a reinsurance company said:“Essentially, it means that I willhave taken a pay cut to come toBermuda. Had this been in effectbefore I came here, I wouldn’t have

come and I think a lot of others atmy level will think twice in future.”

Mr Irvine said: “The real ques-tion for Bermuda is what are theexempt companies going to do? Idon’t get the sense that they aregoing to say, ‘We’re not going tohire Americans because they aretoo expensive.’ I just don’t thinkthe talent pool exists. Does that

mean more jobs may move back tothe US? Possibly. Companies arefaced with some difficult decisions.

“It will likely change the demo-graphics of the industry althoughthey are already changing. Theclass of 2001 was very much NorthAmerican, particularly the US,whereas the class of 2005 has amuch more UK, London flavour.”

Critics of the changes are hope-ful that they could yet get areprieve. Said Mr Irvine: “There isa provision whereby the IRS candraft regulations to take intoaccount places where there is ahigh cost of living, which wewould think might includeBermuda, but if and when thatguidance comes, no one knows.”

WORKFORCE

[ 17 ]

Island’s Americans feel the pinchNEW TAX LAW COULD CHANGE THE FACE OF THE BERMUDA MARKET

17227A_BIQ_Q1_Qx5 6/27/06 7:32 AM Page 17

[ 18 ]

MEDIA WATCH

“ACE secretly agreed with insurance brokers andother insurers to rig bids for insurance policies.Because of this illegal conduct, policyholders didnot get the impartial recommendations theydeserved to get and they ended up paying more fortheir insurance. ACE also paid contingent commis-sions to brokers in exchange for the brokers steeringbusiness to ACE, again without the policyholders’

knowledge or consent. This settlement … will helprestore integrity to the insurance markets.”

— Connecticut Attorney-General Lisa Madigan onACE’s $80 million settlement over bid-rigging charges

“The insurance industry posted a profit for 2005despite record catastrophe losses, and experi-enced strong growth in policyholders’ surplus,

indicating that rate levels are still stalwart andcapacity is abundant in most lines. Conditionsare ripe for further softening.”— David Bradford, Editor-in-Chief at Advisen,

in a statement at RIMS

“By 2010 we could see $100 billion in catastro-phe losses in a single year.”

— Robert Hartwig, Chief Economistof the Insurance Information Institute

“I don’t see us catching Bermuda inthe next 10 to 15 years.”

— Seamus Tivnan, head of theInsurance Managers’ Association of

Cayman, quoted at RIMS, Honolulu

“Numerous sources report thatproperty reinsurance rates are nowrising substantially for risks in catas-trophe-prone areas, which willincrease primary insurers’ costs ofproviding coverage. These develop-ments highlight the need for publicpolicymakers to look long and hardat how catastrophe risks should behandled. One year’s solid perform-ance shouldn’t be misinterpreted.We clearly face very serious risks.”

— Gregory Heidrich, Senior VicePresident at PCI

Promoting the best of race relations, race awareness, workforce representation and fair and equal access to opportunity.

Are you a part of the CURE? www.cure.bm

Bermuda’s surveyed workforce has over 27,000 employees, closely representing the country’s racial population. Black people represent about 55%. White people represent 34%. Yet, Black people hold only 27% of those senior and executive level jobs.

Help us to promote equality of opportunity in the workforce. Mentor and Train. Personally challenge discrimina-tion. Advocate for members of all of Bermuda’s racial community to be fairly represented in the workforce.

The price of integrityCONNECTICUT A-G ANTICIPATES A CLEANERNEW ERA FOLLOWING THAT ACE SETTLEMENT

“I give you the seven-billion-dollar pup, then you give meback the seven-billion-dollar pup, and we’ve each made

seven billion dollars.”

Working model?“Coming off back-to-backextraordinarily active hurricaneseasons, the market is lookingfor leadership. We are takinga clear, unam-biguous positionthat our clientsshould managetheir risks in amanner consis-tent with elevated levels of hur-ricane activity and severity. Welive in a dynamic world, andthere is now a critical mass ofdata and science that point tothis being the prudent course ofaction.”

— Hemant Shah, Presidentand CEO of cat modeller RMS

17227A_BIQ_Q1_Qx5 6/20/06 1:29 PM Page 18

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[ 20 ]

PEOPLE

ENDURANCE SPECIALTY: Michael Fujii hasbeen appointed Chief Operating Officer — Insuranceat Endurance Specialty Holdings. In this new position,Mr Fujii will expand his current role as head of thefirm’s US insurance business to oversee Endurance’sglobal insurance operations.

AXIS: Richard Housley has been appointedPresident of AXIS Global Insurance. CurrentlyEuropean Division President of AXIS Insurance, MrHousley will now directly oversee all operating andunderwriting activities within AXIS Global Insurance.He will continue to serve as European DivisionPresident within AXIS Global Insurance and asGlobal Property Leader within AXIS Insurance.Richard Gieryn, currently General Counsel of AXISUS Holdings, has been promoted to General Counselof AXIS Capital. He will oversee all legal matters atthe company, reporting directly to AXIS Capital CEOand President John Charman.

IMAGINE: Gregory Morrison has been namedPresident and Chief Executive Officer of ImagineGroup Holdings. He was previously Vice Chairman ofPlatinum Underwriters Holdings. Bob Forness,Chief Underwriting Officer of Imagine, and MikeDaly, the Bermuda-based reinsurer’s Chief FinancialOfficer, have been acting co-CEOs of Imagine sinceBrad Huntington stepped down as President andCEO last July.

AWAC: promoted to Senior Vice President areGerald Browning in Casualty FacultativeReinsurance; Thomas McKevitt in Property TreatyReinsurance; Rick Mello in Human Resources andAdministration; and Rob Moreno at NorthAmerican Casualty Treaty Reinsurance.

OIL: Ricky Lines, formerly of XL Capital, hasjoined the OIL Group of Companies as ChiefFinancial Officer.

ACE: Andy Gibbs, Chief Financial and OperationsOfficer for ACE Bermuda, and Gus Hardart, ChiefFinancial Officer for ACE Tempest Re Group, are toswap roles. The exchange is part of the group’s businesscontinuity and succession plan for key financial execu-tives. Meanwhile, John Keogh has been namedChief Executive Officer of the group’s internationalproperty/casualty unit, ACE Overseas General. MrKeogh, previously President and CEO of National

Union Fire Insurance Co of Pittsburgh, an AIG divi-sion, will replace Gary Schmalzriedt, who retires inOctober. Also at ACE, Mary Cirillo has been electedto the Board of Directors, replacing Robert Staley,who has retired. Ms Cirillo has served as an advisor toHudson Venture Partners, a New York venture capitalfirm, as well as Chairman of OPCENTER, a networkoperations services firm.

PARTNERRE: Mike Mitchard has been appointedPartnerRe’s Chief Information Officer. He has 23years of experience in information technology, mostrecently at ACE Overseas General. He replacesWerner Heiz, who is retiring.

ARIEL RE: the head of ACE Energy, Chris Fisher,has been recruited to lead Ariel’s energy underwritingdivision.

RENRE: Fred Donner has joined as Executive VicePresident and Chief Financial Officer. He succeedsJohn Lummis, who has retired. Mr Donner, 48, whowill be based in Bermuda, had a 22-year career atKPMG, where he most recently served as SeniorAudit Partner and National Insurance Practice Leader.

XL: Susan Cross is XL Capital’s new Global ChiefActuary, having been Chief Actuarial Officer of thecompany’s reinsurance operations. She replaces JamesMcNichols, who has decided to “pursue other inter-ests”. Meanwhile, former ACE executive JohnGallagher has been named Chief UnderwritingOfficer of XL Insurance’s Global Property operations.He was previously EVP Property at ACE USA.

Fujii climbs to summitENDURANCE PLACES AMERICAN CHIEF ON TOP OF THE WORLD

ACE Bermuda Insurance haspromoted Patrick Tannock(above) to Executive VicePresident. Mr Tannock managesACE Bermuda’s professionallines business and also servesas Chief Underwriting Officerand Director of ACE Bermuda’sspecialist subsidiary, CorporateOfficers & Directors Assurance(CODA).

Rees Fletcher, President andChief Executive Officer of ACEBermuda, said: “Patrick hasbeen instrumental in the growthand profitability of ACEBermuda’s professional liabilitybusiness. He has a provenrecord of product innovationand continues to address clientand industry needs.”

Mr Tannock has more than20 years’ experience in theinternational insurance industry.He joined ACE in 1993 aftersuccessful spells with Marsh &McLennan (Bermuda), RiskTreatment Services and INAInternational. He has become aregular speaker at professionaland educational conferences,and currently serves as co-chairman of the Bermuda PLUSConference.

The rise andrise of PatrickTannock

Please send Bermuda-related awards, appointments and promotions with digital pictures to [email protected], writing “BIQ People” in the subject line

Gerald Browning Thomas McKevitt Rick Mello

Mike Mitchard Fred Donner Rob Moreno

17227A_BIQ_Q1_Qx5 6/20/06 1:29 PM Page 20

LYNDA MILLIGAN-WHYTE& ASSOCIATES

A full service international business law firm

P.O. Box HM 1913Hamilton, Bermuda HM HX

Tel: 441-295-1302Fax: 441-295-8555

Email: [email protected]

Lynda Milligan-Whyte & Associates is a fullservice international business law firm withattorneys who have over 20 years of experi-ence in practicing corporate/commerciallaw in Bermuda and internationally particu-larly in company and trust formation,insurance registration, mutual fund regu-lation, civil litigation/insolvency matters andcorporate governance/government compli-ance areas.

The law firm was founded by Lynda Milligan-Whyte, J.P., the former U.B.P. GovernmentLeader in the Bermuda Senate.

BARRISTERS & ATTORNEYS

Trott & Duncan20 Brunswick Street, Hamilton

PO Box HM 2094Hamilton HM HX

Telephone: (441) 295-7444Facsimile: (441) 295-6600

Email: trott&[email protected]: www.td.bm

Contact: Kim N. Wilson, JPTrott & Duncan provides a comprehensiverange of legal services. The firm blends aninnovative approach to the practice of lawwith over 150 years of combined legalknowledge and experience. The firm’s clientbase spans Bermuda, Europe, the UnitedStates, the United Kingdom, the West Indiesand Canada.

Contact:Delroy Duncan, FCIArb.,JP

Trott & Duncan provides a comprehensiverange of legal services, including a widerange of corporate, insolvency insuranceand reinsurance services. The firm blendsan innovative approach to the practice oflaw with over 150 years of combined legalknowledge and experience. The firm’sclient base spans Bermuda, Europe, theUnited States, the United Kingdom, theWest Indies and Canada.

PO Box HM 2032Hamilton HM HX, Bermuda

www.bermudamedia.bm

Telephone: (441) 292-7279Facsimile: (441) 295-3189E-mail: [email protected]

Contacts:Ian Coles, President

Charles BarclayEditor-in-Chief

Lissa FisherDirector of Marketing

Peter BackebergHead of Television Production

The island’s largest independentmedia organisation, producing inno-vative, speciality magazines and tele-vision programming which providethe sophisticated business and leisuretraveller with a reliable, high-qualityintroduction to Bermuda. Productsinclude: Bermuda Business Visitor,Who’s Who in Bermuda Business,New Resident as well as two televi-sion channels — The BermudaChannel and The InternationalBusiness Channel.

BERMUDAMedia

Willis (Bermuda)Limited

The Vallis Building, Third Floor58 Par-la-Ville Road

Hamilton HM 11, BermudaMailing Address: P.O. Box HM 1995

Hamilton HM HX

E-mail: [email protected]: (441) 295 1272Facsimile: (441) 295 4143

Services: Willis (Bermuda) Limited areinsurance brokers for all classes of interna-tional insurance and reinsurance, specialis-ing in casualty, property, directors & officers,and financial reinsurance.

77 Front StreetHamilton HM 12,

Bermuda

Tel: 1(441) 296-5627Fax: 1(441) 296-1749Email: [email protected]

Website: www.bes.bm

Contact: Dawn M. Zuill - PresidentMarkus A. Defilla- Managing Director

Laura E. Jackson - Recruitment Advisor

BES LIMITED is a leading provider ofpermanent and temporary recruitmentservices to Bermuda’s Business Sector.

Specializing in a broad range of indus-tries including the insurance and reinsur-ance business arena, BES provides inno-vative and flexible recruitment servicesincluding comprehensive employmentand relocation assistance to new start-upcompanies. All services are tailored tomeet the individual business needs ofeach client.

17227A_BIQ_Q1_Qx5 6/20/06 1:37 PM Page 21

Foremost it takes discipline. Global insurers and reinsurers who can go the distance must beable to consistently overcome the unexpected. At Allied World Assurance, we can and we do.We write reliably profitable business because we recruit professionals of exceptional talent. We maintain an A rating because we are solidly backed. And we continue to grow because our customer relationships are built on service and mutual benefit. In property, casualty andreinsurance, Allied World Assurance is the kind of company you want on your side.

It’s about strength and commitment

ALLIED WORLD ASSURANCEBermuda Boston Chicago Dublin London New York San Francisco

www.awac.com

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