Recently Michael Pritula, a director with McKinsey & Company said he was surprised by how little the new Bermuda companies have impacted the market. He was quoted as saying: “Twelve months ago, everyone was talking about the amount of money being raised. At that time they were confident they would earn a sure-fire 40 percent compounded return over the following two years, yet I haven't heard a robust assessment of what they have done.”

I must admit I was surprised when I read what Mr. Pritula had to say.

However, once I thought his comments through, I decided instead of looking at his comments as a negative, they should be viewed, as a positive sign that the new capacity that came to Bermuda was needed to help fill the void left in the market in the wake of September 11.

My argument is further supported by a report called “The Big Squeeze” recently issued by The London based reinsurance intermediary Benfield Group. A.M. Best gives the following summary of the Benfield report: “The influx of new capital after the (World Trade Center disaster) appears increasingly inadequate against the massive outflow caused by falling investment markets, reserve strengthening and escalating catastrophe losses,” the report said, citing estimates obtained from Swiss Re Group. “Since 2000, the industry has lost some $200 billion of capital against $26 billion raised in 2001 and $19 billion in 2002”.

When I gave my insurance predictions for the year 2002, I stated that the results of the new companies coming to Bermuda would not be as great as some investors had originally thought. My reasoning for that conclusion was and still is that the market has reached an unprecedented crossroads in its history. The insurance industry has faced the following challenges since September 2001:

1.The sustained bear market;

2.Corporate governance issues which have affected the way insurance companies report their earnings and account for off sheet balance sheet deals leading to calls for greater transparency in the insurance industry;

3. The lingering effects of September 11, 2002;

4. The resurgence of asbestosis; and

5. The impact of mould claims on the once sought after middle market accounts.

These have had irreversible and monumental effects on the performance of insurance companies the world over.

We are seeing large companies increasing their reserves for old claims such as asbestos because clients and investors are demanding to know the true solvency picture of insurers. This is why we have seen such companies as Travelers and ACE announce significant increases to their asbestos reserves. This trend is likely to continue for some time particularly since the new Sarbanes-Oxley Act makes corporate leaders of companies criminally liable for false certification and tampering with records.

The European insurance market, once heralded as the strongest reinsurance marketplace, is retrenching and pulling out of US business. Lloyd's is under investigation by the EU because the EU believes Lloyd's has violated laws. The US insurance market is said to be undercapitalised by some $38.5 billion. Based on all of these factors, how could any analyst or investor be surprised that the Bermuda market is not able to provide huge yields to its investors?

It is highly unlikely that we will see the skyrocketing stock prices of insurance companies for a long time. The world today is a much different place to the world prior to September 11. Much has changed and now expectations must be lowered to a realistic level on the performance of any company.

In Bermuda alone, we have seen the virtual disappearance of the stand-alone ‘finite risk' carriers because the market has changed. No longer are clients willing to take the risk of using financial products that could affect their balance sheets because they do not want to become known as the next Enron, WorldCom, Global Crossing or Xerox. They are also reacting to the passage of the Sarbanes-Oxley Act and none of them want to be held criminally liable for tampering with their balance sheets. So for now, traditional insurance companies are going back to basics, recognising that the days of financial products are best left on the back burner until the economy sorts itself out.

The market is changing. Clients are still looking for alternative means to cover their exposures and Bermuda continues to offer the infrastructure to allow clients the flexibility to do so. But in the present market, can any analyst or investor expect the Bermuda players to deliver the results that may take the industry years to ever see again?

A significant reason why the insurance industry finds itself in the position that it is in today stems from the pressure placed upon it by investors and analysts to provide them with huge yields.

After all the turbulence that has occurred in the marketplace since September 2001, isn't it time everyone recognised that the way stocks were measured in the past is in no way reflective of the financial well being of a company.

So instead of questioning whether the new Bermudian companies are under performing, the question should be are the new Bermuda companies serving a useful purpose in helping to stabilise the turbulent insurance marketplace?The answer is, unquestionably, yes.

@EDITRULE:

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday. Feedback crduffycwbda.bm