The Bermuda market will be “horrified” by the new capital model to be introduced early next year by rating agency Standard & Poor’s (S&P).

The comment was made by Caroline Foulger, an insurance partner at PricewaterhouseCoopers, on Wednesday, the opening day of the Bermuda Insurance 2006 Conference.

The day before the conference opened, S&P had released the long-awaited outline of the new capital model it intends to introduce next year, the first complete upgrade since 1991 of the agency’s method for evaluating corporate capital held by insurance companies.

Ms Foulger agreed that the new model, the agency’s response to the wave of criticism that engulfed all insurance market particpants after Hurricanes Katrina, Rita and Wilma last year, was “the right thing to do”, and modified her comments on the Bermuda market’s response to “somewhere between consternation and horror.”

Summarising the effect that the new model would have, Marc Eiger of S&P wrote: “The big picture is that many property/casualty companies may need more capital (or come up with alternatives such as cutting dividends or reducing share buybacks), while some major life companies may benefit from the factors in these proposed changes.”

The proposed changes are not final and are subject to change during the next 90 days, during which time S&P is seeking the input of those likely to be affected. There appeared to be no sentiment for ducking the issue, even among the property/casualty companies most affected by the new model. “Everybody’s in the same boat,” Ms Foulger added.

The conference was almost from the outset rated an immense success by organisers. Almost 250 delegates were registered and almost all showed up, resulting in standing room only crowds on the first day, which was held in the Gazebo Room of the Hamilton Princess.

Peter McClean, a director of Standard & Poor’s, started the conference off with an overview of the Bermuda captive scene. The locals in the audience — the great majority — were drawn from the ranks of middle management of insurance and reinsurance companies, and had only a passing interest in captives. To his credit, Mr. McClean sensed the mood and ended his scheduled hour after just 20 minutes, giving way to the main event, a discussion of the new capital model.

The conversation was introduced by Mark Puccia, managing director at S&P, one of a very large delegation in attendance from the agency. “A company’s competitive position is equally important,” Mr. Puccia said. “It is at the start of the virtuous cycle. Or, if you don’t have a competitive position, the start of the vicious cycle.”

The model is a highly technical subject, and so was the outline given by Grace Osborne, a director of S&P. She was at pains to point out, as was the documentation that accompanied her comments, that capital is only part of one of nine elements that go to enabling S&P to rate a company. Other important elements include enterprise risk management (the newest industry buzzword), liquidity, operating performance and, to a lesser extent, management and corporate strategy, investments, and financial flexibility.

Full details of the new model can be found on Standard & Poor’s website.

In answer to a question from the audience, Ms Osborne said:<\p>“The ratings today are right, but profiles change, so we will see some minor changes.” She also said that she expects “we’ll get a lot of feedback on equities, for which we have adopted a modelling technique that tries to address volatility”.

At this point, Ms Foulger was drawn into the conversation. Her comment on the shock Bermuda companies should expect was followed by a view from Simon Marshall, a director of S&P, that, in contrast, “many European companies will greet the new model with a big sigh of relief”.

The reason, he said, is that property/casualty companies “will be tax-adjusted, which will help those with a bias toward short-tail lines.” Bermuda companies, of course, pay no corporate taxes for which, curiously, they appear to be about to be penalised.

Ms Osborne also said “life and health companies will be fine”. She pointed out that property/casualty underwriting losses in the past 15 years have totalled $276 billion, and that only one profitable year was recorded between 1990 and 2004 — that year being 2004. The nine-month financial results strongly suggest that, absent a major catastrophe in the next 45 days, 2006 will also be a profitable year.

The last panel discussed the merits of the London and Bermuda markets. London has been buoyed by Berkshire Hathaway’s purchase of the Equitas legacy problems, although history suggests that in a straight race between Warren Buffett (the power behind Berkshire Hathaway) and the London market, the latter is unlikely to emerge the winner.

Mr. McClean introduced the topic by saying: “Bermuda is the up-and-coming star, but many of the new companies last year came from London.”

He outlined the ways in which the markets are complementary, and pointed out how neither could exist without the other. He did mention that Bermuda is the third largest supplier of capacity to Lloyd’s, although no one mentioned last week’s stunning deal in which Bermuda’s Catlin Group became the largest single supplier, with its acquisition of Wellington Underwriting.

As usual, panellist Robert Childs, chief executive officer of Hiscox Bermuda, was outspoken, a breath of fresh air given the caution almost everyone else demonstrated in their comments.

“Bermuda is a big market,” he said, when asked why shareholders of his parent company had that very day voted to move their operations to Bermuda. “We could not avoid being at the bazaar. If you have a stall, it is no good putting it in the garage; you put it in the market. Forty percent of our business comes from the US, and we needed to be nearer to the risk. We could not afford to be at a competitive disadvantage by not being in Bermuda.

“Regulators here understand the commercial imperative, which may have no meaning in other parts of the world.”

Julian Cusack, chief financial officer of Aspen Insurance Holdings, pointed out that the Equitas deal “makes Lloyds potentially more attractive. The market has been transformed from the appalling state it was in during the 1980s and beyond.” Issues remain in the London market, he said, including processing and market friction.

A discussion ensued on “global nomads”, a term that aptly describes modern insurance people, and, increasingly, modern insurance companies.

Mr. Childs chimed in: “I sent an e-mail back to London, when I was first here. I said that if you ever wondered where all those people are that you haven’t seen for a while, they’re all here. I have never seen as many London brokers as I did walking down Front Street.”

Adding that he expected his next comment would haunt him, he said: “There are more decision makers here than anywhere else in the world.”

New S&P capital model ‘will horrify’ market