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How 2019’s mammoth bond rally buoyed the entire eurozone

Return of ECB’s debt-buying programme plays central role

This year’s rally reached all corners of the eurozone’s sovereign bond market. Every member of the currency bloc has seen its 10-year bond yield hit an all-time low.

While Germany’s debt stole the headlines, with all of its bonds trading at sub-zero yields at one point during the year, countries generally considered riskier have performed even better. In former crisis spots such as Italy, Spain, Portugal and Greece, spreads over German debt -— a measure of how risky investors consider these bonds — tightened to record lows. As German Bunds, which serve as a benchmark for the euro area, gave up some of their gains in the autumn, these countries have outperformed.

One driver of this trend is a return of relative political stability, and comparatively healthy growth to what became known as the eurozone “periphery” during the debt crisis. But a far bigger driver has been investors’ desperation for higher-yielding bonds in a market where more than $11tn of debt continues to trade at a negative yield.

“When Bund yields are so low, investors are forced to go up the risk spectrum for returns,” said Rabobank strategist Lyn Graham-Taylor.

Many fund managers would prefer not to hold too much Italian debt, Mr Graham-Taylor said, given weak growth and the potential for political volatility. But a huge bond market with mostly above-zero yields is tough to ignore. At one point this year nearly two-thirds of all positive yielding debt in the eurozone was Italian. “A standard thing you hear from investors is that they hate the credit but they can’t avoid holding it,” Mr Graham-Taylor said.

The return of the European Central Bank’s bond-buying programme in November, after a nine-month hiatus, has further supported eurozone government bonds of all stripes. At the height of the eurozone crisis, “peripheral” bonds typically moved in the opposite direction to “core” debt such as Germany’s. This year, all markets have risen in unison.

Scrutiny of tax havens and a wave of consolidation are testing an industry that is a mainstay of the island’s economy

Pitts Bay Road in Bermuda is a who’s who of global insurance. Winding along the picturesque waterfront of Hamilton, the island’s capital, the road and its surrounding streets house the local offices of Allianz, Chubb, Axa and Aon. 

Over the past 30 years, the Atlantic Ocean island has turned itself into one of the world’s biggest insurance hubs through a combination of low taxes, flexible regulation and easy access to the US.

Its speciality is reinsurance — the cover that insurance companies buy to protect themselves from huge claims caused by extreme events, such as big US tropical storms. The Association of Bermuda Insurers and Reinsurers says that its members generate about $100bn in premiums a year and employ around 1,500 people on the island. 

Marc Grandisson, chief executive of Bermuda-based Arch Capital, says: “Clients come here . . . because [there is] a marketplace. Clients can come here and talk to 60 per cent of their providers . . . within a square mile.”

But Bermuda’s status is under threat. Its tax advantages — long one of the big attractions of doing business there — have been eroded by US laws designed to stem the flow of capital offshore. A lot of independent insurers have been swallowed up by global companies. And cities around the world such as London and Singapore are fighting hard to grab a chunk of the island’s business.

The increased scrutiny of tax havens and calls to improve transparency in such jurisdictions will increase the pressures on the island nation of 65,000 people, which has suffered from a decade of economic decline.

“Bermuda is still important, but it is no longer the shining outlier that it used to be,” says Christian Reber, a partner at BCG. “The novelty has worn off.” 

Bermuda’s insurance industry sparked into life in the 1970s and 1980s when a handful of companies were set up to fill a hole in the market for some types of US commercial insurance. 

The early days were pretty hairy. “Bermuda was a dirty word in the 1980s,” says Stephen Catlin, an insurance industry veteran. “There was terrible regulation — you could turn up with a brass plate and do what you wanted.”

But the industry, and the regulators, evolved quickly. The boom times came in the 2000s. Prices for reinsurance spiked in the early 2000s after the 9/11 terror attacks led to huge claims, and again in 2005 when Hurricanes Katrina, Rita and Wilma caused extensive property damage in the US. 

Insurance entrepreneurs were quick to jump on the opportunities presented by rising prices to set up new companies. Bermuda welcomed them with open arms, offering a convenient location and a regulator that allowed businesses to be set up quickly. 

“Post 9/11, you could get yourself up and running in Bermuda in four weeks. In London it would take a year because of regulation,” says Mr Catlin. 

Low taxes were also a major attraction. Bermuda has no corporate income tax, which is a big advantage to a reinsurance industry where years with no significant natural catastrophes can be very profitable. 

The companies set up were known as the class of 2001 and the class of 2005. The former included Arch Capital, Axis and Allied World. The latter included Ariel Re, Flagstone Re and Validus Re. Those two waves helped to build a critical mass of insurers in Bermuda. 

Mr Grandisson says: “Tax created the impetus . . . but Bermuda also has English law, is well developed and created a regulatory environment that is very strong yet more flexible and a lot easier to work with than most of the other jurisdictions around the world.”

The regulator — the Bermuda Monetary Authority — is no pushover though. Its reputation among both insurance companies and their customers was boosted in 2016 when the EU said that Bermuda’s rules were equivalent to its own Solvency II regime. And in November this year, the US National Association of Insurance Commissioners ruled that Bermuda was a “reciprocal jurisdiction” — similar to equivalence. 

The classes of 2001 and 2005 and a host of other independent Bermudan insurers have slowly disappeared. Ace and XL, two of the earliest insurers on the island, have been taken over by Chubb and Axa respectively in recent years. 

There are just a handful of sizeable, independent Bermuda-based companies left, including Arch, RenaissanceRe and Argo. Life is not necessarily smooth for them — Argo is in the midst of a bitter fight with an activist investor and is facing an SEC investigation into pay. 

Industry executives say that reinsurance is slowly becoming a scale game, in which only the largest companies have the capacity and data processing power to create the best prices for big clients. Mid-scale companies such as those that multiplied in Bermuda, they say, need to specialise if they are to survive. 

The multinationals say they are still committed to Bermuda, arguing that they would not have made acquisitions there if they did not like the market.

AIG, for example, bought Validus for $5.6bn in 2018. “Bermuda is a safe bet when you’re forming a company . . . you’ve got a venue that people will put money into,” says Bermudan-born chief executive Brian Duperreault. “You’ve got a regulatory climate that is tough but fair. Bermuda will continue to survive if it continues to be an innovative place for the market.”

Greg Hendrick, chief executive of Axa XL — a part of the French multinational, says: “It will remain a vital market for low frequency, high severity insurance and reinsurance . . . it is a core part of our North American business.”

And yet many companies are diversifying away from the island.

AIG itself has just decided to open up a big new reinsurance business in Lloyd’s of London. It has also agreed to sell most of its stake in Fortitude Re, a Bermuda-based reinsurer, for $1.8bn.

Japan’s Sompo, which bought Bermuda-based Endurance for $6.3bn in 2016, has just reshuffled the management of its international business. The new boss, Mikio Okumura, will be based in New York, unlike his predecessor whose office was in Hamilton. 

And Axa XL earlier this year reshuffled its management, merging its London and Bermuda units, although Mr Hendrick says it has no plans to change headcount on the island. 

Even the remaining Bermuda-based independents, which are still very committed to the island, are diversifying. RenaissanceRe last year agreed to buy Tokio Millennium Re for $1.5bn. Part of the rationale was access to new markets: “We liked that it was Zurich-based, advancing our strategy in that region with an established European underwriting platform,” says Kevin O’Donnell, chief executive of RenaissanceRe. 

The company also has an office in Singapore, to help rising demand for reinsurance from Asia. 

These changes are part of a wider shift in which people and businesses in the reinsurance sector have slowly been leaking away from Bermuda, threatening the island’s economy.

Nigel Frudd, head of Sompo’s international business, says: “The number of companies here has shrunk primarily due to industry consolidation and we have seen a significant departure of talent, such as senior managers and underwriters.”

According to figures from Fitch Ratings, the amount of shareholder capital in the Bermuda insurance market slipped from $82bn in 2017 to $77bn in 2018, and the amount of premiums written there shrunk by 8 per cent.

The number of people employed by ABIR members peaked in 2007 at about 1,800, and is now down to about 1,500, according to ABIR and Bernews, a local news website. 

Insurance experts say that a lot of the industry’s technological development is now happening elsewhere. 

“If you look at where the centre of gravity is especially for tech- and data-driven innovation, it is not in Bermuda,” says BCG’s Mr Reber. “Bermuda doesn’t have the talent pools, the tech firms, the potential . . . partners. That will matter for Bermuda in the long term. People will work elsewhere, the talent pool will be smaller and decisions will start to be taken elsewhere.”

The disappearance of the independent insurers is one of the reasons for the shift. But it is not the only one.

The cost of living has also been a factor. Living costs in Bermuda are the second highest in the world, according to Numbeo, just behind the Cayman Islands, a tax haven 2,200 miles south-west of Bermuda. Reinsurers, which have had a series of expensive years because of rising claims from natural catastrophes, are trying to save money.

“It is cheaper for us to employ people in London than in Bermuda,” says Mr Catlin, who has just started a new company called Convex. Although Convex will be headquartered in Bermuda, most of its staff will be based in London. 

And the global attitude to low tax jurisdictions is also shifting, putting places like Bermuda under pressure. 

US president Donald Trump created tax rules in 2017 to discourage companies from moving profits offshore. The base erosion and anti-abuse tax (BEAT) rules make it less attractive for US-based insurers to buy reinsurance from Bermuda-based subsidiaries by charging a levy on the premiums paid. 

“Companies are not ceding as much business from the US to Bermuda,” says Brian Schneider, a senior director at Fitch Ratings. “They are keeping more of the capital in the US.”

There could be more of the same to come. The OECD is also looking at rules that would make it less attractive for insurers to reinsure some of their risks in Bermuda. 

Earlier this year, it appeared on the EU’s tax haven blacklist. Although it managed to get itself removed from the list just three months later after making technical changes to its rules, the episode has dented Bermuda’s reputation.

Mervyn Skeet, head of taxation at the Association of British Insurers, says: “Every time Bermuda has been asked to do something by the EU, it has worked hard with the EU to find a solution.”

Despite these setbacks, Bermuda has had some notable recent victories. The island has managed to attract the biggest reinsurance start-up in recent years, when Convex decided to base itself there. The company is Mr Catlin’s comeback vehicle after his first business was sold to XL for $4.1bn in 2015

Bermuda, he says, is more “user friendly” than other jurisdictions. That could also be an attraction for other companies that want to take advantage of a recent spike in reinsurance prices, although executives think a “class of 2020” is unlikely. 

The island has also taken a leading role in other parts of the insurance market. One is reinsurance for life insurance companies. Another is its role in the huge growth of so-called insurance-linked securities, which allow investors to take on insurance risk directly. According to Aon, the insurance broker, $93bn is deployed in these securities around the world. 

Bermuda has become a centre for companies that create and manage these vehicles and is now recognised as the global centre for ILS, having taken that title from the Cayman Islands. That success has drawn envious glances, with a host of jurisdictions now aiming to take a slice of the ILS pie. Paris, Guernsey and Singapore are all trying to win ILS business. And a proposed revamp of Lloyd’s of London, the 300-year-old insurance market, includes measures to attract ILS vehicles. 

These add to the pressures the Bermudan insurance market is already facing from industry consolidation and tax changes. “Lloyd’s is irreplaceable,” says one New York-based insurance executive. “Bermuda is not.”

The revised policy regime will not spur needed domestic competition and growth

Attracting comparatively little notice in the midst of its trade war with the US, China’s new foreign investment law, which the National People’s Congress approved in March 2019, will come into effect on January 1, 2020.

For such an important statute, first drafted back in 2015, expectations were high among reformers in China and among international investors that the fruits of Beijing’s efforts over so long a gestation would yield a quantum change to China’s foreign investment policy regime.

The new law and its implementing regulations — which were published only in November 2019, leaving just one month for the business community to file comments and for Beijing to incorporate any modifications before the law becomes effective — do signal an improvement. But the reality is that China’s posture towards foreign investment will still be significantly out of sync with global best practice.

China’s reformers know full well that the country can ill afford to pass up such an opportunity for improvement. Why? Because foreign direct investment to the country has been trending downward.

Between 2013 and 2017 — before the eruption of trade frictions between Beijing and Washington — global net FDI to China was in continuous decline. Its magnitude in 2017, at $168bn, was lower than the 2008 level of $172bn. While FDI rose in 2018 to $203bn, that amount is still far less than the magnitude for each of the six years between 2010 and 2015, when the average was $261bn.

Measured in relation to GDP, an even more challenging picture emerges: China’s global net FDI inflows have been on an unmistakable downward trend, from 6.2 per cent of GDP in 1993 to 1.5 per cent in 2018 — the lowest level since 1991.

Against this backdrop, one might have thought that President Xi Jinping and the Communist party leadership would have jumped at the chance to fashion a new policy that, compared with the labyrinth of existing law, would be systematic and perceived by foreign investors as truly hospitable, as a means to revive China’s dimming growth prospects.

However, China’s new approach is largely to establish protocols that vaguely define the limits of the rights foreign investors are entitled to enjoy and the ways in which various government agencies are to conduct themselves to ensure such rights are honoured. It is almost as if Beijing is looking through the wrong end of a telescope.

To be sure, there are some important advances. The foundational principle underpinning world-class foreign investment laws of “national treatment” — affording foreign investors rights equivalent to those enjoyed by domestic firms — is well articulated. Intellectual property rights of foreign businesses are deemed to be protected in the same way as those of Chinese firms. Agencies are prohibited from divulging foreign enterprises’ trade secrets. Foreign investors are given the freedom for overseas remittance of profits, capital gains and liquidation proceeds (among other sources of income) in renminbi or in foreign currency. Participation in Chinese government procurement tenders by foreign firms is explicitly allowed. Moreover, when expropriation occurs, “fair and reasonable” compensation “shall be given in a timely manner”.

However, the ways in which many of these provisions are to be exercised in practice are neither rigorously nor fully spelled out (especially in the November 2019 implementing regulations, where one would expect to see them). Some appear to be actually hollow.

For example, the text indicates that the adherence to “national treatment” may vary both across different levels of government (local, municipal, provincial and central) and across various regions of the country. Indeed, the lack of an integrated national treatment regime is reflected in the law’s text: it admonishes agencies to “co-operate closely” and “in accordance with their division of responsibilities”.

Although foreign investors are given the right to appeal to various governmental authorities, an independent adjudicative process is not established. Nor are there rules defining time-bound decision-making to foster timely resolution of such issues. Foreign firms may request the opportunity to review regulatory documents only when a lawsuit is instituted against administrative actions.

The stipulation of providing fair, reasonable and timely compensation for expropriation is, in fact, not terribly comforting. The standard pertains only to “expropriation authorised by law” and carried out in the “public interest”. As many international businesses know, such acts often occur outside the law. Moreover, it is often the case that expropriations are done to serve a party’s private interest. In effect, the expropriation provision contains a large loophole.

Aligning the extent of foreign firms’ protection of intellectual property to that which applies to domestic businesses is not a very high standard. Ask any Chinese entrepreneur how effective he or she feels their intellectual property is accorded legal protection.

Perhaps the most striking aspect of the new law is its silence on the means by and the extent to which foreign investors have the freedom to enter new product or geographic markets, through greenfield projects or the acquisition of Chinese businesses.

After all, one of the key objectives of countries putting in place policies to encourage foreign investment is to lower barriers to business entry in order to stimulate domestic competition, provide local consumers with new products or services, expand employment opportunities and foster innovation — all of which are engines of growth.

On this score, unfortunately, the new foreign investment law represents a lost opportunity for China’s leadership.

Final installment of Skywalker trilogy opens down 20% from ‘Last Jedi’ debut

LOS ANGELES—Not even the Force can withstand withering reviews.

After mixed fan reaction and thumbs-down from most critics, “Star Wars: The Rise of Skywalker” took in an estimated $175.5 million in the U.S. and Canada over the weekend, the lowest opening of the trilogy produced by Walt Disney Co. The “Skywalker” opening, which theater owners had hoped would debut north of $200 million, is 29% below the 2015 installment “The Force Awakens” and 20% below “The Last Jedi” from 2017.

A new big-screen adaptation of the Andrew Lloyd Webber musical “Cats,” attracted sizable attention for all the wrong reasons. It drew some of the harshest—and most bewildered—critical reviews in recent history and lost all nine lives in its debut, grossing $6.5 million.

“Bombshell,” the Lions Gate Entertainment Corp. LGF.B 4.88% dramatization of the sexual-harassment crisis at Fox News, lived up to at least part of its name and also sputtered at the box office, collecting $5.1 million.

It was a lackluster start to Hollywood’s busiest season. Poor word-of-mouth can make or break a release heading into the holiday, when normal weekdays perform like Saturday nights at the theater since children are out of school and many parents take vacation time. The last two weeks of the calendar year are typically a boon to a struggling exhibition industry, which has seen grosses dip about 5% so far this year and faces an unpromising slate of releases in 2020. That Star Wars and a musical starring Taylor Swift failed to attract audiences as robustly as expected is particularly worrisome at a time when Netflix Inc. and even Disney itself offer big-budget releases streamed directly into the home, forcing studios to make the case to consumers to get off the couch with each new release.

Though massive by most standards, the “Skywalker” opening fell short of exhibitor hopes, considering it was the culmination of a series accustomed to record-setting openings.

It will also be the last Star Wars movie until 2022, since Disney decided to put the series on a “hiatus” after “Skywalker,” and the downward trend of Star Wars openings appears to affirm that decision.

Disney has faced long-term issues with Lucasfilm Ltd., the Star Wars production company it purchased for $4 billion in 2012.

“Skywalker” is Disney’s fifth Star Wars movie in four years, and the onslaught has depleted enthusiasm among some fans, many of whom thought the trilogy’s story line went in surprising and upsetting directions in the second installment, released in 2017. Disney’s own “The Mandalorian,” which premiered on the company’s new streaming service last month, may have also sucked up some of the fan appetite for more Star Wars stories.

“This is such a beloved story ingrained in pop culture, and you’re never going to satisfy everyone,” said Cathleen Taff, Disney’s head of distribution.

Opening-weekend audiences gave “Skywalker” a B+ grade, according to the CinemaScore market research firm, the first non-A grade for any Star Wars film tracked by the service, including George Lucas’s prequels and the others produced by Disney.

Overseas grosses added $198 million to the weekend total. In China, “The Rise of Skywalker” faltered as previous installments have, opening in the country to a paltry $12.1 million.

Disney has struggled to win fans of the franchise in China, home to the world’s second-largest box office, since few consumers there saw the original trilogy and have little nostalgia for classic characters making their reappearance like Han Solo and C-3PO. It has led to depleted revenue from the country, which has overwhelmingly embraced other Disney franchises like the Marvel Studios comic-book adaptations.

The tone and approach of “Star Wars: The Rise of Skywalker” is aligned with the more traditional story lines of the space opera, a fan-friendly approach that may attract repeat moviegoers.

“We want to look at it at the end of its run, not the beginning,” said Ms. Taff.

Michael Taylor, a warehouse worker in Ann Arbor, Mich., went to see the movie three times on Thursday and Friday and predicts he’ll catch a few more screenings before it leaves theaters.

“It has some plot issues you can pick apart, but who cares?” said Mr. Taylor, a die-hard Star Wars fan who even has a tattoo of prequel character Jar Jar Binks on his right biceps. “I loved it.”

For “Cats,” the opening-weekend gross was hardly surprising, given that the movie became a punchline almost as soon as early trailers appeared in July, showing actors such as Jennifer Hudson and Judi Dench singing and dancing in what the studio behind the filmmakers called “digital fur technology.”

It was released by Comcast Corp. ’s Universal Pictures, which will have another chance at the holiday box office with “1917,” its critically acclaimed World War I epic hitting theaters on Christmas Day.

Few of the season’s other new releases can compete with the scale of Star Wars.

Other Dec. 25 releases include a critically acclaimed adaptation of Louisa May Alcott’s “Little Women,” the animated children’s movie “Spies in Disguise” and a dark exploration of New York’s Diamond District called “Uncut Gems.”

The holiday season can give a movie unexpected staying power, as with the 2017 musical “The Greatest Showman.” The Hugh Jackman song-and-dance spectacle was written off as a flop after it opened to $8.8 million on its opening weekend. But thanks to positive word-of-mouth, it steadily drew in moviegoers on its way to collecting a blockbuster $174 million in the U.S. and Canada.

Theater owners had been hoping for a lucrative holiday season this year since the schedule for 2020 is hardly promising. Despite new releases in the James Bond, Wonder Woman and “Fast & Furious” franchises, the schedule includes fewer surefire blockbusters than 2018 or 2019.

 Shares in Asia drifted near record highs Monday, with volumes subdued as investors count down to the holiday break. Ten-year Treasury yields held above 1.90%.

Equities had modest declines in Tokyo, Sydney and Shanghai. They were little changed in Hong Kong and Seoul. S&P 500 futures were flat after logging a record high Friday, when the gauge capped its biggest weekly gain since September. The U.S. yield curve remains near its steepest in more than a year, underscoring how recession worries have receded. Oil prices are holding above $60 a barrel in New York.

Nikkei +0.02% Hang Seng -0.05% CSI -1.20% Shanghai -1.35% Shenzen -1.83%

Eur$ 1.1085 CNH7.0073 CNY 7.0105 JPY 109.40 GBP 1.3015 CHF 0.9816 RUB 62.2973 TRY 5.9349 WTI$ 60.14 -0.50%

S&P +0.03% EuroStoxx -0.13% Dax -0.12% FTSE -0.19% SMI +0.08%

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