Re/insurers in the Bermuda market are facing a challenging market at the moment, according to rating agency AM Best.
In its latest review of the re/insurance market on Bermuda AM Best said that the Island was trying to adapt to persistent challenges to the underwriting and investment environments there, before adding that: "Despite these best efforts negative trends have become increasingly evident."
According to the AM Best review the Bermuda market saw an 8.6 percent increase in property/casualty net premiums written, its largest uptick in the current five-year period.
In addition it points out that the Bermuda market’s total revenue and collective shareholders’ equity each increased by roughly $4 billion in 2016, even after returning approximately $4 billion to shareholders.
However, according to AM Best profitability has not been trending in the same direction as margin compression continues.
The review points out that in the years following the impact of Superstorm Sandy in 2012, the Bermuda market experienced a steady deterioration in both return on equity (ROE) and the combined ratio.
Return on revenue has seen a similar trend, showing that the Bermuda market is struggling to generate profits sufficient to cover the cost of capital.
The AM Best report claims that: "The long predicted – yet little seen – drying up of favourable reserve development has slowly started to emerge in year-end 2016 results with favourable reserve development as a percentage of net premiums earned dropping below 6.0 percent for the first time in the current five-year period and steadily declining since the five-year high of 7.3 percent in 2013.
Historically speaking, 2016 was a modest catastrophe year with Hurricane Matthew and some seismic events and wildfires having a greater impact on results than they would have in prior years when better pricing margins provided greater ballast to absorb catastrophic activity or shock losses."
AM Best said that it still maintains a negative outlook on the global reinsurance sector and pressures facing the Bermuda market are no different and perhaps even magnified. It points out that Bermudians have pivoted to primary and other classes of business, including mortgage (re)insurance, and have utilized third-party capital among other strategies to help boost returns. Balance sheets have also seen alternative investment allocations, to varying degrees, as well as the increased use of retrocessional coverage to both generate and safeguard capital, respectively.
AM Best concludes that despite the above, balance sheets remain strong on an absolute and risk-adjusted basis. "Generally speaking, most Bermudian companies have reduced their overall exposures year over year with an uptick in retrocession through excess-of-loss coverage or de-risking of their books of business. Both actions are yet another indication of the prevailing pricing environment. Capital management activities also continued in 2016 with roughly $2.7 billion of share repurchases and $1.3 billion in dividends returned to shareholders but in aggregate, those activities generated less than 0.5 percent of ROE for the market."
AM Best, Bermuda, Insurance, Reinsurance