Bermuda re/insurer profits under threat from overabundance of capital

01-09-2016

While Bermuda re/insurers have a long history of profitability, it has, in recent years, been challenged by economic pressure and an overabundance of capital from traditional and alternative sources, according to Fitch Ratings.

Fitch revealed favourable but tempered operating results in a 2015 review of audited GAAP financial statement of 19 class 4 Bermuda-domiciled re/insurers.

The underwriting gains for this group of re/insurers were $4.4 billion in 2015, with a combined ratio of 86 percent and a 10 percent net income return on common equity (ROE), with all measures deteriorating from the previous year.

Fitch suggested the ROE for these re/insurers is likely to decline in 2016 due to rising core loss ratios, larger insured catastrophe losses and lower investment income.

"Bermuda-based underwriters face intense price competition, limited growth opportunities and earnings pressure. This historically profitable market could be challenged further as organic revenue growth is unlikely to improve in the near term," said Brian Schneider, senior director of Fitch Ratings.

The re/insurers’ aggregate combined ratio improved by 6.5 percentage points in 2015 – the lowest since 2010 – due to favourable loss reserve development.

Bermuda re/insurers have demonstrated loss-reserve strength for over 10 years, and Fitch expects future reserve redundancies to continue but at a reduced rate.

In addition, Fitch suggested that Bermuda re/insurers are challenged by falling written premiums and lower investment yields, with the reported written premium volume decreasing by 7 percent for the group in 2015 over the prior year.

In 2015, the aggregate investment yield fell to 2.1 percent, marking the seventh straight year of declining yields.

In response to this, Fitch notes that certain companies have modestly shifted their portfolio allocation towards equities and alternative investments to boost expected returns, though fixed income securities still make up the larger part of investments.

However, the group of re/insurers continue to demonstrate a strong capital positions, with shareholders’ equity declining year of year, decreasing 6 percent in 2015 to $73.1 billion from $77.9 billion.

The decline, however, had been influenced by extraordinary dividends declared and paid by Chubb operating subsidiaries.

With regard to Solvency II equivalence, Fitch suggested the Bermuda Monetary Authority’s efforts had paid off as it was granted to commercial re/insurers by the European Union.

Fitch Ratings, Insurance, Reinsurance, Solvency II, Bermuda

Bermuda Re