12 May 2017News

S&P: Bermuda’s re/insurers can shrug off Q1 punches

A combination of the Ogden rate changes in the UK and high natural catastrophe losses have delivered a one-two-punch to Bermudian re/insurers' earnings in the first-quarter of 2017, according to a new report from rating agency Standard & Poor’s.

According to S&P these losses chipped away at underwriting profitability, adding to re/insurers' woes as soft industry pricing persisted and competitive pressures grew, with alternative capital reaching record highs.

However, in spite of these tough market conditions, gross premiums written for Bermudian re/insurers rose 5.5 percent to $17.54 billion in first-quarter 2017 from $16.64 billion in first-quarter 2016.

In a statement S&P said: “S&P Global Ratings maintains a stable outlook on its ratings on the reinsurance sector, even though we expect business conditions to remain weak, pressuring near-term earnings. We believe strong capital adequacy, overall strong enterprise risk management (ERM), and still-rational underwriting behaviour by most reinsurers have helped them navigate these challenging market conditions.

“Although we can't predict what the natural catastrophe losses will look like for the whole year, we expect first-quarter 2017 to be fairly representative of how the year will play out for Bermudian re/insurers in terms of pricing, competition, and capital management. With the majority of the reinsurance renewals for the industry being completed in January and April, we expect prices to remain depressed, albeit decreasing at a lower rate than in previous years.”

S&P pointed out that despite global property and casualty reinsurance rates falling between zero and 5 percent at the January and April 2017 renewal periods, Bermudian re/insurers were able to grow their top-line from the prior-year period. As the soft market continued to constrain rates, premium growth was aided primarily by recently completed acquisitions.

Net investment income buoyed earnings for the companies, rising 27.4 percent year-over-year to $855.9 million. Improving financial markets in the US and higher interest rates generated the year-over-year improvement.

According to S&P, AXIS was a positive outlier in this regard, seeing its investment income more than double to $99 million, primarily because of changes in the fair value of the company's alternative investments. PartnerRe's change in year-over-year performance in investment income was the worst, falling 4.3 percent due to the intentional reduction in high-yield fixed-income securities, as well as a general restructuring of its investment portfolio.

S&P said that it believes that these rate declines will continue to underlie tepid organic growth for the industry, with pockets of opportunity being exploited by early movers.

The rating agency concluded: “If the first-quarter natural catastrophe losses are an indication for the rest of the year, this will likely put further pressure on reinsurers' underwriting margins. However, the Bermudians have been tested before, and with their robust capital adequacy and strong ERM practices, we believe the industry as a whole will be able to navigate these choppy waters reasonably well for now.”