At first glance, Bermudian re/insurance companies appeared to start the year with a bang, reporting a 21 percent increase in consolidated gross premiums written (GPW), according to a new report published by Standard & Poor’s.
However, that picture is slightly misleading because much of the Bermudian’s overall growth was driven by a few companies that had made major acquisitions during the past 18 months, S&P indicated in its report titled “Bermuda Re/Insurance Quarterly Insights: Still Holding Their Own.”
“For instance, the combined XL Group plc and Catlin Group Ltd. increased GPW by 76 percent. RenaissanceRe Holdings Ltd.’s acquisition of Platinum Underwriters Holdings Ltd. increased GPW by 34 percent. Lastly, Endurance Specialty Holdings Ltd.’s acquisition of Montpelier Re Holdings Ltd. increased GPW by 24 percent.”
If these newly merged companies are excluded from the GPW calculations for Bermudian re/insurers, growth would be only 4 percent during the first quarter of 2016, compared to the same period in 2015, said the report.
In addition, the overall GPW growth was driven upwards by “outlier companies,” such as AXIS Capital Holdings, which reported a 17 percent jump in GPW during the first quarter as a result of “increases in multiple lines of business driven by quota shares and multiyear deals,” S&P added.
When the results are re-examined after the removal of AXIS’ results, the Bermudian industry growth would have been less than 1 percent, the report said.
Pockets of Strength
“Overall, aggregated GPW rose to $16.12 billion in the first three months of 2016 from $13.38 billion in the same period in 2015,” said S&P, noting that this was driven by pockets of strength across a few lines of business such as accident and health insurance, U.K. motor reinsurance, and mortgage reinsurance.
Most other lines, such as agriculture, marine, energy, property and property catastrophe continued the market trend of pricing weakness, S&P said.
“S&P Global Ratings believes this shows continuing trends of fierce competition and a soft global reinsurance market that have caused the Bermudians to look to diversify premium streams.”
Underwriting Profits Remain Strong
Despite the market headwinds, S&P said underwriting profitability remained strong for the Bermudians. “In the first three months of 2016, the industry delivered a calendar-year combined ratio of 88.7 percent, compared with 86.1 percent in the same period in 2015.”
S&P explained that this deterioration was mainly “driven by a 160 basis point (bp) increase in the calendar-year loss ratio, and a 90 bp increase in the acquisition expense ratio.”
While continuing to benefit from favorable reserve releases, they dropped Q1 2016 to $511 million (a 5.6 percent favorable impact on the loss ratio), from $615 million in Q1 2015 (a 7.8 percent favorable impact on the loss ratio).
“If we were to exclude the reserve releases, the accident-year loss ratios remained somewhat flat at 60 percent in both periods,” S&P said.
“The acquisition expense ratio worsened due to increased paid commissions….” The ratings agency said that this was not surprising, “given the fierce competition in the market to write profitable business and the premium companies are paying to assume such risk.”
The report noted that the best underwriting results belonged to RenaissanceRe with a combined ratio of 72.6 percent, while the worst belonged to Maiden Holdings Ltd. at 98.9 percent.
The industry annualized return on shareholders’ equity (ROE) declined to 8.7 percent in Q1 2016 from 12.8 percent in the first three months of 2015, S&P affirmed.
“All Bermudian companies experienced a decline in their ROEs in first-quarter 2016 compared with the prior-year period,” the report said, attributing this to difficult market conditions and low investment income, which are acting at drags on net income. Overall net income dropped by 28 percent to $1.27 billion in Q1 2016, compared to $1.76 billion during the same period in 2015.
S&P said that the Bermudians’ net investment income was down 13 percent year-over-year, largely due to the global equity and credit market volatility in the first few months of 2016.
“The hardest hit was Endurance, which saw investment income decline 73 percent due to poor performance of alternative investment funds and high-yield loan funds,” the report continued. “However, Maiden performed the best with investment income growth of 28% as the company increased its allocation to fixed-income securities and lowered its cash position.”
“We expect the Bermudians to continue to focus on strengthening their value proposition and enhancing their client relationships, recognizing the changing market dynamics as a number of cedents are centralizing their reinsurance purchases,” the S&P report went on to say.
Source: Standard & Poor’s