Bermuda market insurers and reinsurers are beginning to experience lower profits, a deterioration in both return on equity and combined ratio as well as the drying up of favorable reserve development. These negative trends are becoming increasingly evident for Bermuda insurers and reinsurers as a result of the persistent challenging underwriting and investment environments, according to a report published by A.M. Best.*
“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,” said the report titled “Bermuda Market Re/Insurers Continue to Fight the Strong Undercurrent of a Challenging Market.”
“The long predicted – yet little seen – drying up of favorable reserve development has slowly started to emerge in year-end 2016 results…,” the report continued. As evidence, A.M. Best pointed to the fact that favorable reserve development as a percentage of net premiums earned dropped below 6.0 percent for the first time in the current five-year period and has steadily declined since the five-year high of 7.3 percent in 2013.
Further, the report said, although 2016 was a relatively modest year for catastrophes, they had “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.”
Strong Balance Sheets
Despite these pressures, A.M. Best confirmed that Bermudian re/insurers’ 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,” it said.
“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.”
In their quest for organic growth, “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,” the A.M. Best report said.
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, it went on to say.
While timing for potential merger and acquisition activity is difficult to predict, conditions remain ripe for another spurt of activity, as market participants from the U.S., Europe, and Asia also continue to look for ways to grow their books of business in the absence of any meaningful organic opportunities, A.M. Best said.
Elusive Market Bottom
“Questions as to how the market will turn linger, with participants largely conceding that hardening across most lines of business is unlikely and most are now hoping for at least some pockets of hardening,” the report continued. “In the absence of some market-changing event, the Bermuda market will need to balance innovation and discipline for the foreseeable future.”
* The report was based on A.M. Best’s analysis of its Bermuda Market Composite, which the ratings agency said “is fluid as companies enter and depart the marketplace.”
Source: A.M. Best