For insurance and reinsurance companies in Bermuda, 2016 was a year of challenges and resulted in a sharp decline in return-on-equity (RoE), while organic growth remains difficult to find.
Rating agency Standard & Poor’s explains in its latest report that Bermudian re/insurance remains under pressure from a range of forces, with pricing still declining, competition on the rise, and the alternative capital market increasing its share of business.
On top of that the slow organic growth and an increased level of catastrophe and weather losses pressured Bermuda’s re/insurance market further in 2016.
Reflecting the challenges in the market, Bermudian re/insurers reported an average return on shareholders’ equity of 8.3% in 2016 compared with 9.5% in 2015, a sharp decline that has eroded profitability somewhat.
The higher catastrophe loss burden as well as declining prior year reserve releases has exacerbated these issues for re/insurers in Bermuda, although one brighter spot was a slight increase in investment income in 2016.
Of course these market conditions are affecting the global re/insurance industry and Bermuda’s companies are not a special case here, all reinsurers face these pressures today.
Reflecting the strength of the Bermuda market, S&P explained; “Robust capital adequacy, overall strong enterprise risk management (ERM) practices, and disciplined underwriting have allowed reinsurers to remain relatively unscathed in an adverse market until now.”
The rating agency believes that conditions will remain a challenge for re/insurers, with weak prospects for the business, that will pressure competitive positions and re/insurer earnings in the near term.
Despite this S&P remains of the opinion that the re/insurance sector will be stable over the near-term outlook.
One difficulty facing Bermuda’s re/insurers is a lack of organic growth. This is partly as companies are maintaining discipline and trying not to underwrite at any price, which has helped terms and conditions to remain stable.
With pricing continuing to decline, S&P expects this discipline will remain a factor and as a result organic growth won’t be seen at all, with an expectation that reinsurers’ organic growth will be flat to down by 3% or so this year.
Gross premiums written (GPW) for the Bermuda market did rise in 2016, up 11.5% to $54.81 billion from $49.17 billion in 2015, but this growth is not organic new business, but rather is due to several recently completed major acquisitions.
Excluding XL, RenaissanceRe, and Endurance which were all part of major M&A deals, GPW growth for the Bermuda-based companies was up 4.3% in 2016 from 2015.
Despite slower performance the Bermuda reinsurers valuations rose in 2016, as the market reacted favourably to public company pricing.
On average, Bermuda re/insurers traded at 1.25x book value as of Dec. 31, 2016, S&P explains, which is up a quarter point just since September of that year.
S&P explains that this “Shift in market perception is due in part to the overall run-up of the financial sector following the U.S. presidential election, with many expecting higher economic growth due to the prospect of increased fiscal stimulus, lower taxes, deregulation, and higher interest rates as the Fed begins to raise them.”
Over supply of capital, both traditional and alternative, is a key issue. Holding back organic growth, further pressuring pricing, ramping up competition, making companies spend more as they try to navigate around the challenging market environment and all meaning that re/insurers are struggling to supplement a shrinking top-line.
Despite all of this though, only one company reported a combined ratio of over 100% in 2016.
Due to the way the global re/insurance market remains today S&P expect further M&A will be seen, with Bermudians likely to be involved.
However, the high valuations explained above may make companies think twice now, which could be a detriment to some of Bermuda’s smaller re/insurers that really could do with some market scale right now.
The outlook remains relatively unchanged and Bermuda’s insurance and reinsurance players will continue to tentatively navigate the market at this time. The mid-year renewals could be telling though and a key market juncture that may provide a little more clarity on how much longer pricing will soften and just how high the competition is getting.