The underwriting results of Bermuda re/insurers were weakened by larger catastrophe losses and reduced reserve redundancies, according to Fitch Ratings.
The combined ratios of the 12 large publicly traded re/insurers with Bermuda operations that Fitch Ratings tracks averaged 91.9% in 2016, up from 88.5% in 2015, as the impact of larger catastrophe losses and lower favorable prior-year reserve development flowed through.
Underlying underwriting results were stable though, with the group of Bermudian re/insurers producing an accident-year combined ratio, excluding catastrophes, of 93.1% in 2016, in line with 93.3% in 2015, although up from 91.4% in 2014. Reserve release contribution dropped to 6.6 points in 2016, down from 7.2 points in 2015.
Senior Director, in Fitch’s Insurance team Brian Schneider, said; “Bermuda companies posted weaker underwriting results and steady profits in 2016; however, returns are starting to near the cost of capital and narrowing profit margins are a key risk.”
The return on equity of Bermuda’s re/insurers held steady at 8.2% in 2016, as lower income from underwriting was offset a little by slightly improved investment results.
The estimated cost of capital of the re/insurers was around 6%-7% for 2016.
“Most Bermuda entities remain focused on returning equity to shareholders and capital growth was modest for the year,” continued Schneider.
Aggregate shareholders’ equity across the group rose by 4% in 2016.
However, when excluding Arch Capital Group Ltd.’s 34% increase driven by preferred share issuances for the acquisition of United Guaranty Corporation, growth drops to only 1% for the group.
Fitch commented that fierce competition was driving Bermudian re/insurer’s increasingly towards M&As as firm’s seek scale and diversification to offset pressures.
Despite weakening market underwriting, the outlook for Bermudian market re/insurers remains stable and is expected to keep this rating for the 12-18 months, according to Fitch.
In contrast, for global reinsurance and U.S. P & C insurance, Fitch’s fundamental outlook is negative, with the agency quoting premium prices and investment yields being expected to remain under pressure in 2017.
However, some Bermudian re/insurers also appear to be treading thin water, as Fitch issued warnings that a select few could be vulnerable to negative rating actions, if pricing adequacy declines materially.
