Bermudian re/insurer’s profitability margins are wearing dangerously thin after years of steady deterioration, despite the market’s attempts to adapt to the current environment with a pivot towards primary and alternative classes of business and increased retrocession purchase.
A.M. Best identified growing negative trends in Bermuda’s Market Composite in its latest report, saying the market’s seen steady deterioration in return on equity (ROE), combined ratio, and return on revenue, at a rate which has left the Bermudian market “struggling to generate profits sufficient to cover the cost of capital.”
Analysis of 2016 year-end results uncovered another emerging negative market trend ” the long-predicted drying up of favourable reserve development, with favourable reserve development as a percentage of net premiums earned dropping below 6.0% for the first time in the current five-year period and steadily declining since the five-year high of 7.3% in 2013,” reported A.M. Best.
With companies releasing vast levels of reserves over recent years to boost results, A.M. Best analysts said 2016 results showed firm’s profits have been more heavily impacted by losses from Hurricane Matthew and other disasters, than they would have been in the past, when “better pricing margins provided greater ballast to absorb catastrophic activity or shock losses.” And this comes despite 2016 being a modest catastrophe loss year when compared with historic averages.
However, the forecast is not all doom and gloom for the Bermudian market, which has been hit with the same challenges of tough competition, market disruption and declining pricing that the rest of the global reinsurance market is currently facing – although A.M. Best said the Bermudian market’s problems may be ‘magnified’.
The report noted the fluidity of the market, as a fast-changing space where companies come and go, as another factor impacting business on the Island.
“With those movements in mind, the Bermuda market saw an 8.6% increase in property/casualty net premiums written, its largest uptick in the current five-year period.”
Bermuda market total revenue collective shareholders’ equity each increased “by roughly $4 billion in 2016, even after returning approximately $4 billion to shareholders,” – encouraging figures, for a market struggling under continued profit margin compression.
The A.M. Best report shows Bermudian players still benefit from strong balance sheets on a risk-adjusted basis.
Bermudian firms have taken measures to respond to the prevailing pricing environment and improve and protect profits; “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.”
“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% of ROE for the market,” said A.M. Best.
And just as the global insurance and reinsurance markets have been moving into specialised and new lines of business, Bermudian firms have adapted to the market environment with a shift towards “primary and other classes of business, including mortgage (re)insurance, and have utilized third-party capital among other strategies to help boost returns.”
However, for many Bermudian players, the changing geopolitical climate and potential changes to U.S. tax and regulation under the Trump administration, means 2016 and beyond will throw some additional uncertainty onto the horizon, with Bermudian-domiciled players still waiting to learn of future changes and what an adequate response would mean.