“Still-rational” underwriting practices across the Bermudian insurance and reinsurance sector so far in 2017 has helped the majority of firms manage the soft market cycle, but higher losses and the impact of the Ogden rate change dented the sector’s profitability in Q1 2017, says Standard & Poor’s (S&P).
Global ratings agency S&P has commented on the performance of the Bermuda re/insurance industry in the first three months of 2017, highlighting further deterioration of underwriting profitability driven by increased natural catastrophe losses, adverse reserve development, and the ongoing soft market landscape.
However, S&P maintains its stable outlook on its ratings in the reinsurance industry, despite the expectation that business conditions will likely weaken further, adding further pressure to earnings.
“We believe strong capital adequacy, overall strong enterprise risk management (ERM), and still-rational underwriting behavior by most reinsurers have helped them navigate these challenging market conditions,” says S&P.
The majority of Bermuda firms experienced unfavourable reserve developments as a result of the change to the Ogden discount rate in the UK to -0.75%. S&P expects the losses from the rate change to be between $6.5 billion and $9 billion, with as much as 80% being absorbed by the global reinsurance industry.
Based on initial estimates, S&P states that Bermudians took a roughly $260 million hit from the Ogden rate change, which impacted their loss ratios by around 2.7 percentage points.
Adding to the pressures of the Ogden impact, natural catastrophe events in the first-quarter of 2017 led to a global insurance industry loss estimate of $7.6 billion, with the majority occurring in the U.S., according to Aon Benfield’s numbers.
Catastrophe losses for Bermudian firms increased by more than double in Q1 2017 when compared with 2016, to $240.4 million ($115.4mn in Q1 2016), which adversely impacted the Bermuda industry’s combined ratio by 2.5 percentage points, up from 1.2 percentage points a year earlier, says S&P.
“The first quarter is usually the quietest for global catastrophe losses, but with higher catastrophe losses so far, 2017 is off to a rough start. Elevated natural catastrophe losses coincided with lower reserve releases for the industry due to Ogden losses, benefiting the combined ratio only by 2.7 percentage points in the first three months of 2017, compared with 5.5 percentage points in the same period in 2016,” says S&P.
The Bermuda reinsurance industry’s combined ratio weakened to 94% in Q1 2017, compared with 90.7% a year earlier. At the same time the industry’s annualized return on equity fell from 8.6% in Q1 2016, to 7.8% in Q1 2017.
S&P reports that gross premiums written across the Bermuda industry increased to $17.54 billion from the $16.64 billion reported a year earlier. Net premiums written increased to $12.65 billion, and net premiums earned totalled $9.8 billion, growth of roughly $400 million on Q1 2016, says S&P.
Reported net income to shareholders declined from $1.8 billion in Q1 2015, to $1.29 billion in Q1 2016, and further still to $1.23 billion in the first-quarter of this year. While net investment income increased to $855.9 million in Q1 2017, compared with $672 million a year earlier, and $769 million in Q1 2015.
Looking forward, S&P says; “If the first-quarter natural catastrophe losses are an indication for the rest of the year, this will likely put further pressure on reinsurers’ underwriting margins. However, the Bermudians have been tested before, and with their robust capital adequacy and strong ERM practices, we believe the industry as a whole will be able to navigate these choppy waters reasonably well for now.”
The profitability of insurers and reinsurers in all parts of the world will likely come under increasing pressure as natural catastrophe losses persist, an abundance of capital continues to drive down rates, albeit at a slowed pace, and the reserving strength of firms is reportedly running thin.
Discipline and efficiency remain key in the softening cycle, and it’s promising to hear S&P highlight the “still-rational” underwriting practices of most Bermudian companies in an effort to navigate the testing market conditions.
