According to a recent S&P Global Ratings report, capitalization remains a key ratings strength for Bermudian re/insurers amid opportune capital raises.
Per S&P’s risk-based capital adequacy model, Bermudian re/insurers’ aggregate capitalization was redundant at the ‘AA’ confidence level at end of 2021.
Despite outsized losses from natural catastrophes and COVID-19 impairing operating results in the past five years, capital raises and investment gains through 2021 have supported the industry’s strong capitalization, says the report.
S&P note that Bermudian re/insurers took advantage of low-interest rates in 2020-2021, bolstering capital by raising a total of $8.7bn.
They also pre-funded some of their upcoming debt maturities, and used capital solutions such as loss portfolio transfers and adverse development covers to support their capital adequacy.
According to the report, some of this capital was deployed for underwriting purposes, leveraging the hardened rates.
S&P writes, “While rising bond yields and capital market volatility in 2022 will erode some of their capital buffer, we believe prospective strong underwriting earnings and increasing investment income will help offset this.
“In addition, the increase in reserve discounting (and thereby a reduction in liabilities) will help offset the impact from the unrealized losses on capital adequacy.”
Between 2017 and 2020, S&P observed that share buybacks were not material for Bermudian re/insurers, as they repurchased just 0.5% to 1.2% of their shareholders’ equity.
However, the total shares repurchased by these companies jumped to 4.5% of their aggregate shareholders’ equity in 2021, led by Arch ($1.23 billion) and RenaissanceRe ($1.03 billion).
Both companies continued to lead in share buybacks in the first half of 2022, with $485 million and $141 million, respectively.
With Bermudian re/insurers raising capital in the past two years, S&P has said the industry’s financial leverage increased marginally over this period, to an aggregate of around 24% at year-end 2021.
Nonetheless, the report notes wide variation among individual companies, with AEGIS and Aspen being the two extremes in the Bermuda market.
AEGIS has a virtually debt-free balance sheet, and its financial leverage of just 1.4% reflects S&P Global Ratings’ adjustment including operating leases.
On the other hand, the report calculates 52.8% financial leverage for Aspen at year-end 2021, following the 2020 payment-in-kind note issuance by Highlands, which S&P incorporate in their view of the group’s creditworthiness.
