Fitch: Potential For Further Market Consolidation

August 4, 2015

Unutilized capital and the threat of alternative reinsurance providers, combined with slowing premium growth and sagging investment yields, increase the potential for further market consolidation of Bermuda based [re]insurers, Fitch Ratings said.

Fitch has outlined its views in a recent report examining a universe of 20 Bermuda-domiciled underwriters’ past four-year results and current trends.

“Increased merger and acquisition [M&A] activity within the global [re]insurance sector has already been focused among Bermuda [re]insurers. A number of deals have closed thus far in 2015 involving substantial Bermuda-based operations, including XL Group plc/Catlin Group Limited and Endurance Specialty Holdings Ltd./Montpelier Re Holdings Ltd,” Fitch said.

“The Bermuda market’s recent strong operating performance, however, is giving way to some deceleration. Premium growth flattened from 2013 to 2014 due to pricing competition and persistent reductions in rates. Future underwriting performance will be affected by less attractive premium rate levels and an anticipated reduction in the magnitude of favorable loss reserve development.

“The Bermuda market’s strength over the past several years is highlighted by property/casualty [P/C] underwriting gains among Class 4 Bermuda [re]insurers reaching a record of $5.8 billion in 2014. Results have been aided by below-average catastrophe losses since 2011. The group’s average combined ratio was just 84.5% over the three-year period ending in December 2014, striking a five-year low of 82.2% last year.

“Bermuda [re]insurers’ five-year average GAAP return on common equity [ROCE] of 11.5% is well above the 8.7% posted by Fitch’s universe of US [re]insurers. These results were achieved despite an aggregate investment yield at year-end 2014 of just 2.4%, marking the sixth straight year of decline. In response, some companies have modestly shifted their portfolio weighting towards equities and alternative investments to boost expected returns.

“Bermuda [re]insurers’ capital positions remain strong, as shareholders’ equity grew 3% to $77 billion at year-end 2014, from $75 billion at year-end 2013. Aggregate operating and net leverage ratios have been stable over the past five years and were 0.5x and 2.0x, respectively, at year-end 2014, placing the group in the ‘AAA/AA’ median range of Fitch’s sector credit factors for these ratios.

“Fitch’s expectation is that Bermuda will be granted full Solvency II equivalency in time for the Jan. 1, 2016 deadline when the regime takes effect. A failure to attain equivalency by this deadline could negatively affect [re]insurers’ ability to compete within the European Union.”

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