Fitch: Excess Capital Affects Reinsurer Profits
“Bermuda-based [re]insurers have a long history of profitability, but economic pressures and an overabundance of capital from traditional and alternative sources has challenged profitability for the group,” according to a new report from Fitch Ratings.
“A review of 2015 audited GAAP financial statements of 19 Class 4 Bermuda-domiciled [re]insurers [the group] reveals favorable but tempered operating results,” Fitch said.
“Underwriting gains for the group were $4.4 billion in 2015 with a combined ratio of 86% and a 10% net income return on common equity [ROE], with all measures deteriorating moderately from the prior year. ROE for this group is likely to decline in 2016 due to rising core loss ratios, larger insured catastrophe losses and lower investment income.
“Bermuda-based underwriters face intense price competition, limited growth opportunities and earnings pressure. This historically profitable market could be challenged further as organic revenue growth is unlikely to improve in the near term,” said Brian Schneider, Senior Director Fitch Ratings.
“Favorable loss reserve development improved the group aggregate combined ratio by 6.5 percentage points in 2015, the lowest amount since 2010. Bermuda [re]insurers have demonstrated loss-reserve strength for over a decade and future reported reserve redundancies are expected to continue but at a reduced magnitude.
“In addition, Bermuda [re]insurers are challenged by falling written premiums and lower investment yields. Reported written premium volume decreased by 7% for the group in 2015 over the prior year.
“The aggregate investment yield for 2015 further fell to 2.1% and marked the seventh straight year of declining yields. Some companies have modestly shifted their portfolio allocation towards equities and alternative investments to boost expected returns, though fixed income securities still make up the lion’s share of investments.
“The group continues to report a strong capital position. Shareholders’ equity declined year over year, decreasing 6% in 2015 to $73.1 billion from $77.9 billion; however, the decline was significantly influenced by extraordinary dividends declared and paid by Chubb Ltd. operating subsidiaries.
“The Bermuda Monetary Authority’s efforts to achieve Solvency II equivalency paid off as Bermuda’s commercial [re]insurers were granted equivalency by the European Union.
“While Fitch views the increased capital standards under Solvency II positively, achieving equivalency was already factored into Fitch’s base-case expectations and no rating actions were taken as a result of the ruling.
“After several years of intense merger and acquisition activity in the global reinsurance sector, the pace of deals has slowed. Fitch believes that further merger & acquisition activity is possible, though likely not at the scale seen in 2015.
The report ‘Bermuda [Re]insurers Financial Performance’ is available at www.fitchratings.com.
