Fitch: Weaker Underwriting Results, Steady Profit

March 7, 2017

Underwriting results for publicly traded Bermuda [re]insurers weakened on larger catastrophe losses and reduced redundancies, according a new dashboard on the Bermuda [Re]insurance Market from Fitch Ratings.

“Fitch’s group of 12 large publicly traded [re]insurers with Bermuda operations posted a combined ratio [CR] of 91.9% in 2016, up from 88.5% in 2015 due to larger catastrophe losses [5.4 points in 2016, up from 2.5 points in 2015] and reduced favorable prior-year reserve development [6.6 points in 2016, down from 7.2 points in 2015],” the company said.

“Underlying underwriting results were stable with the group producing an accident-year CR, excluding catastrophes, of 93.1% in 2016, in line with 93.3% in 2015, although up from 91.4% in 2014.”

“Bermuda companies posted weaker underwriting results and steady profits in 2016; however, returns are starting to near the cost of capital and narrowing profit margins are a key risk,” said Brian Schneider, Senior Director, in Fitch’s Insurance team.

Bermuda [re]insurers’ return on equity held steady at 8.2% in 2016 as reduced underwriting income was offset by slightly improved investment results. The estimated cost of capital was around 6%-7% for 2016.

“Most Bermuda entities remain focused on returning equity to shareholders and capital growth was modest for the year,” added Mr. Schneider.

Bermuda [re]insurer’s aggregate shareholders’ equity was up 4% in 2016. However, when excluding Arch Capital Group Ltd.’s 34% increase driven by preferred share issuances for the acquisition of United Guaranty Corporation, growth drops to only 1% for the group.

Fitch added, “The Bermuda [re]insurance landscape remains fiercely competitive and prone to M&A as [re]insurers seek scale and diversification. Fitch maintains a Stable Rating Outlook on both global reinsurance and US property/casualty [P/C] insurance, which includes coverage of Bermuda market [re]insurers.

“The majority of ratings should be stable over the next 12-18 months, although select Bermuda [re]insurers could see negative rating actions if pricing adequacy declines materially. Fitch’s fundamental outlooks on both global reinsurance and US P/C insurance are negative, as premium prices and investment yields are expected to remain under pressure in 2017.”

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