Fitch Ratings says in a newly published report that the market of Bermuda-based (re)insurers continues to grow and generate long-term underwriting profits. While considerable financial data is available for public holding companies that own Bermuda-based (re)insurers, the report focuses on GAAP results from 2009-13 for a universe of 21 Bermuda domiciled underwriters.
This group of class 4 Bermuda (re)insurers wrote $39bn of net premiums and had $76bn in shareholders' equity as of year-end 2013. In aggregate, these (re)insurers are characterized by strong balance sheet fundamentals, with operating and net leverage ratios within the 'AAA'/'AA' range of Fitch's reinsurance sector credit factors.
The group's five-year average net income return on equity (ROE) of 12.2% compares favorably with a 7.9% GAAP ROE over the same period for Fitch's overall universe of North American insurers. The group's shareholders' equity grew at a 7.4% CAGR over the past five years despite significant parent dividend payments, though large paid-in capital contributions have buoyed growth for some (re)insurers.
Despite periodic volatility tied to catastrophe losses, the group in aggregate reported a five-year average combined ratio of 89.7 and posted an 83.2 ratio in 2013. A considerable amount of underwriting activity is tied to US risk exposures, as well as property reinsurance. Competition from the alternative reinsurance market, continued low interest rates and the volatility of earnings in property catastrophe-focused business may dampen profitability going forward.
Bermuda (re)insurers have demonstrated loss reserving strength for over a decade. Favourable reserve development to net premiums earned(NPE) over the last five years has benefited the combined ratio on average by 7.1 percentage points and by 6.8 percentage points in 2013. Given relatively stable loss-cost trends, moderate but declining reserve releases are anticipated in the future.
Large asset allocations to fixed-income securities combined with a low interest rate environment have caused aggregate portfolio yields to drop over each of the past five years from 4.1% in 2009 to 2.5% in 2013. Most (re)insurers have strategically kept their portfolios conservative as a means to maintain sufficient liquidity to meet and settle claims and to avoid balance sheet volatility. However, some companies have modestly shifted their portfolio weighting towards higher expected return investments such as equities and alternative investments.
The report: "Bermuda (Re)insurers Financial Performance" is available at http://www.fitchratings.com
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