Bermudian (re)insurers reaped strong earnings in 2013 despite increasing competition, persistently low investment yields, and a tepid economic recovery in the US and Europe, according to a Standard & Poor's Ratings Services report titled "Barbarians At The Gates: Are Bermudian (Re)Insurers Victims Of Their Own Success?."
The 20 participants in our annual Standard & Poor's/Deloitte Bermuda Insurance Survey generated strong underwriting and operating performance in 2013, thanks in part to mild catastrophe losses and favourable prior year reserve development. In aggregate, the 20 (re)insurers had a combined ratio of 85.6, an improvement from 91.5 in 2012, and a return on average equity of 12.9%, up from 11.4% in 2012. These strong results have supported the Bermudian reinsurers' overall risk-adjusted capitalization, which the rating agency views as a rating strength.
One of the hottest topics on survey participants' minds was the recent rise in third-party capital and its effect on property catastrophe rates.
"Although this mechanism has been part of the reinsurance landscape for decades, the influx of third-party capital has increased significantly over the past couple of years," said Standard & Poor's credit analyst Taoufik Gharib.
As much as $100bn of alternative capital could flow into the reinsurance market during the next five years, according to reinsurance intermediary Aon Benfield.
Competition from the glut of third-party capital is only adding fuel to the fire. Traditional reinsurers are already competing in an attempt to deploy their excess capital. In addition, large cedants are rationalizing their reinsurance spending as their reinsurance purchasing decisions are increasingly made at the group level rather than at individual operating units. This portfolio optimization approach is streamlining reinsurance programmes and reducing the number of reinsurers used for protection. As a result, S & P believes that competition among the Bermudian (re)insurers would be fierce even without the surge in third-party capital.
S&P continues "Growing competition and its potential to dent (re)insurers' profitability caused us to revise our view on the global reinsurance sector trends to negative from stable earlier this year. The tipping point came in early January, when we observed increasingly competitive underwriting behaviour among (re)insurers that we believe will weaken their profitability in 2014 and 2015."
"We think that companies without a defendable competitive position, or those that are more aggressive in maintaining market share by competing on price or relaxing their underwriting discipline, are most at risk," said Gharib. "We could revise our assessment of those (re)insurers' business risk profiles to reflect the relatively higher risk. In addition, we believe Bermudian (re)insurers with diminished capital buffers, or those whose earnings capacity is persistently constrained, could face rating pressure."
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