Bermudian reinsurer ROE’s down nearly a third, pressures remain: S&P

Bermuda domiciled reinsurance companies saw average annualised return on equity (ROE) drop almost a third in the first-quarter of 2016 to 8.7%, underlining continued market headwinds despite an increase in gross written premiums (GWP), according to S&P.

Global insurance and reinsurance ratings agency Standard and Poor’s (S&P) report on the operations of Bermudian re/insurers during Q1 2016, reveals that despite an increase in consolidated GWP of 21%, market pressures remained in the quarter and will likely continue to test firms throughout 2016.

S&P notes that the growth in GWP to $16.12 billion, compared with $13.38 billion in the first three months of 2015, was driven by a small selection of companies including XL Catlin, RenRe, and Endurance, and while there were “pockets of strength” in some business lines, there was weakness across the majority of business.

“S&P Global Ratings believes this shows continuing trends of fierce competition and a soft global reinsurance market that have caused the Bermudians to look to diversify premium streams,” said S&P.

Underlining the continuation of intense competition and persistent headwinds facing Bermuda domiciled reinsurers, S&P reveals that the group of Bermudian firms saw the industry annualised ROE decline to 8.7%, compared with 12.8% for the same period in 2015.

In fact, S&P states that all Bermudian reinsurance companies witnessed their ROEs decline in the first-quarter of this year when compared with a year earlier.

“We believe that ROEs were depressed this quarter because of the difficult market conditions and investment income being drags on net income,” said S&P.

The ratings agency reveals in its report, ‘Bermuda Re/Insurance Quarterly Insights: Still Holding Their Own,’ that net income for Bermudian firms during Q1 fell by 28% on the same period last year, to $1.27 billion.

Furthermore, persistent low interest rates around the globe continue to support wider financial market turmoil, which contributed to a decline in the investment income of Bermudian reinsurers of 13%, year-on-year, highlights S&P.

The growth in GWP during the first-quarter of 2016 combined with the continuation of reserve releases implies that generally, the underwriting profitability of Bermudian reinsurers was strong in the period, notes the ratings agency.

However, further deterioration of the industry’s combined ratio in the quarter when compared with Q1 2015, to 88.7% up from 86.1% a year earlier, and further reduction in ROEs across the board combined with yet another quarter of investment income turmoil, reveals that numerous pressures remain in the global insurance and reinsurance landscape.

What’s more, interest rates aren’t expected to turn anytime soon, and neither is the state of the global reinsurance landscape.

True, reinsurance industry experts and analysts in recent weeks noted a deceleration of rate declines at the April renewal season, further boosted by a rise in reinsurance demand from cedents, but absent a truly significant loss event rates are expected to decline further at mid-year, and beyond.

The forecast is for further rate declines in key markets such as Florida and the U.S., at the upcoming June and July 1st reinsurance renewals, suggesting that underwriting returns are not going to increase and again leading to more risk being assumed at lower returns.

So, with profits increasingly hard to come by on the investment side of the balance sheet, and the competitive, over-capitalised state of the softening landscape predicted to ensue at a time of dwindling reserves, Bermuda (and all global) reinsurers can likely expect the pressures that drove performance in Q1 to persist.

“We expect the Bermudians to continue to focus on strengthening their value proposition and enhancing their client relationships, recognizing the changing market dynamics as a number of cedents are centralizing their reinsurance purchases,” said S&P.