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Growing competition from outside cash may squeeze Bermuda reinsurers: S&P


Despite a strong 2013, Bermuda reinsurers face a range of challenges that could impact their performance as soon as this year, according to a report released Tuesday by Standard & Poor's Rating Services Inc.

“Barbarians At The Gates: Are Bermudian (Re) Insurers Victims Of Their Own Success?” looks at how competition, alternative capital and lower investment returns could weigh on reinsurers' performance.

While 2013 was a banner year that saw the aggregate combined ratio of the 20 (re)insurers participating in the annual Standard & Poor's/Deloitte Bermuda Insurance Survey improve to 85.6% from 91.5% in 2012 as they “generated strong underwriting and operating performance,” momentum may be shifting, according to S&P.

The “increasingly competitive landscape will likely hurt Bermudian (re)insurers' profitability in 2014 and 2015 and could threaten some players' market positions,” said the report.


Much of that competition comes from third party capital entering the space from long-term investors such as pensions and endowments as well as more “opportunistic” sources like hedge funds. The report says that as much as $100 million of such funding could flow into the space over the next five years, citing a figure from Aon Benfield Inc.

“The influx of third-party capital into the Bermudian reinsurance market is disrupting existing business models, as competition among traditional (re)insurers also heats up,” said the S&P report.

“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 in a statement accompanying the report.

Low investment yields are also a bane to reinsurers. The report said net investment income dropped 4.6% to $6.15 billion in 2013 from $6.45 billion in 2012 while net yield on invested assets including cash and cash equivalents dropped to 2.6% in 2013, “down materially from 4.0% in 2009,” said S&P.