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.

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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.