Bermuda insurers, reinsurers face market headwinds

The Bermuda market continues trying to adapt to the persistent underwriting and investment challenges as it struggles to generate profits to cover the cost of capital, A.M. Best Co. Inc. said in a briefing Wednesday. 

The Bermuda market saw an 8.6% increase in property/casualty net premiums written, its largest uptick in the current five-year period, according to the briefing. The Bermuda market’s total revenue and collective shareholders’ equity each increased by roughly $4 billion in 2016, even after returning about $4 billion to shareholders.

Unfortunately, the briefing said, profitability has not been heading in the same direction as margin compression continues.

In the years following the impact of Superstorm Sandy, the briefing said, the Bermuda market saw a steady deterioration in both return on equity and the combined ratio. Return on revenue has seen a similar trend, indicating that the Bermuda market is struggling to generate profits sufficient to cover the cost of capital. 

The briefing said that historically speaking, 2016 was a modest catastrophe year with Hurricane Matthew and some seismic events and wildfires having a greater impact on results than they would have in prior years, when better pricing margins provided greater ballast to absorb catastrophic activity or shock losses.

Best said it still maintains a negative outlook on the global reinsurance sector, and that pressures facing the Bermuda market are no different than those worldwide, though perhaps magnified.

Bermudians have shifted to primary and other classes of business, including mortgage insurance and reinsurance, and have used third-party capital among other strategies to help boost returns. 

“Generally speaking, most Bermudian companies have reduced their overall exposures year over year with an uptick in retrocession through excess-of-loss coverage or de-risking of their books of business. Both actions are yet another indication of the prevailing pricing environment,” the briefing said.

Capital management activities also continued in 2016, A.M. Best said, with roughly $2.7 billion of share repurchases and $1.3 billion in dividends returned to shareholders. But in aggregate, those activities generated less than 0.5% of ROE for the market.

Potential merger and acquisition activity still looms over the Bermuda market as participants from the U.S., Europe and Asia continue to look for ways to grow their books of business in the absence of any meaningful organic opportunities. 

M&A timing is difficult to predict, but the conditions remain ripe for another spurt of activity, the briefing said. Questions as to how the market will turn linger, with participants largely conceding that hardening across most lines of business is unlikely and most now hoping for at least some pockets of hardening.

The convergence of all these factors forces companies to manage shareholder expectations while exhibiting underwriting discipline and remaining relevant to cedents. In the absence of some market-changing event, the Bermuda market will need to balance innovation and discipline for the foreseeable future, the briefing said.