Bermuda ROE to be “slightly better than 10%”

Bermuda ROE to be “slightly better than 10%”

Bermuda Market – Return on Equity (2007-YTD 3Q 2012)
Return on equity (%)
2007 15.3
2008 -1.7
2009 16.4
2010 12.2
2011 1.3
YTD 3Q 2012 (Annualized) 12.5
Source: AM Best Research
The Bermuda insurance and reinsurance market will post a return on equity (ROE) of more than 10% for 2012, despite losses from Superstorm Sandy, AM Best has predicted in a new report.

The Bermuda composite tracked by AM Best posted a 16% ROE in 2009, and a 19% ROE in 2006. AM Best said the composite in is a position to post an ROE of “slightly better than 10%” for this year, but noted that this is relatively attractive when compared with an annual yield of 1.6% on 10-year Treasury bonds.

The rating agency noted that Bermuda insurers and reinsurers have changed their investment allocations in recent years to increase yield.

“In general, the Bermuda market has seen a slight movement to lower credit quality securities, and the duration of the portfolio is shorter, but AM Best sees nothing that is alarming,” said the report, called Amid Tepid Returns, Bermuda Insurers Discover That It Is All Relative. “Furthermore, AM Best’s discussions with executive management teams indicate companies are seeking to control what they can –underwriting – whether through risk selection or by expanding into new lines of business.”

AM Best said that a new breed of reinsurer has entered the Bermuda market in recent times, with hedge fund-backed reinsurance companies seeking to marry high investment returns with underwriting returns.

“Is this the new (re)insurance model for the future? Probably not, but it may have its niche in the market for some time to come,” said the report. “AM Best sees many traditional (re)insurance companies that maintain firm, and conservative, maximum allocation thresholds with regard to hedge funds or alternative investments, and most companies are not even close to hitting the upper end of their stated thresholds.”

Bermuda Market – Property/casualty net premium written growth (2007-2011)
Year-on-year NPW growth (%)
Category 2007 2008 2009 2010 2011
Bermuda Catastrophe 20 12 4 4 -3
Bermuda Hybrid -5 3 0 3 9
Bermuda Global (Re)insurance 7 -2 -2 2 3
Source: AM Best Research
The rating agency said that the hedge fund-back reinsurers’ strategy of de-emphasising underwriting and concentrating on investments in soft markets and moving capital more towards underwriting in hard markets may face some challenges.

“In a business that still highly values relationships, this model may experience some challenges depending on the degree of the pullback from underwriting and the classes of business written,” said the report. “Then again, it is uncertain as to how large of an underwriting appetite these companies will have when the next hard cycle arrives.”

The Bermuda market composite reported a combined ratio of 88.6% for the first nine months of the year, including 5.6% of favourable reserve development. Last year was the only year the Bermuda market reported an underwriting loss in the past five years. However, 2008 is the only one of the past five years to lead to a net loss, a result of investment losses from the financial crisis.

The Bermuda market’s capital was virtually flat at the end of 2011 compared to the start of that year, which was well above the level in 2007.

“For year-end 2012, capacity is forecasted to reach a record high, and share repurchases are running at about 45% of net income,” said the report. “The level of share repurchase activity is strong but still less than the rate seen in 2010, when the Bermuda market repurchased roughly 75% of its net income – and 2010 was quite a profitable year.”

AM Best views the Bermuda market as being disciplined in terms of pricing, estimating that it is deploying roughly 80% of its available risk-adjusted capital.

The rating agency’s outlook for the Bermuda market’s ratings is also stable, supported by strong risk-adjusted capital, judicious enterprise risk management and stable pricing.

But the report warned: “AM Best expects reasonable organic growth in capital, assuming a normal level of global catastrophe losses. However, AM Best remains concern that the stabilisation in reinsurance pricing may be short-lived, as there are already indications that property-cat pricing will be challenged to hold 2011’s rate increases at the Jan 1 renewal season, and it is not certain that Sandy will change this. Given that operating performance helps drive balance sheet strength, this is an important leg of the proverbial stool, and with operating results strained by investment yields, this ultimately could strain the ratings of companies in the sector.”

Bermuda Market – Trend summary (2007-YTD 3Q 2012)
2007 2008 2009 2010 2011 YTD Q3 2012
Net premiums written (P/C only) USD 45.5 USD 45.4 USD 44.5 USD 46.8 USD 49.0 USD 40.3
Net earned premiums (P/C only) 46.0 45.9 45.1 46.7 48.6 37.0
Net investment income 8.1 6.9 7.4 7.3 6.9 5.3
Realized investment gains/(losses) (0.2) (6.3) 0.7 2.0 (0.4) 1.3
Total Revenue 54.7 48.8 56.2 59.0 57.9 46.1
Net Income 10.7 (1.1) 11.6 10.5 1.1 8.3
Shareholders' Equity (End of Period) 73.9 61.5 80.8 87.1 86.3 92.7
Loss Ratio 56.6% 63.2% 54.7% 60.9% 76.1% 58.0%
Expense Ratio 28.9 29.7 29.9 31.1 30.3 30.6
Combined Ratio 85.6 92.8 84.7 92.0 106.4 88.6
0.0 0.0 0.0 0.0 0.0 0.0
Favorable Loss Reserve Development -5.1 -8.2 -6.8 -6.8 -6.4 -5.6
Return on Equity (Annualized) 15.3 -1.7 16.4 12.2 1.3 12.5
NPW (P/C only) to Equity (End of Period) 61.6 73.9 55.0 53.8 56.8 58.0
Net Reserves to Equity (End of Period) 133.8 165.0 130.7 124.6 133.5 124.6
Gross Reserves to Equity (End of Period) 174.3 214.5 165.1 155.4 166.0 151.7
Source: AM Best Research

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