Jonathan Kent, Business Editor

Bermuda’s re/insurance market is battling against deteriorating profitability in a tough market, according to analysts from rating agency AM Best.

But balance sheets remain strong and companies have reduced their risk exposures in response to soft pricing.

AM Best’s market briefing, which focuses on its “Bermuda composite” of companies for whom it provides credit ratings, says the market has “experienced a steady deterioration in both return on equity and the combined ratio” since Superstorm Sandy in 2012.

“Return on revenue has seen a similar trend, showing that the Bermuda market is struggling to generate profits sufficient to cover the cost of capital,” the report adds.

Favourable reserve development — a significant factor in profitability — is starting to dry up, Best said.

“Favourable reserve development as a percentage of net premiums earned dropping below 6 per cent for the first time in the current five-year period and steadily declining since the five-year high of 7.3 per cent in 2013,” the report states.

“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.”

The analysts make clear they believe the spate of consolidation seen in recent years is not over.

“Potential merger & acquisition activity still looms over the Bermuda market as market participants from the US, Europe, and Asia also continue to look for ways to grow their books of business in the absence of any meaningful organic opportunities,” the report states.

“M&A timing is difficult to predict but the conditions remain ripe for another spurt of activity.”

And the report presents little optimism for an improvement in pricing any time soon.

“Questions as to how the market will turn linger, with participants largely conceding that hardening across most lines of business is unlikely and most are now hoping for at least some pockets of hardening,” the report states.

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