Double hit for insurers and reinsurers
A double whammy of cuts in the UK discount rate for bodily injury lump-sum payouts and higher natural disaster losses has hit earnings of the island's insurance and reinsurance industry.
A report by ratings agency Standard & Poors said the combination had “delivered a one-two punch to Bermudian reinsurance and insurance earnings in first quarter 2017.”
The report added: “These losses chipped away at underwriting profitability, adding to re/insurers' woes as soft industry pricing persisted and competitive pressures grew with alternative capital reaching record highs.”
But the Standard & Poors quarterly insight said: “In spite of these tough market conditions, gross premiums written for the Bermudians rose 5.5 per cent to $17.54 billion in first quarter 2017 from $16.64 billion in first quarter 2016.
“Several acquisitions that closed during the past few quarters supported overall growth, but were partially offset by pricing declines at the January 1 renewal period.”
The UK Ministry of Justice recently reduced the discount rate — known as the Ogden rate — used to calculate lump sum awards in British injury cases to negative 0.75 per cent from 2.5 per cent.
The cut is equivalent to a decrease of 325 basis points and the first rate change since 2001.
The report said: “We estimate the losses from this development, which we view as casualty catastrophe, to be between $6.5 billion and $9 billion, of which 80 per cent will likely be absorbed by the global reinsurance market.
“Based on announced losses Bermudians took about a $260 million hit — about 2.7 percentage points — to their loss ratios in first quarter 2017.”
The report added that natural catastrophe losses for the quarter amounted to $7.6 billion, 18 per cent lower than the ten-year median of $9.3 billion.
But Standard & Poors added: “According to Aon Benfield, nearly three-quarters — $5.7 billion — of the insured losses were sustained in the US, which is lower than the $6.3 billion in the same period in 2016, but significantly higher than the ten-year median of $4 billion.
“Reported catastrophe losses for the Bermudians rose to $240.4 million in first quarter 2017, more than double the level for the same period in 2016 and more than 4.5 times that of 2015 and 2014.
“Bermudians felt the sting of these losses, as the industry's combined ratio was adversely affected by 2.5 percentage points, compared with 1.2 points in the same period in 2016.”
Standard & Poors added its global rating remained stable for the reinsurance sector, even though it expected business conditions to remain weak, hitting near-term earnings.
The report said that, despite global property and casualty reinsurance rates falling between zero per cent and five per cent at the January and April renewal periods this year, the Bermuda market was able to grow its top line from the same period last year.
It added: “As the soft market continued to constrain rates, premium growth was aided primarily by recently completed acquisitions.
“For example, Arch Capital Group Ltd's gross premiums written increased 15.5 per cent, primarily due to its acquisition of United Guaranty Corporation, which closed in December 2016.
“Argo Group International Holdings Ltd's 15.2 per cent top-line growth was bolstered by its acquisition of Ariel Reinsurance Co Ltd, which closed in February 2017.”
The report said: “Although acquisitions drove higher premiums in aggregate, the experience of individual re/insurers varied.
“From an organic growth perspective, Everest Re Group Ltd led the charge with a growth premiums written growth rate of 18.3 per cent fuelled by expansion of its insurance operations, which has been its focus in recent years.”
But the report added that some insurers and reinsurers were more affected by the existing pricing conditions. It said: “This included Lancashire Holdings Ltd, which saw its gross premiums written fall 14.9 per cent due to the timing of some renewals — ie, multiyear contracts written in prior periods that are not up for renewal yet — as well as the highly competitive rates environments in which the company writes its business.
“These pressures have been exacerbated by the continuing influx of third-party capital, which reached $81 billion as of year-end 2016, an all-time high.
“This pushed total global reinsurer capital to $595 billion, also a record level, based on Aon Benfield's report.”