While still profitable, operating return on equity (ROE) for Bermuda-based reinsurers has declined steadily over the past 10 years, according to global ratings agency Fitch.
In a study that observed 15 major Bermuda-based re/insurers over a ten year period (2007 – 2016), it was revealed that operating ROE declined to 7.4%, due to weakening of both underwriting and investment results.
Among the 15 re/insurers studied, 11 remained active until the end of the period: Allied Word, Arch, Argo,
Aspen, Axis, Endurance, Everest Re, PartnerRe, Renaissance Re, Validus, and XL Group. Meanwhile, the inactive ones were: Flagstone (acquired by Validus), IPC Holdings (acquired by Validus), Montpelier Re (acquired by Endurance), and Platinum Underwriters (acquired by Renaissance Re).
Alongside with the decline in ROE is an increase in firms’ combined ratios. From 85% in 2007, underwriting ratios increased by eight points to 93% in 2016. The difference was wider for reinsurance, increasing 10 points, from 79% to 89%. Including investment income, operating rations (excluding catastrophes) increased 18 points to 85% in 2016 from 67% in 2007.
Another trend Fitch noticed was that growth was driven more by acquisitions than organic methods. The ones that had the highest compound annual growth rates for gross written premiums, Validus (11.6%) and Endurance (10%), were also the most acquisitive.
Catastrophe losses hit reinsurers harder than insurers, adding 11.5 points to the reinsurance segment’s combined ratio, versus only 3.6 points for insurance.
"Insurers will continue to struggle to produce double-digit returns, a level that almost all Bermuda-based companies consistently achieved a decade ago," said Brian Schneider, senior director at Fitch. "We saw a shift from reinsurance to insurance as reinsurance margins declined, but they have yet to produce consistent favourable insurance underwriting results."
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