Fitch: 'Bermuda Market Remains Resilient' - Bernews

Bermuda-based [re]insurers continue to be tested by challenging market conditions, including heightened catastrophic losses and diminishing competitive advantage resulting from U.S. tax reform, according to Fitch Ratings.

A statement from the ratings agency said, “However, the Bermuda market remains resilient given its strong global position, demonstrated underwriting expertise, robust and effective regulatory backdrop and Solvency II equivalence.

“Mergers and acquisitions for Bermuda [re]insurers are expected to continue as larger and smaller players face the realities of economies of scale. Smaller, marginalized players have exited the market due to profit and growth challenges, while larger ones see increasing difficulties in attaining organic growth.

“Business combinations, while providing potential upside, are not without risk. Synergies are dependent upon the appropriate valuation of target companies, the level of integration risk and adequacy of reserves, among other considerations.

“Tax reforms, including the lowered U.S. corporate tax rate of 21% from 35% and the base erosion and anti-abuse tax [BEAT], have eroded Bermuda’s pricing advantage relative to the U.S.

“With the economic incentive to internally cede business to Bermuda from the U.S. substantially diminished, Bermuda-based [re]insurers have changed the structure of offshore operations, retaining more business and capital in U.S. affiliates. Most intercompany quota-share arrangements have been cancelled, while others have been reduced or restructured to lessen the negative impact.

“[Re]insurance industry capital remains very strong, allowing most individual companies to absorb near-term volatility and the effects of adverse events. Global insured catastrophe losses for the [re]insurance industry reached $80 billion in 2018. While this fell 75% from the $140 billion from 2017, it remains meaningfully above the 10-year and 30-year inflation-adjusted averages of $61 billion and $41 billion, respectively.

“Fitch expects the group of Bermuda-based [re]insurers it actively follows to post a combined ratio near 100% for full-year 2018, down from 106.9% in 2017. This improvement reflects a reduced catastrophe loss burden of approximately 10 points on the 2018 combined ratio, compared to 20.2 points in 2017, although above the five-year [2013-2017] average of 6.6 points.

“Reinsurance pricing has disappointed sellers for the past two years, with overall rates flat and generally stable at the January 2019 renewals. Many market participants anticipated that substantial catastrophic losses would fuel momentum for a second year of rate increases; however, this has failed to materialize.

“As alternative capital increasingly competes with traditional capital, the extent of cyclical price changes following severe cat losses will be reduced. However, rates could potentially increase at midyear 2019 following a capacity pullback by the insurance-linked securities [ILS] market.”