OREANDA-NEWS. July 30, 2015. Fitch Ratings says in a newly published report that the market of Bermuda-based (re)insurers demonstrates a long history of operating profits and favorable returns, but recent inflows of capital and alternative forms of reinsurance are promoting market consolidation and placing pressure on future profitability.

While considerable financial data is available for public holding companies that own Bermuda-based (re)insurers, the report focuses on GAAP results from 2010-14 for a universe of 20 Bermuda domiciled underwriters.

The group of class 4 Bermuda (re)insurers continues to report strong financial results, with property/casualty (P/C) underwriting gains reaching a high of \\$5.8 billion in 2014. Below-average catastrophe losses over the past three years have been beneficial to underwriting results, with the group reporting a three-year average combined ratio of 84.48% and a five-year low 82.2% combined ratio in 2014. Return on common equity (ROCE) compares favorably to Fitch's universe of GAAP-filing U.S. P/C (re)insurers, with the group of Bermuda (re)insurers posting a five-year average 11.5% ROCE versus 8.7% for U.S. (re)insurers.

Despite the group's strong operating performance, there are indications that profitability may be pressured in the future. Written premium growth flattened from 2013 to 2014 due to pricing competition and persistent reductions in rate. The magnitude of favorable reserve development is also expected to decline in the near to mid-term as slower revenue growth will struggle to keep pace with generally stable loss cost trends.

The group's capital position remains strong, as shareholders' equity grew 3% from \\$75 billion at year-end 2013 to \\$77 billion at year-end 2014. Aggregate operating and net leverage ratios have been stable over the past five years and were 0.5x and 2.0x, respectively, at year-end 2014, placing the group in the 'AAA/AA' median range of Fitch's sector credit factors for these ratios.

The Bermuda Monetary Authority has been working closely with the European Commission in order to attain Solvency II equivalency, but approval is still pending. Fitch expects Bermuda will be granted full equivalency by the time Solvency II takes effect Jan. 1, 2016 but notes that failure to attain equivalency by this deadline may negatively affect (re)insurers' ability to compete within the European Union.

Increased merger and acquisition (M&A) activity within the global reinsurance sector has particularly affected Bermuda (re)insurers and shows no signs of slowing. A number of deals have closed thus far in 2015, with three more deals scheduled to close in the latter half of 2015. Of note is the recently announced merger between ACE Ltd. and Chubb Corp., both of which own Bermuda-based entities, expected to close in first-quarter 2016.

(Re)insurers continue to struggle in their search for yield, as the aggregate investment yield at year-end 2014 was 2.4%, marking the sixth straight year of decline. In response, some companies have modestly shifted their portfolio weighting towards equities and alternative investments to boost expected returns.

The report 'Bermuda (Re)insurers Financial Performance' is available at www.fitchratings.com or by clicking the link above.