Poor returns on equity are making Bermuda look a less attractive place to do business than it once was, Fitch told the reinsurance sector at the ratings agency’s Monte Carlo briefing
The advantage once held by Bermuda as the jurisdiction of choice for reinsurance is diminishing, according to Fitch Ratings.
Brian Schneider, a senior director of the ratings agency, told an audience gathered for the Fitch press conference in Monte Carlo that a series of factors meant that the advantages of setting up in Bermuda are no longer as great as they once were.
Return on equity (RoE) was at a loss in Bermuda for 2017 off the back of major hurricane losses.
And despite a relatively quiet year for catastrophes in 2018 so far, RoEs for this year are still only at 5.4% - well off the historic double-digit returns that used to be achieved by reinsurers in the jurisdiction.
“The industry is still struggling in terms of RoE,” Schneider said. “Some of that is due to a rise in interest rates that we’ve seen in Bermuda in the first six months.
“They had to put their unrealised losses into their income statement, so that is driving lower ROE that we’re seeing in 2018 as rates have risen.
“But clearly what’s evident is that Bermuda is not able to produce double digit ROEs as they once did. Even in low cat years it’s a challenge to be able to produce those types of levels.”
Another key factor has been recent US tax reforms.
Schneider said the reforms have narrowed Bermuda’s advantage relative to the US, and that this has helped push M&A since the beginning of this year.
Schneider particularly highlighted recent deals that have seen Bermuda based Validus, XL Catlin, Maiden Re and Aspen bought by non-Bermuda based players.
“We are seeing less and less major Bermuda players. The other interesting aspect of the AIG-Validus and AXA-XL Catlin deals are that they were larger companies buying into the alternative capital platforms, with Validus having a very strong platform and XL being in that space as well.
“I think that’s a valuable asset that both AIG and AXA wanted to get into because they think that is where the future of the industry is going.”
Global Reinsurance reported only yesterday that the number of companies on the Bermuda Stock Exchange (BSX) was at a record high, with 263 companies listed.
BSX chief executive was positive about the future outlook for reinsurance in Bermuda, and that new capacity entering Bermuda had made for an “exciting year” in terms of products coming to market.
And Brad Adderley, partner at Bermuda-based law firm Appleby, is adamant that Bermuda continues to be the best place for reinsurers to base themselves.
Adderley highlighted the ease of setting up and accessing standard Bermuda style catastrophe bonds as two of the main advantages that Bermuda held over other jurisdictions.
He said: “Because it’s fully funded, because you’re dealing with sophisticated investors, it’s fully transparent and it has an aggregate limit clause, meaning you’re categorising the risk for the maximum liability, it makes the whole process very easy.
“In the Bermuda marketplace you don’t file prices, you don’t file forms or policies, which makes it easier to deal with the other reinsurers in Bermuda. This is definitely to market advantage.”
Fitch’s Schneider conceded there are still great advantages to being based in Bermuda, but said that these were diminishing with the acquisitions of the major Bermuda-based reinsurers in recent mergers and acquisitions (M&A).
“It does continue to be an advantage to be in Bermuda, but certainly much less so than it has in the past, and it really only leaves a handful of companies left who have the potential to be involved in M&A as well,” said Schneider.
“It will be interesting to see how the last remaining well-established Bermuda reinsurers like Everest Re, Ren Re, Arch, Axis and Lancashire respond to this new environment,” he added.