Catastrophe Losses and US Tax Reform Continue To Affect Bermuda Financial Results

A review of 2018 generally accepted accounting principles financial statements of 22 Class 4 Bermuda-domiciled re/insurers revealed slight favorable results despite above-average catastrophe losses, according to Fitch Ratings. Underwriting gains for the group in 2018 were $0.3 billion, with a combined ratio of 98.7 percent and a 3.4 percent net income return on equity, with both measures improving over 2017 results. Market pricing and policy term improvements will likely foster better 2019 performance, the rating agency said.

Catastrophe Losses Influence Results

Bermuda re/insurers' exposure to catastrophe losses is a key source of underwriting volatility. Above-average 2018 global insured catastrophe losses, estimated at $81 billion, represented the fourth-highest 1-year loss on record. A third straight year of sizable second-half catastrophe losses will dampen 2019 operating results.

US Tax Change Reduce Premiums

The enactment of the base erosion and anti-abuse tax reduced the long-standing Bermuda tax advantage over the United States, as reported net premiums written for the group declined 8.4 percent in 2018 over the prior year. The excise tax steps up to 10 percent in 2019 from 5 percent in 2018, expecting to further reduce premiums going forward.

Strong Capital Position Maintained

Shareholders' equity for the group decreased year over year by 6 percent in 2018 to $77.3 billion from $82.6 billion. Aggregate operating and net leverage ratios of 0.5x and 2.4x, respectively, at year-end 2018 varied little since 2008 and underscore capital strength. Capital allocation to Bermuda subsidiaries may see future adjustments given the reduced cessions from US affiliates.

Passive Foreign Investment Rules

Third Point Re, the combination of Third Point Reinsurance Company Ltd. and Third Point Reinsurance USA Ltd., transferred its equity securities and related liabilities into a fund structure due to a US tax change. The tax rule seeks to close the loophole of having passive income offshore through a re/insurance company in an effort to avoid US taxes.

Reserve Releases Improve

Class 4 re/insurers experienced an increase in favorable reserve development to net premiums earned in 2018. Reserve development continues to remain favorable as the group aggregate reverses a declining trend experienced over the last 5 years.

Bermuda Merger Activity Halts

Bermuda had no new major deals announced to date in 2019. Companies have focused on organic growth with favorable pricing, terms, and conditions. Activity for the moment seems temporarily at a standstill as the universe of willing sellers is limited with recent market condition improvement.