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After Bermudian Re/insurers' Half Decade Of Underperformance, Are Better Days Ahead?

While Bermuda is known for its pink sand beaches, clear turquoise waters, and blue skies, Bermudian re/insurers have generated gloomy underwriting performance during the past five years (2017-2021). As in the broader reinsurance market, the Bermudian re/insurers rated by S&P Global Ratings (12 covered in this article) have failed to produce adequate returns as elevated natural catastrophe events rage on, fueled by the effects of climate change. Unique circumstances such as the COVID-19 pandemic, the Russia-Ukraine conflict, and the threat of long-lasting high inflation have also affected Bermudian re/insurers, showcasing the global entanglement of the industry.

Indeed, in the past five years, Bermudian re/insurers posted $21 billion in natural catastrophe losses and $3 billion in COVID-19-related claims. During this period--in which the frequency and severity of secondary perils such as wildfires, convective storms, floods, etc., increased--the Bermudians' annual share of global natural catastrophe losses ranged from 3.5% to 5.5%.

Sunny days could still be on the horizon, however, since industry losses sparked rate increases in the past few years, which will likely continue as we head into the 2023 reinsurance renewals. Low interest rates in 2020 and 2021 gave ample opportunity to raise capital to be deployed into the hardening market. Recent interest rate increases and the Russia-Ukraine conflict have created market volatility that can be seen in re/insurers' balance sheets, yet these rising interest rates will help investment income recover as well.

Being adaptable is key in this environment. A hybrid model is a prime example of a common strategy Bermudian re/insurers are using to manage volatility. These companies have shown perseverance amid complex and unprecedented underwriting conditions and hope to leave their choppy legacy in the past.

A Vibrant Global Reinsurance Hub

Bermuda (A+/Stable/A-1) is a global financial hub for property/casualty re/insurance, with a growing presence in life re/insurance. The island has gained a prominent position in the global property catastrophe reinsurance market given the amount of related premiums written by Bermudian re/insurers. According to S&P Global Ratings' "Global Reinsurance Highlights" reports, Bermuda's share of the global reinsurance market based on net reinsurance premiums written fluctuated between 7% and 9% in the past five years. In addition, Bermuda remains an attractive domicile for sidecars, alternative capital structures, collateralized reinsurance, insurance-linked securities, and structured solutions for legacy business.

Over the past few decades, Bermuda has also become the domicile of choice for global re/insurance start-ups. The territory offers adaptable legislation and regulation, tax efficiency, established infrastructure, and proximity to the U.S., the largest re/insurance market in the world. It also benefits from institutional stability and its track record of implementing reforms to ensure sustainable public finances and economic growth over the long term.

According to S&P Global Ratings, despite a sizable economic contraction of 6.9% in 2020, real GDP increased an estimated 1.9% in 2021 and will grow by 3.2% in 2022. This would lead to GDP per capita of about $119,920 in 2022--one of the highest in the world. The reopening of the economy, continued strength in the international financial services sector, and the resumption of tourism are supporting the economic recovery.

The international financial services sector represented about 27.5% of Bermuda's GDP in 2020, much larger than tourism's share (typically about 5% of GDP), and has remained resilient in the past few years, providing more economic stability in Bermuda than in other island economies. S&P Global Ratings expects the Bermudian international financial services sector will retain its global comparative advantage and continue to sustain the island's economic prosperity over the long term.

Evolving Tax Regime

The tax regime in Bermuda could be evolving with proposals regarding a global minimum tax under the Organization for Economic Cooperation and Development (OECD) Pillar 2 and the U.S. passive foreign investment company regime. In December 2021, the OECD published detailed rules to assist in the implementation of a landmark reform to the international tax system, which will ensure multinational enterprises will be subject to a minimum 15% tax rate from 2023. The minimum tax will apply to multinational enterprises with revenue above €750 million.

We believe this minimum corporate tax rate could affect Bermudian re/insurers, whose corporate income tax rate could jump to 15% from 0%, reducing their profits. However, based on our conversations with some re/insurance executives on the island, the Bermudian authorities could possibly lower the payroll tax as a potential offset.

Hybrid Model Becoming A Common Solution To Volatility

The global reinsurance sector has faced many challenges in the past several years. A barrage of catastrophe events has continued through almost every year since 2017, pressuring reinsurance ratings. In addition, COVID-19 resulted in material losses in the property/casualty and life reinsurance sectors in 2020-2021 and the first half of 2022 (though pandemic losses in 2021 and in the first six months of 2022 affected mostly life reinsurers). This sparked inflation woes that have yet to be tamed. The latest challenge is the Russia-Ukraine conflict, which exacerbated inflationary pressures and, while the full extent of the impact on the reinsurance market is still unclear, will likely result in sizable losses for the global reinsurance industry.

Yet with any challenge comes opportunity, and Bermudians' top-line growth averaged 14.1% in the past five years, with total gross premiums written (GPW) reaching $69.3 billion in 2021. The growth occurred organically and through acquisitions, such as AXIS acquiring Novae in 2017, RenaissanceRe acquiring Tokio Millennium Re in 2019, and Sirius International merging with Third Point in 2021. Low interest rates in 2020 and 2021 gave many companies the opportunity to raise capital in amid already hardening reinsurance pricing to deploy in both reinsurance and insurance lines. Bermudian re/insurers raised $8.7 billion of fresh capital, including equity raises of $2.8 billion and debt of $5.9 billion.

Chart 1


Most Bermudian re/insurers have adopted a hybrid model and are looking to increase their diversification in less volatile insurance lines to help manage their businesses' volatility. Therefore, Bermudians' insurance GPW grew by 18.9% in 2021 to $31.6 billion (or 46% of the market's GPW), while reinsurance GPW grew 24.5% to $37.7 billion (or 54% of the market's GPW). Everest Re, for example, has a multiyear plan to realign its business risk by growing its insurance book more rapidly than reinsurance, with the intent to deliver improved risk-adjusted operating margin with reduced volatility. AXIS is another recent example, after the company announced it would exit property and property catastrophe reinsurance lines and focus more on growing its primary specialty insurance business.

This year's renewals have underscored the dislocation in the reinsurance market, with property catastrophe-exposed capacity remaining constrained. In addition, uncertainty about the duration of and potential losses from the Russia-Ukraine conflict poses challenges in some specialty lines. In the first half of 2022, Bermudian re/insurers reported only about $370 million in losses related to this conflict, with no significant effects on their results thus far.

Given the challenges in the reinsurance market, we expect Bermudian re/insurers will continue to reshape their underwriting portfolios, reducing earnings volatility by further diversifying into less volatile lines and primary insurance business.

Earning Cost Of Capital Remains A High Hurdle

Similar to the global reinsurance industry, the Bermudian re/insurers have struggled to earn their cost of capital in the past five years except in 2019. This was largely due to the heightened catastrophe losses that have riddled the past several years, loss creep, investment volatility in fourth-quarter 2018, and COVID-19 losses, which were largely concentrated in 2020 for Bermudian re/insurers. It seems the trend has continued in 2022 because of capital market volatility.

Chart 2


Improving Underlying Metrics In The Past 18 Months

In the past five years, Bermudian re/insurers reported a weak average combined ratio at 101.5%, including an 11.8-point impact from natural catastrophe losses. During this period, operating performance varied among re/insurers, with some navigating the challenging market dynamics better than others.

Top performers were Fidelis, Arch, and AEGIS, which were the only Bermudian re/insurers to have five-year average combined ratios below 100%.

  • Fidelis, while heavily exposed to catastrophe risk, has shown superior results and attributes the success to its risk management capabilities.
  • Arch has benefited from its mortgage insurance segment, which has supplemented earnings while its property/casualty insurance segment has struggled, like its peers'.
  • AEGIS has a strong competitive advantage in its mutual company, supported by its leadership position and strong presence in North American energy utilities, relatively low property catastrophe exposure, and the top-quartile performance of its Lloyd's syndicate, which adds material earnings diversity.

Chart 3


On the other hand, SiriusPoint, Aspen, and Argo produced the highest five-year average combined ratios, and all suffered from weak underwriting results but are taking remediation actions to improve their performance.

  • SiriusPoint is in the process of de-risking its portfolio by shifting to primary insurance.
  • Aspen has been refocusing on its most profitable business lines and reduced its expense base over the past few years. It is also reducing its natural catastrophe exposure.
  • Argo has taken underwriting and strategic actions to address the underperformance in its international business and has materially reduced its severity risk appetite.

Table 1

Risk Appetite Shows Its Mark - Historical Underwriting Results
Combined ratio (%) 2021 2020 2019 2018 2017 Five-year average Standard deviation
Fidelis 93.1 83.1 87.7 80.6 86.0 86.1 4.3
Arch 85.3 94.0 80.9 82.2 90.2 86.5 4.9
AEGIS 94.4 94.4 101.6 96.1 99.2 97.2 2.8
Hiscox 93.2 114.5 106.8 94.4 98.8 101.5 8.0
Everest Re 98.5 103.4 95.9 109.2 103.9 102.2 4.6
PartnerRe 93.6 109.0 103.4 104.6 106.1 103.3 5.2
Lancashire 108.9 110.4 83.2 94.1 124.8 104.3 14.4
AXIS 97.0 110.0 103.0 101.1 113.7 105.0 6.1
RenaissanceRe 102.7 104.4 95.0 89.0 138.5 105.9 17.2
Argo 107.9 106.6 111.3 97.9 107.2 106.2 4.4
Aspen 104.8 107.5 114.0 110.0 125.6 112.4 7.3
SiriusPoint* 117.6 118.1 114.3 104.9 115.3 114.0 4.8
Bermudian industry 97.0 104.6 99.0 99.5 107.5 101.5 3.9
*Sirius International Insurance Group Ltd. merged with Third Point Reinsurance Ltd. on Feb. 26, 2021. 2021 reflects SiriusPoint financials, while 2020 and prior-year data reflects Sirius International.

Table 2

Significant Natural Catastrophe Loss Impact On Underwriting
Net impact of natural catastrophe losses on combined ratio (percentage points) 2021 2020 2019 2018 2017 Five-year average Standard deviation
AEGIS 3.8 1.5 1.5 3.3 7.7 3.5 2.3
Argo 4.2 6.0 1.9 3.1 9.2 4.9 2.5
Arch 8.3 6.4 2.2 4.2 8.9 6.0 2.5
Hiscox 7.7 1.7 6.3 6.4 9.3 6.3 2.5
PartnerRe 9.1 11.4 5.9 9.0 14.0 9.9 2.7
AXIS 9.4 9.5 7.3 9.0 20.1 11.1 4.6
Aspen 13.5 7.1 6.5 12.4 24.4 12.8 6.4
Everest Re 10.9 4.9 7.4 24.1 24.8 14.4 8.4
SiriusPoint* 19.0 5.8 13.5 15.4 25.0 15.7 6.3
Fidelis 25.6 17.2 15.9 19.1 24.2 20.4 3.8
RenaissanceRe 28.5 17.2 12.9 10.0 59.4 25.6 18.0
Lancashire 34.1 14.1 12.4 25.4 42.5 25.7 11.5
Bermudian industry 12.6 7.9 6.7 11.7 19.9 11.8 4.6
*Sirius International Insurance Group Ltd. merged with Third Point Reinsurance Ltd. on Feb. 26, 2021. 2021 reflects SiriusPoint financials, while 2020 and prior-year data reflects Sirius International.

Meanwhile, Lancashire, RenaissanceRe, and Fidelis continue to assume substantial property catastrophe risk exposure relative to their balance sheets. Hence, in an active catastrophe year, we expect these three companies to display meaningful catastrophe losses relative to their peers, as evidenced by five-year average natural catastrophe impacts of 25.7 combined ratio points, 25.6 points, and 20.4 points, respectively, which are the highest levels among Bermudian re/insurers. Fidelis and Lancashire have nearly 50/50 splits between reinsurance and insurance premium writings, while 88% of RenaissanceRe's writing is reinsurance. All three companies are managing their volatility risks and diversifying their businesses into lower-severity lines. However, we do not expect meaningful shifts in their risk appetites, and we believe severity risks will remain a prominent strategy of their respective portfolios.

In the first half of 2022, underwriting results significantly improved. Bermudian re/insurers reported a combined ratio in the mid-80s, compared with the low 90s in the prior-year period. The improvement mostly stemmed from better accident-year loss ratios, supported by favorable re/insurance pricing. However, we are still in the midst of the Atlantic hurricane season, which typically shapes the year's performance.

The picture is slightly better when it comes to return on equity (ROE). Bermudian re/insurers generated a five-year average ROE of 5.2%, mainly driven by investment returns. However, in the six months ended June 30, 2022, the ROE turned negative because of investment volatility, despite improved underwriting results.

Table 3

ROE Performance Driven By Investment Returns
Return on equity (%) 2021 2020 2019 2018 2017 Five-year average Standard deviation
Arch 16.2 11.4 15.6 8.1 7.1 11.7 3.7
AEGIS 10.6 8.3 10.3 5.2 7.7 8.5 2.0
Everest Re 13.9 5.5 11.9 1.1 5.7 7.6 4.7
PartnerRe 9.7 3.5 13.6 (1.3) 3.9 5.9 5.2
Fidelis 3.4 9.8 6.3 6.3 2.4 5.6 2.6
RenaissanceRe (1.0) 9.9 11.8 4.2 (6.0) 3.8 6.7
AXIS 11.6 (2.2) 6.1 0.8 (6.4) 2.0 6.3
Lancashire (4.2) 0.3 10.5 3.5 (6.1) 0.8 5.9
Hiscox 7.7 (12.9) 2.2 5.1 1.5 0.7 7.2
Argo 0.3 (3.0) (0.8) 3.2 2.8 0.5 2.3
Aspen 1.1 (2.0) (9.0) (5.2) (8.1) (4.7) 3.8
SiriusPoint* 2.7 (18.1) (2.5) (0.9) (7.5) (5.2) 7.2
Bermudian industry 8.6 4.6 9.6 2.6 0.7 5.2 3.4
*Sirius International Insurance Group Ltd. merged with Third Point Reinsurance Ltd. on Feb. 26, 2021. 2021 reflects SiriusPoint financials, while 2020 and prior-year data reflects Sirius International.

Table 4

Lower Favorable Reserve Developments In Recent Years
(Favorable)/unfavorable reserve development (%) 2021 2020 2019 2018 2017 Five-year average Standard deviation
Lancashire (12.4) (10.9) (20.9) (30.7) (15.2) (18.0) 7.2
Fidelis (0.8) (5.3) (3.1) (17.1) (10.7) (7.4) 5.9
Hiscox (5.1) (1.2) (1.0) (12.7) (13.4) (6.7) 5.4
RenaissanceRe (4.8) (4.7) (0.8) (13.7) (2.4) (5.3) 4.5
Arch (4.7) (2.5) (3.6) (5.8) (6.2) (4.6) 1.4
PartnerRe (3.6) 1.4 (1.1) (5.8) (11.1) (4.0) 4.3
AEGIS (1.0) (5.2) 2.1 0.4 (12.4) (3.2) 5.2
AXIS (0.7) (0.4) (1.7) (4.2) (4.8) (2.4) 1.8
Aspen (1.9) (0.0) 2.6 (5.0) (4.6) (1.8) 2.8
Everest Re (0.1) 4.6 (0.9) 5.6 (4.9) 0.9 3.8
SiriusPoint* (2.5) 1.1 7.2 (0.6) (0.1) 1.0 3.3
Argo 7.2 0.4 8.0 (1.0) (0.5) 2.8 3.9
Bermudian industry (2.3) (0.1) (0.6) (3.9) (6.5) (2.7) 2.3
*Sirius International Insurance Group Ltd. merged with Third Point Reinsurance Ltd. on Feb. 26, 2021. 2021 reflects SiriusPoint financials, while 2020 and prior-year data reflects Sirius International.

Capitalization Remains Robust Amid Opportune Capital Raises

As with global reinsurance peers, capitalization remains a ratings strength for Bermudian re/insurers. Per our risk-based capital adequacy model, Bermudian re/insurers' aggregate capitalization was redundant at the 'AA' confidence level at year-end 2021.

While outsize natural catastrophe and COVID-19 losses have impaired operating results in the past five years, capital raises and investment gains through 2021 have supported the industry's strong capitalization. Bermudian re/insurers took advantage of low interest rates in 2020-2021 and bolstered capital--raising a total of $8.7 billion--prefunded some of their upcoming debt maturities, and used capital solutions such as loss portfolio transfers and adverse development covers to support their capital adequacy.

They deployed some of this capital for underwriting purposes, leveraging hardened rates. While rising bond yields and capital market volatility in 2022 will erode some of their capital buffer, we believe prospective strong underwriting earnings, along with increasing investment income, will help offset this. In addition, the increase in reserve discounting (and thereby a reduction in liabilities) will help offset the impact from the unrealized losses on capital adequacy.

Between 2017 and 2020, share buybacks were not material for Bermudian re/insurers; they repurchased 0.5% to 1.2% of their shareholders' equity. However, the total shares repurchased by these companies jumped to 4.5% of their aggregate shareholders' equity in 2021, led by Arch ($1.23 billion) and RenaissanceRe ($1.03 billion). Both companies continued to lead in share buybacks in the first half of 2022, with $485 million and $141 million, respectively.

With Bermudian re/insurers raising capital in the past two years, the industry's financial leverage increased marginally over this period, to an aggregate of around 24% at year-end 2021. Financial leverage in the mid-20s is typical for Bermudian re/insurers. Nonetheless, we see wide variation among individual companies. AEGIS and Aspen are the two extremes in the Bermuda market: On one hand, AEGIS has a virtually debt-free balance sheet, and its financial leverage of just 1.4% reflects S&P Global Ratings' adjustment including operating leases. On the other hand, we calculate 52.8% financial leverage for Aspen at year-end 2021, following the 2020 payment-in-kind note issuance by Highlands, which we incorporate in our view of the group's creditworthiness.

Chart 4


Investment Portfolios Are Weathering Market Volatility

In general, Bermudian re/insurers' investment portfolios are well diversified and conservatively managed, with 70.4% of total invested assets at year-end 2021 allocated to investment-grade fixed-income securities, 8.0% to cash and cash equivalents, and 21.6% to risky assets. In light of low interest rates in 2020 and 2021, Bermudians increased their allocation to 'BBB' rated corporate bonds and alternative investments in search for yield. On one end of the spectrum, Aspen, Fidelis, and Hiscox have conservative investment strategies, while on the other end, AEGIS, PartnerRe, and Arch are more aggressive.

Chart 5


In the six months ended June 30, 2022, unrealized losses affected Bermudian shareholders' equity, which dropped by about 10% relative to year-end 2021. Given a significant proportion of investments are in fixed-income securities with a 2.5-year average duration (varying from 1.5 years to four years), we expect Bermudian re/insurers to report large unrealized losses in 2022. However, we believe these re/insurers' adequate liquidity and positive operating cash flow will help them to hold these investments until maturity, thereby offsetting most of the unrealized losses. In addition, rising interest rates will materially increase reinvestment yields, and Bermudian re/insurers with lower fixed-income portfolio durations and/or higher cash balances will benefit more than their peers.

Chart 6


Chart 7


Looking Ahead

Bermuda will remain a prominent global reinsurance hub, expanding its reach into growing lines of business such as mortgage and cyber reinsurance. The performance of the past five years has been lackluster, but expected hardening reinsurance rates and new underwriting opportunities could be the lifeline needed for Bermudian re/insurers to regain their footing and begin to earn their cost of capital once again.

We expect capitalization to remain a strength for these companies. While rising interest rates and ensuing unrealized investment losses will likely erode capital buffers, they will also bolster investment income. In addition, we expect improving reinsurance pricing will support stronger underwriting earnings, bolstering the industry's capitalization. Despite uncertainty and seemingly nonstop headwinds, we believe Bermudian re/insurers will continue to adapt and hunt for market opportunities.

Table 5

Bermudian Re/insurers – Rating Score Snapshot
Rank Company Holdco ICR* Op co FSR§ Outlook Anchor Business risk profile Competitive position Financial risk profile Capital and earnings Risk exposure Funding structure Governance Liquidity CRA§

Arch Capital Group Ltd.

A- A+ Stable a+ Strong Strong Very Strong Very Strong Moderately Low Neutral Neutral Exceptional 0

AXIS Capital Holdings Ltd.

A- A+ Stable a+ Strong Strong Very Strong Excellent Moderately High Neutral Neutral Adequate 0

Everest Re Group Ltd.

A- A+ Stable a+ Very Strong Very Strong Satisfactory Very Strong High Neutral Neutral Adequate 0

PartnerRe Ltd.

A- A+ Stable a+ Very Strong Very Strong Strong Excellent High Neutral Neutral Adequate 0

RenaissanceRe Holdings Ltd.

A- A+ Stable a+ Very Strong Very Strong Strong Excellent High Neutral Neutral Adequate 0

Hiscox Insurance Co. Ltd.

BBB+ A Stable a- Strong Strong Satisfactory Satisfactory Moderately Low Neutral Neutral Exceptional +1

Associated Electric & Gas Insurance Services Ltd.

NR A- Positive a- Strong Strong Satisfactory Strong Moderately High Neutral Neutral Exceptional 0

Lancashire Holdings Ltd.

BBB A- Stable a- Strong Strong Strong Excellent High Neutral Neutral Adequate 0

Fidelis Insurance Holdings Ltd.

BBB A- Stable a- Satisfactory Satisfactory Strong Excellent High Neutral Neutral Adequate 0

Aspen Insurance Holdings Ltd.

BBB A- Stable a- Strong Strong Satisfactory Excellent High Moderately Negative Neutral Adequate 0

Argo Group International Holdings Ltd.

BBB- A- Negative a- Strong Strong Strong Very Strong Moderately High Neutral Neutral Adequate 0

SiriusPoint Ltd.

BBB A- CW Negative a- Strong Strong Satisfactory Very Strong High  Neutral Neutral Adequate 0
*Issuer credit rating on the holding company. §Financial strength rating on core operating subsidiaries. CRA--Comparable ratings analysis. IICRA--Insurance Industry and Country Risk Assessment (intermediate for all 12 Bermudians). NR--Not rated. S&P Global Ratings' ratings are as of Aug. 23, 2022.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Taoufik Gharib, New York + 1 (212) 438 7253;
Michael Zimmerman, Centennial + 303-721-4575;
Secondary Contact:Saurabh B Khasnis, Centennial + 1 (303) 721 4554;

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