NU Online News Service, Nov. 16, 2:37 p.m. EST
While Bermuda's insurance and reinsurance companies are facing significant pressures, ranging from soft pricing to proposed U.S. legislative initiatives, their performance is positive, according to a report released by Moody's Investors Service.
In its yearly report on Bermuda companies, Moody's noted their strong 2009 profitability during a year that has so far been largely free of catastrophes.
Going forward, however–without a transformational catastrophic event–Moody's said it expects their profit margins to come under increasing pressure as rate decreases affect the top line, investment income drops due to low yields, and the favorable impact of reserve releases diminishes.
The report affirmed that their present ratings already reflect the potential effects of these difficulties, despite the likelihood of weakening credit fundamentals for the sector over the next 12-to-18 months.
The report identifies some of the challenges that are facing these insurers and reinsurers.
Moody's said it is concerned that the lingering after-effects of the credit crisis are likely to continue for some time, including potential inflation that could affect both loss cost trends on claims and the valuation of large fixed income portfolios; continued volatility in capital markets, which cramps financial flexibility; and a likely surge in professional liability claims in the coming years.
"With casualty rates continuing their downward trajectory," said Moody's Vice President James Eck, "rate adequacy in many casualty lines is tenuous at best; in fact, overcapacity, broker market consolidation and budget constraints of buyers suggest the current soft market for casualty risks may continue for some time."
According to the Moody's analysis, Bermuda firms with sizable casualty businesses will be challenged because "these companies remain vulnerable to shifts in loss cost trends, and the existence of sizable reserve releases, which have heretofore bolstered calendar-year underwriting margins, may be coming to an end."
Bermuda insurers and reinsurers may also eventually have to deal with the new legislative initiatives coming out of the U.S. Congress if they become law. The Neal Bill seeks to disallow the deduction for excess non-taxed reinsurance premiums paid by U.S. insurers to foreign-based affiliates.
"With an estimated 85 percent of premiums currently ceded to offshore affiliates likely to be in excess of the limitations prescribed by the proposed legislation," Mr. Eck said, "the effective 'tax' on ceded premiums would make most intercompany reinsurance arrangements between U.S.-based subsidiaries and Bermuda flagship companies uneconomic."
The report is titled "Market Perspective: Bermuda Insurance & Reinsurance."
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