The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top insurer yesterday warned that the industry was set to face “significant pressure” on profits, with his company unable to “rest on our laurels” despite achieving the sector’s highest possible ratings.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that many Bahamian property and casualty (P&C) underwriters would experience “significant headwinds” in 2015.

He based this forecast on a saturated Bahamian general insurance market, as a result of several new underwriter entrants in recent years, plus premium rate pressure stemming from lower reinsurance rates.

And, while Bahamian consumers might expect to benefit from lower home and auto premium rates, Mr Saunders said this would likely be offset when the sector becomes ‘VAT-able’ from July 1, 2015, onwards.

He added that RoyalStar’s 2014 profits were in line with the company’s internal projections, despite being lower than the prior year’s, with 2015 performance reliant on margins and the growing battle for industry ‘market share’.

Mr Saunders was speaking to Tribune Business after A. M. Best, the leading global ‘rating agency’ for the insurance industry, reaffirmed the company’s top ‘A’ (Excellent) financial strength rating and ‘a’ issuer credit rating.

The outlook for the company was branded ‘stable’, and the RoyalStar managing director told Tribune Business: “I guess it’s a feather in our cap.

“We have to remain consistent, remain with our eye on the ball. There are a lot of challenges in the market, locally and globally, and there is no time to rest on our laurels.”

Mr Saunders explained that property insurance margins were “shrinking” due to increased capacity in the global reinsurance markets, as hedge funds and ‘alternative’ investment vehicles join established reinsurers to battle for clients.

Bahamian property and casualty insurers, which have relatively thin capital bases of their own compared to their developed country counterparts, buy huge quantities of reinsurance annually to help spread/minimise the risks they underwrite.

While this appears to be good news for Bahamian consumers, Mr Saunders said 7.5 per cent VAT’s introduction would likely mean no reduction in home and auto premiums.

“Margins are going to shrink,” he explained. “There’s going to be an impact from VAT, but we really don’t know what.

“There’s going to be some reduction in premium income because the rates are going to decline due to reinsurance costs.

“That’s a saving to the Bahamian people, but they’re going to be hit with VAT, so it’s going to have an offsetting effect.”

Mr Saunders said several Bahamas-based underwriters, especially the newcomers, were “more interested in market share than underwriting profits”, thus heralding a looming battle for territory in a crowded, limited market.

“These are the challenges we have to face,” he told Tribune Business. “Until there’s mergers and acquisitions, and/or reinsurance losses, there’s going to be significant pressure on the bottom line, there’s going to be significant headwinds because reinsurance capacity is available.

“I think all of us are going to be under tremendous pressure to ensure expense ratios and losses are in line. There’s going to be tremendous pressure on the bottom line, tremendous pressure on those people who have to grow to maintain critical mass.”

Mr Saunders said it was the established Bahamas-based property and casualty underwriters, with experience of managing through complete economic cycles, that would likely emerge on top.

While many would seek to grow their business, he explained that RoyalStar would stick with its conservative approach by looking to retain its existing portfolio.

“We don’t cry wolf over spilt milk,” Mr Saunders told Tribune Business, indicating that whether 2015 turned out to be a ‘hurricane year’ would again largely determine its financial performance.

“We’ve done well. We did a little below last year [2013],” he added, “but we’re happy with the result because that’s what we budgeted for.

“2015 is going to be a function of getting the margins we want, and how aggressive are the new companies in the market.”

In analysing RoyalStar’s (RSA) performance, A. M. Best said: “The ratings reflect RSA’s solid risk-adjusted capitalisation, strong operating performance, established presence within the Caribbean market and its resilient underwriting results, which consistently places it among the top of its Caribbean peers.

“RSA continues to record overall profitability, which is derived from the company’s strong underwriting performance and steady levels of investment income. Consistent earnings have enabled RSA to continue to achieve surplus growth and enhance its risk-adjusted capitalisation.”

As for the downside, A. M. Best said: “Partially offsetting these positive rating factors is the geographic concentration of RSA’s operations in the Bahamas, the company’s exposure to weather-related catastrophe events and its dependence on reinsurance to mitigate losses and protect its surplus.

“Additionally, Caribbean insurance markets have become increasingly competitive as domestic and regional insurers have ramped up attempts to gain market share.

“RSA mitigates much of its exposure to frequent and severe weather-related events through prudent risk management planning, which includes minimising coverage written in flood and storm surge areas, along with a comprehensive reinsurance programme placed with a panel of high quality reinsurers.

“While the ratings are stable, factors that may lead to positive rating actions include RSA’s continued strong underwriting results in conjunction with surplus appreciation and improvements in the Bahamas’ macroeconomic environment,” A. M. Best added.

“Factors that may lead to negative rating actions include a material decline in RSA’s risk-adjusted capitalisation or adverse operating results that are exacerbated by a series of large, catastrophic events.”