The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading insurer yesterday expressed hope that a 10 per cent year-over-year fall in property and casualty premiums will “soften the blow” from Value-Added Tax (VAT) for Bahamian consumers.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that he still expected “some fallout” for the Bahamian insurance industry due to consumers being unable to afford premiums once the 7.5 per cent VAT levy is added from July 1.

However, he expressed optimism that the property and casualty underwriter would still match last year’s $3.8 million profit performance in 2015, having got its forecasts “spot on”.

“After we did our initial revised budget, we realised the margins were decreasing,” Mr Saunders told Tribune Business of 2014’s forecasts. “We budgeted for $3.9 million, and came in at $3.8 million.”

The RoyalStar chief explained that premium rates, and insurance margins, in the Bahamas were coming under pressure from a “soft” reinsurance market.

Bahamian property and casualty insurers typically buy huge quantities of reinsurance to cover the risks they underwrite, and a major influx of non-traditional investors into that market has created a global capital surplus depressing reinsurance rates.

These developments, in turn, are creating pressure on the Bahamian and other Caribbean insurance markets through lower premium rates and margins - good for consumers, but not for underwriters.

“It’s pressure om reinsurance, and pressure on local markets with new entrants and everybody going after the same non-organic growth,” Mr Saunders said.

This has resulted in pricing ‘softness’ that is preventing RoyalStar from charging a premium that matches the risk associated with some clients, especially in the Cayman Islands.

“Cayman rates have slipped further than the Bahamas’ rates due to capacity,” Mr Saunders told Tribune Business. “In Cayman the rates slipped year-over-year by 20 per cent, and they were down here 10 per cent year-over-year.”

He added that the latter decline might minimise VAT’s impact for Bahamian insurance consumers, who will have to pay the latter’s 7.5 per cent levy on their property and casualty, and health, premiums from July 1.

“It’s difficult to predict,” Mr Saunders conceded of VAT’s potential impact. “We believe that with the pressures on the insurance market there’s going to be some fall-out, because people will not be able to afford the premiums.

“But there has been a 10 per cent decrease in premium rates. That should soften the blow for the Bahamian people.”

Mr Saunders said the insurance industry’s major challenge with VAT implementation was to “get clarification” on how it would impact issues such as outstanding claims still being dealt with from prior years.

He emphasised that the sector wanted such claims “grandfathered in” with no VAT attaching to them, and the legal fees and other costs paid in relation to these potential liabilities.

“We have to work through the cycle. It’s a very, very difficult reinsurance cycle,” Mr Saunders reaffirmed.

“It’s easy to look at indisciplined underwriting, but those who are indisciplined in this market are going to find themselves in big trouble in those years to come as the potential of catastrophe (hurricanes) is not going away. It’s always looming.”

Mr Saunders said RoyalStar and its shareholders currently saw no need to adjust the company’s model, which has always taken a conservative approach to underwriting, making sure premium prices match the underlying risk involved.

“We have always looked at our business model,” he explained. “Do our core values stand up in today’s market? We figure they do. There are acceptable risks out there, and risks out there we are not going to touch.

“Disciplined underwriting is our core value, and we are going to stick with it. We are in this business for the long-term. We are protecting the assets of the Bahamian people. If we have to take reduced profits to protect these assets, we will do that.”

Mr Saunders told Tribune Business that the reinsurance market pressures were ultimately likely to drive consolidation, and mergers and acquisitions, in the Bahamian and Caribbean insurance sectors - especially among brokers and agents.

“I suspect that in two-three years it will spur people who have never talked to each other to be talking, especially in the broker market, as they will feel the pinch more than underwriters,” he said.

“Smaller players will see it is better to combine and merge than be a sole proprietor, especially if the soft cycle lasts for a long time.”

And Mr Saunders added in RoyalStar’s 2014 annual report: “The management team of RSA will take decisive action to control spending as insurance rates continue to decline. We now believe it is prudent to position the company for lower, more volatile premiums for the foreseeable future.

“The fundamentals of the regional insurance market have changed significantly. Therefore we are sure that the same market pressures which are forcing the reinsurers to combine operations will eventually impact our local industry.”

While RoyalStar was “always looking” for growth and acquisition opportunities, both in the Bahamas and wider Caribbean, Mr Saunders said it would only move on those that “make sense”, add value and share a similar business model.

“We are not going to close our eyes to what is going on in the market,” he told Tribune Business. “We are preparing the company for a volatile growth environment but sustainable profitability.

“We will protect our market share no matter what. We have a good set of accounts, a good business and we will protect that business.”

RoyalStar’s $3.8 million profit for 2014, featuring a $2.755 million underwriting profit and $1.044 million in investment returns, was 7.76 per cent below 2013 results.

Its shareholder equity year-end was $44.874 million, and the return on equity (ROE) for ordinary shareholders was 9.08 per cent.

Gross written premiums (GWP) weer down 1.4 per cent at $66.229 million. Yet net written premiums (NWP) after deductions for catastrophe and excess of loss reinsurance costs were $12.634 million, an increase of $453,800 or 3.7 per cent.

Mr Saunders said: “The NWP increase was particularly encouraging in the present business environment.

“Expenses for 2014 totalled $5.478 million, which was an increase of 3.7 per cent over 2013. The increase in expenses was related to the increase of $229,400 in depreciation expense.”