The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

RoyalStar Assurance “won’t be chasing the rainbow” for new business in 2016, with pricing pressures and other market uncertainties driving it to forecast a flat year-over-year performance.

Anton Saunders, the property and casualty underwriter’s managing director, told Tribune Business it was sticking to its conservative philosophy and would not be seeking “pie in the sky” returns from this year.

He revealed that, for the second straight year, RoyalStar was projecting a ‘flat’ bottom line compared to the prior period - a performance it had managed to achieve in 2015.

For the 12 months to end-December 2015, RoyalStar effectively matched its previous year’s performance, generating net income of $3.712 million compared to $3.8 million in 2014.

This was achieved despite a net $500,000 loss produced by Hurricane Joaquin, which generated a gross $30 million in claims - most of which is being covered by RoyalStar’s reinsurance partners.

“Knowing the nature of the market, we projected our results would be right in line with 2013 and 2014, and they were spot on,” Mr Saunders said.

“Joaquin on the gross side, our network partners are projecting $30 million worth of claims. That includes the Club Med resort in San Salvador, Morton Salt on Inagua, and various government entities that we insure. The net to us is $500,000.”

RoyalStar’s Joaquin impact is less than 50 per cent of the $1.2 million impact sustained by Bahamas First, arguably its main competitor in the Bahamian property and casualty insurance market.

Like its rival, RoyalStar has not been immune to the pricing pressures that have driven premium rates down over the past three to four years, squeezing underwriter margins.

The carrier suffered a near-$3 million decline in top-line gross written premium, which fell by 4.3 per cent year-over-year in 2015, from $66.229 million to $63.351 million.

Net written premiums fell by more than $2 million or 11 per cent, dropping from $19.275 million in 2014 to $17.172, with net premiums earned dropping by a similar amount.

Mr Saunders, though, said RoyalStar and the wider industry had been able to offset the consumer impact of Value-Added Tax’s (VAT) July 1 introduction to insurance premiums via rate decreases.

“The good thing about it is that because reinsurance prices have come down, we were able to offer clients at least a 10 per cent decrease in price for 2015. That took care of the impact from VAT for consumers,” the RoyalStar managing director added.

With Bahamian insurers required to buy huge amounts of reinsurance to supplement their relatively thin capital bases, and assume most of the risk they underwrite, Mr Saunders said reinsurance rates were the main determinant of local prices.

The huge amount of excess capacity in the reinsurance market, driven by the entrance of non-traditional players such as private equity firms and hedge funds, is good news for Bahamian consumers since it promises to keep the rates they charge local insurers relatively low.

Mr Saunders said this situation is likely to persist in the near term, with experts predicting that it would take major catastrophic claims losses worth between $40-$70 billion to provoke a major change in rates.

He, however, predicted that the Bahamas was “coming to the end” of the premium reductions enjoyed by consumers for the past three-four years.

“There’s only so much margin we can wipe,” Mr Saunders said. “We’re in the business of making some margin, and after the last three-four years there’s no more room for reductions. The overall reduction in premium prices, I believe, is coming to an end.”

In a bid to boost margins, Mr Saunders explained that RoyalStar reduced the amount of risk it retained on its books from its property insurance portfolio in 2015, while simultaneously increasing its motor insurance exposure.

“With the reinsurance market so soft on the property side, we decided because of the margins and price sensitivity to cede more of that to the reinsurers,” he told Tribune Business.

“On the motor side, we used to take 10 per cent and give that to the reinsurers. We decided in 2015 to bring that back in house, as we have more control over the motor portfolio.”

RoyalStar offset the decline in its net premiums earned with a matching 9.8 per cent fall in total direct expenses, which fell from $11.043 million to $9.959 million year-over-year.

This kept its underwriting performance flat at $7.987 million for 2015, compared to $8.233 million the year before. With operating expenses held relatively flat, RoyalStar also received a boost from a 169.5 per cent year-over-year increase in the unrealised value of its investment portfolio, which jumped to $415,433.

Mr Saunders said there would be little change to RoyalStar’s traditional underwriting approach, with the company forecasting a similar financial performance to 2015 - hurricanes permitting.

“We have always taken the conservative approach that in hard markets we grow and in soft markets we contract,” he told Tribune Business. “We’re all concerned about the clients we have, giving them the best deals possible, and won’t be chasing rainbows for more business.

“We think that because of the climate in the reinsurance market, it is prudent to budget for more of the same in 2015. We’re not looking for pie in the sky, and know that one hurricane could change the forecast overnight.

“We’re just going to hunker down, hope for the best and that our competitors don’t do anything crazy with the rates, and hold on to our position. The pressure is on: No if’s, but’s and maybe’s about it.”