The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian property and casualty insurer yesterday revealed it had beaten its own 2015 profit expectations by 7.34 per cent, even though its bottom line declined by almost $700,000 year-over-year.

Tom Duff, Insurance Company of the Bahamas (ICB) general manager, told Tribune Business that the underwriter’s financial performance - and that of its competitors - had been hit by the “underperforming economy’s” impact on premium income.

“We expected 2015 to be a difficult year, because insurance companies’ fortunes are inextricably linked to the health of the economy,” he explained. “And we knew 2015 would be a difficult year for the economy.”

Referring to recently-released gross domestic product (GDP) figures, which showed the Bahamian economy was contracting compared to pre-recession levels, Mr Duff said insurers had been impacted - like everyone else - by Value-Added Tax’s (VAT) introduction and the Baha Mar impasse.

“We just observed a general decrease in business confidence as a result of all these issues,” he added. “We budgeted for that, and [net income] was actually some 7.34 per cent better than anticipated.”

ICB, the carrier through which BISX-listed J. S. Johnson places much of its property and casualty business, suffered an 18.5 per cent total comprehensive income decline in 2015.

Its bottom line dropped from $3.618 million to $2.948 million, but Mr Duff said ICB had anticipated this given that it enjoyed “a very good claims side” experience in 2014.

Correctly forecasting that this would not be repeated, Mr Duff said the company budgeted accordingly, and ended up exceeding its own profit forecasts.

ICB’s net claims incurred grew by more than $500,000, or 35.4 per cent, year-over-year in 2015 to $1.993 million compared to $1.472 million the year-before. Mr Duff said this figure was boosted by the $282,584 net impact from Hurricane Joaquin-related claims.

“It wasn’t a major impact, but it adds to the higher claims costs,” he explained. “The main issue for us, as with all insurance companies, is the top-line, where we all suffered a loss of income to some degree.”

ICB’s gross written premium income fell by 12.2 per cent or more than $6 million year-over-year, dropping from $51.504 million in 2014 to $45.243 million.

However, Mr Duff said the top-line revenue decline would only have been 5.17 per cent if the premium from ‘fronted policies’ was stripped out of ICB’s results.

He explained that such policies were issued by ICB on behalf of other underwriters that were not licensed to operate in the Bahamas, but who provided coverage for clients based in this nation.

ICB typically earns a fee for “issuing the paper”, with all premium income going to the other carrier.

However, Mr Duff said that over the past two years, the Insurance Commission of the Bahamas, the industry regulator, has been requiring local underwriters to include ‘fronted policy premiums’ in their top-lines - even though they do not retain the funds, and the associated risk, on their books.

“If we strip that out, real gross written premium is down by 5.17 per cent,” he added. “It’s kind of what we expected. It’s a function of the underperforming economy.

“Overall, for the bottom line, we weren’t too unhappy with the profitability we made. It’s 7 per cent better than budgeted for. Return on Equity was also 9.864 per cent, which was reasonably satisfactory in the current environment.”

Pointing out that 2016 would mark 20 years of ICB’s operations, Mr Duff said the carrier had grown from an initial $3 million equity capital base to one where its net worth was now more than 10 times’ greater - standing at $30.636 million at year-end 2015.

While well-placed to cope with any catastrophic events or market developments, Mr Duff agreed with his industry counterparts on expectations that 2016 would be “much more of the same” when it cane to the Bahamian economy’s performance.

He added that insurers had “effectively absorbed VAT”, which was introduced on premiums on July 1 last year, thanks to a 7.5-10 per cent drop in property catastrophe costs.

“That has allowed insurance companies to discount premium rates, which has helped to alleviate pressure from VAT,” Mr Duff told Tribune Business.

“What has happened is that the industry has reduced its premiums to compensate for VAT. It has given us the scope to do that.”

The ICB chief, though, questioned how sustainable this was given the uncertainties over “where the industry is in regard to the general insurance cycle”.

Mr Duff explained that the insurance market typically went from high premium rates to low ones, and back again, as profitability for both reinsurers and Bahamas-based carriers changed.

“We’re in a situation where we’re not exactly sure where the industry is in the cycle,” the ICB chief added. “We probably all agree we’re near the bottom of the cycle, and when you’re at the bottom, it clearly does affect your profitability.

“We’ll have to see whether we’ve reached the bottom, or are approaching the bottom, and whether reinsurance rates will soften further or if they have reached the limit of their tolerance.”

While the continued presence of non-traditional players, such as private equity and hedge funds, in the reinsurance market, indicates there is a belief there are profits still to be had, Mr Duff said this position could change rapidly if there was a major catastrophic event or sudden market shock.

Reinsurers effectively determine the premium rates paid by Bahamian consumers for property and casualty coverage, as local underwriters are forced to buy huge amounts to supplement their relatively thin capital bases and share the exposures they take on.

“It’s a case of battening down the hatches, doing what we do well, and if we do that we should be OK,” Mr Duff told Tribune Business.

“ICB will be focusing on customer service, technical underwriting, and working hard to retain the existing book. We wait for better times, for the economy to pick up, and get better returns on investment.”