A.M. Best Special Report: Bermuda Insurers Discover That it is All Relative [Professional Services Close – Up]

With the third quarter past and a few weeks until the end of the year, is shaping up as a solid year for underwriting performance, and A.M. Best Co.'sBermuda market composite is in a position to post a return on equity (ROE) of slightly better than 10 percent.

Hurricane Sandy is still somewhat of a wild card, but even in a worst-case scenario, most Bermuda market companies should be able to hold their footing based on results through the first nine months of the year. Roughly three years ago, for 2009 the composite posted a 16 percent ROE. Three years before that, in 2006, the composite average was a 19 percent ROE - with favorable loss-reserve development of less than 2 percent and no net realized gains. At that time, most market participants and observers knew that 2006 was likely the high-water mark for property and casualty returns. What most didn't know then was that by the end of 2012, the Bermuda market would struggle to post the round number of 10 and would be challenged to post double-digit returns over the intermediate term.

However, it is all relative. Perceptions change, modes of thinking rearrange, and the collective mindset in the corporate and investing world has evolved. Financial crises have a way of doing that. While people may long for the days of 16 percent or 19 percent average ROEs, 10 percent in 2012 appears relatively attractive when compared with an annual yield of roughly 1.6 percent on 10-year U.S. Treasury bonds. Still, the (re)insurance sector has been out of favor for some time with investors. Net investment income, once the stabilizing ballast for (re)insurance companies' earnings, now is more like a dragging anchor holding back earnings. Making it more difficult is the longer-term threat of rising interest rates and inflation.

To watch a video of Robert DeRose discussing this report, please visit ambest.com/v.asp?v=fmderose1212.

A.M. Best Company is an insurance rating and information source.

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