Regulatory Update October - December 2017

Transcription

1 Regulatory Update October - December 2017

2 Table of Contents Preface 1 Quarterly Synopsis 2 Market Analysis and Quarterly Statistics 3 a) Bermuda Money Supply 3 b) Domestic and Foreign 4 Currency Position c) Banking 5 d) Bermuda Stock Exchange (BSX) 8 e) Investment Funds 10 f) Company Authorisations 11 g) Insurance 12 Quarterly Review of the 13 Commercial (Re)insurance Sector Regulatory and Legislative 16 Statistical Index Bermuda Money Supply 3 BD$ Deposit and Loan Profile - 4 Combined Banks and Deposit Companies Foreign Currency Position - 4 Combined Banks and Deposit Companies Banking Sector Assets and Deposits 5 Basel III Ratios 6 Combined Balance Sheet of Bermuda Banks 7 and Deposit Companies (Consolidated) Selected Stock Market Performance Indicators 8 Chart 1. Price Level, indexed (Q1-2005=100) 9 Chart 2. Annualised Return Volatility 9 Chart 3. Dividend Yield 9 (nominal and inflation-adjusted) Chart 4. Ratio Between Trading Volume 9 and Market Capitalisation Investment Funds 10 Companies, Partnerships and 11 Permits Statistics - Applications Approved Insurance Registrations (Q4-2017) 12 Table 1. Select Financial 14 Soundness Indicators (FSIs) Figure 1. Dispersion of Financial 15 and Reserve Leverage Figure 2. Claims Volume and 15 Premium Income (Q Q4-2017) Regulatory Update October - December 2018

3 Preface This bulletin reports on activities at Bermuda Monetary Authority (Authority) and developments impacting the financial sector, as well as the community generally including: regular statistical data covering Bermuda Dollar money supply, Bermuda banks balance sheet analysis, and other financial and company sector information updated for the quarter ended 31st December 2017.* The Regulatory Update is only published in electronic format and can be downloaded as a PDF file on the Authority s website If you wish to receive an notice when the next edition is available, you may sign up to our e-subscription service by clicking the e-alerts button on the homepage of the Authority s website. *Published March

4 Quarterly Synopsis Major economies continued to pick up pace as financial conditions remained buoyant; developed markets such as the US, UK and Europe experienced positive growth going into the last quarter of Bermuda s banking sector continued to maintain sufficient levels of regulatory capital and a positive liquidity position under the Basel III standards. Total assets increased in Q4, following three consecutive quarters of negative growth. Quarterly profits fell, due to higher operating costs paired with lower reported income. Large losses from natural catastrophes in the third quarter continued to impact Bermuda s (re)insurance companies, increasing the combined ratio and negatively affecting profitability. Bank capital levels were down during the quarter. The banking sector s capital position fell in Q4, with the primary capital ratio measured by the Common Equity Tier 1 (CET1) ratio down 94 basis points (bps) to 19.9%. Capital adequacy as measured by the Risk Asset Ratio (RAR) fell from 22.3% to 21.0%. The change in overall regulatory capital levels fell by 5.4% (or $104.7 million) to $1.9 billion during the quarter, while Risk-Weighted Assets (RWAs) increased slightly by $46 million (or 0.5%) reaching a year-end total of $8.8 billion. Banks continued to maintain a cushion of capital on top of their required minimums through the Capital Conservation Buffer (CCB) as well as a buffer for entities deemed to be Domestic Systemically Important Banks (D-SIBs). Banking leverage remained comfortable, with the supplementary leverage ratio falling to 7.8% which is well above the regulatory minimum requirement of 5.0%. The liquidity position of banks improved in the last quarter, due to an increase in aggregate core deposits and lower lending. Total customer deposits held by banks increased by 1.9% (up $354 million) while lending was down by 4.2% (down $372 million) over the same period. The net cumulative effect caused the sector s Loans to Deposits (LtD) ratio to fall from 47.3% to 44.5%. Banks remained compliant with the phased-in Liquidity Coverage Ratio (LCR) of 80% and other regulatory liquidity requirements. The domestic liquidity position experienced a modest increase in Q4, as the LtD ratio rose to 101%. Thus the reliance on foreign currency to supplement any potential funding shortfall for domestic lending remained minimal. The banking sector posted lower profits in Q4. Net profits were down 83.8% when compared to the prior quarter. Net interest income, comprised of 67.8% of total income, was up 2.7% to $144.7 million over the prior quarter. Income sources from other banking activities declined by 32.6% (or $19.7 million); while nonbanking sources fell by 11.4% ($3.4 million) causing total income levels to fall by 8.1% (or $18.9 million) to $213.4 million. Total operating and non-operating expenses grew by 162.5% to $186.9 million relative to the prior quarter. Banks reported net income of $26.5 million in the fourth quarter, down 56.0% from a year earlier. Banking investment returns were stable, as annualised Return on Assets (RoA) was unchanged at 0.4%; while annualised Return on Equity (RoE) declined to 4.0%. Domestic money supply fell by 2.4%, driven by the quarterly decline in BD$ customer deposits. For the quarter, local customer deposits declined by 2.2% (down $77.1 million) to $3.4 billion, and reached its lowest level for Notes and coins in circulation were higher, due in part to an active seasonal quarter. The Bermuda Stock Exchange (BSX) (excluding funds) increased its total market capitalisation by $37.2 billion to $432.1 billion for the end of Q4. The overall performance of the BSX was positive, driven by the increase in market capitalisation due primarily to changes in the trading values of several large, international companies. Total trading volume in Q4 was 355,420 shares with a corresponding market value of $2.9 million. The BSX also recorded positive returns of 2.9% in Q4. At the end of Q4-2017, the market capitalisation of Insurance-Linked Securities (ILS) on the BSX stood at $24.2 billion, representing 77.6% of the global stock of outstanding ILS deals. Bermuda s (re)insurance sector reported higher losses during the quarter compared to a year ago. Bermuda s (re)insurance market continued to absorb losses associated with an active hurricane season during the prior quarter, resulting in the combined ratio increasing to 101.4% compared to 93.6% for the prior year quarter. Profits were positive, as Return on Investments (RoI) increased to 0.6%, while Return on Equity (RoE) stood at 0.5%. Global economic activity remained resilient during the last quarter of the year. Eurozone Gross Domestic Product (GDP) grew 2.7% in the fourth quarter while inflation continued to remain benign. The UK economy performed ahead of forecasts at 0.5% in the final three months of the year, backed by a dominant services sector. US GDP expanded at a rate of 2.6% in the last quarter of 2017, missing economists expectations for 3% growth the slowdown reflected a drag from inventories and trade. The International Monetary Fund (IMF) estimates that annual global output was estimated to have grown by 3.7% in 2017, half a percentage faster than The pickup in growth was broad based upside surprises were experienced in Europe and Asia. Year-over-year growth in the Eurozone was estimated to be 2.5%, the fastest growth rate since 3.0% in China s economy grew 6.9% in 2017, topping the government s target of around 6.5% annual growth - supported by resilient external demand and robust household consumption. Regulatory Update October - December

5 Market Analysis and Quarterly Statistics A) BERMUDA MONEY SUPPLY Domestic money supply fell for a second consecutive quarter to $3.5 billion for the three months ended 31st December The quarterly decline in money supply was mainly attributed to higher outflows of BD$ customer deposits, which fell by 2.2% (or $77.1 million) to $3.4 billion; while the stock of notes and coins in circulation was higher, rising by 6.2% to $141 million. Bermuda Money Supply (BD$ mln) Q Q Q Q Q Q Notes & Coins in Circulation* Deposit Liabilities 3,441 3,518 3,532 3,499 3,448 3,450 Total 3,582 3,651 3,670 3,630 3,586 3,578 Less: Cash at Banks and Deposit Companies BD$ Money Supply 3,538 3,614 3,630 3,592 3,540 3,539 % Change on Previous Period -2.10% -0.44% 1.06% 1.47% 0.01% -0.25% % Change Year-on-Year -0.04% 2.11% 2.30% 2.52% 2.66% 3.53% Totals may not add due to rounding. * This table denotes the supply of Bermuda Dollars only. United States currency is also in circulation in Bermuda but the amount has not been quantified. 3

6 B) DOMESTIC AND FOREIGN CURRENCY POSITION BD$ Deposit and Loan Profile Combined Banks and Deposit Companies (Unconsolidated) (BD$ mln) Q Q Q Q Q Q Deposit Liabilities 3,441 3,518 3,532 3,499 3,448 3,450 Less: Loans, Advances and Mortgages (3,578) (3,608) (3,641) (3,688) (3,772) (3,812) Surplus/(deficit) Deposits (138) (90) (109) (189) (324) (362) Percentage of Deposit Liabilities Loaned 104.0% 102.5% 103.1% 105.4% 109.4% 110.5% Totals may not add due to rounding. Bermuda s liquidity position declined in Q4, however, the local economy continued to be well-positioned compared to a year ago. The BD$ LtD ratio increased to 104.0% during the quarter, with local deposit liabilities (down 2.2% or $77.1 million) falling at a faster rate relative to domestic loans and advances (down 1.0% or $29.1 million) halting the decline in the net deficit balance between domestic lending and BD$ customer deposits held by banks. Foreign Currency Position - Combined Banks and Deposit Companies (Consolidated) (BD$ mln) Q Q Q Q Q Q Total Foreign Currency Assets 17,855 17,441 17,887 18,346 18,582 18,242 Less: Other Assets Less: Foreign Currency Loans to Residents 1,118 1, ,115 Net Foreign Currency Assets 16,492 16,160 16,635 17,159 17,395 16,814 Foreign Currency Liabilities 16,031 15,523 16,054 16,691 17,017 16,490 Add: BD$ Deposits of Non-Residents Net Foreign Currency Liabilities 16,201 15,708 16,226 16,862 17,179 16,671 Net Foreign Currency Position Totals may not add due to rounding. Q and Q Net Foreign Currency Liabilities amended due to calculation error. The foreign currency surplus position was down 36% to $291 million in Q4. The decline in the FX current account balance was a result of higher inflows of foreign currency liabilities (up 3.2% or $507.9 million) compared to an increase in net foreign currency assets (up 2.1% or $331.6 million). The overall surplus balance continues to reflect a sound FX funding position. Regulatory Update October - December

7 C) BANKING Banking Sector Assets and Deposits (BD$ mln) Q Q Q Q Q Q Total Assets 21,769 21,392 21,912 22,454 22,713 22,414 Quarterly Change (%) 1.8% -2.4% -2.4% -1.1% 1.3% -6.2% Total Deposits 19,153 18,802 19,233 19,947 20,216 19,501 Quarterly Change (%) 1.9% -2.2% -3.6% -1.3% 3.7% -7.4% Total assets for the sector expanded in Q4 following three quarters of negative growth, but were 4.2% lower year-on-year. The quarterly rise in total assets was primarily attributed to an increase in interbank deposits, which rose by 35.7% to $3.2 billion, however, all remaining asset categories fell over the same period. Total customer deposits grew in Q4, and rose 2.2% to $19.2 billion. The majority of the growth was attributed to the increase in savings deposits (up 5.4% or $330.3 million) and time deposits (up 8.6% or $237.6 million); though some of the overall growth was negated by a decline in demand deposits (down 2.2% or $217.6 million). Asset funding sources are primarily funded by FX customer deposits, comprising of 82.1% of all customer deposits held by banks. 5

8 Basel III Ratios The sector s capital adequacy as measured by the Risk-Asset Ratio (RAR) was down, falling by 1.3% to 21.0% in Q4, but was 0.6 percentage points higher than amounts reported a year ago. The CET 1 ratio fell to 19.9%, though was 1.3 percentage points higher compared to a year earlier. 25% 20% 20.4% 18.6% 20.9% 19.3% 21.4% 19.8% 22.3% 20.8% 21.0% 19.9% 15% 10% 7.2% 7.4% 7.7% 8.4% 7.8% 5% 0% Q Q Q Q Q BASEL III - Risk asset ratio BASEL III - CET 1 ratio BASEL III - Leverage ratio Period RAR RAR Change CET I CET 1 Change 2017 Q4 21.0% (1.3%) 19.9% 0.9% 2017 Q3 22.3% 0.9% 20.8% 1.0% 2017 Q2 21.4% 0.5% 19.8% 0.5% 2017 Q1 20.9% 0.5% 19.3% 0.7% 2016 Q4 20.4% (1.6%) 18.6% 0.4% Regulatory Update October - December

9 Combined Balance Sheet Of Bermuda Banks And Deposit Companies (Consolidated) Q Q Q (BD$ mln) Total BD$ US$ Other Total BD$ US$ Other* Total BD$ US$ Other Assets Cash Deposits 3, ,995 1,236 2, ,293 1,079 2, ,369 1,514 Investments 9, ,860 1,424 9, ,766 1,604 9, ,797 1,549 Loans & Advances 8,514 3,464 3,317 1,733 8,886 3,499 3,515 1,871 8,890 3,554 3,321 2,015 Premises & Equipment Other Assets Total Assets 21,769 3,914 13,372 4,483 21,392 3,951 12,770 4,671 21,912 4,025 12,715 5,171 Liabilities Demand Deposits 9,696 1,092 7,344 1,260 9,913 1,144 7,494 1,275 9,700 1,137 7,242 1,321 Savings 6,444 1,572 3,045 1,828 6,114 1,586 2,772 1,755 6,639 1,599 3,045 1,995 Time Deposits 3, , , , , , Sub Total - Deposits 19,153 3,429 11,749 3,975 18,802 3,507 11,457 3,839 19,233 3,519 11,627 4,087 Other Liabilities Sub Total - Liabilities 19,787 3,756 11,954 4,078 19,286 3,763 11,554 3,970 19,880 3,826 11,833 4,221 Equity & Subordinated Debt 1,982 1, ,106 1, ,032 1, Total Liabilities and Capital 21,769 5,664 12,048 4,056 21,392 5,757 11,693 3,942 21,912 5,724 11,991 4,197 Q Q Q (BD$ mln) Total BD$ US$ Other Total BD$ US$ Other Total BD$ US$ Other Assets Cash Deposits 4, ,645 1,449 3, ,489 1,058 3, ,875 1,529 Investments 8, ,578 1,350 9, ,459 1,101 8, ,845 1,103 Loans & Advances 8,629 3,620 3,015 1,995 8,773 3,656 2,973 2,144 9,222 3,694 3,420 2,108 Premises & Equipment Other Assets Total Assets 22,454 4,108 13,465 4,882 22,713 4,132 14,172 4,410 22,414 4,172 13,403 4,839 Liabilities Demand Deposits 10,249 1,110 7,891 1,248 10,607 1,081 8,358 1,167 10,320 1,096 7,949 1,276 Savings 6,895 1,597 3,354 1,943 6,613 1,567 3,257 1,789 6,329 1,539 2,819 1,971 Time Deposits 2, , , , , , Sub Total - Deposits 19,947 3,486 12,559 3,903 20,216 3,433 13,121 3,661 19,501 3,428 12,095 3,977 Other Liabilities Sub Total - Liabilities 20,468 3,777 12,676 4,015 20,779 3,761 13,239 3,778 20,201 3,711 12,386 4,104 Equity & Subordinated Debt 1,986 1, ,935 1, ,213 1, Total Liabilities and Capital 22,454 5,641 12,821 3,992 22,713 5,586 13,371 3,756 22,414 5,542 12,787 4,085 Premises and Equipment and Other Assets have been restated to reclassify equipment and other fixed assets that were previously recorded under Other Assets. 7

10 D) BERMUDA STOCK EXCHANGE (BSX) The total market capitalisation of the BSX (excluding funds) was $432.1 billion at the end of Q4-2017, up by $37.2 billion from $394.9 billion recorded in Q This increase was primarily due to changes in the trading values of several large, international companies. Total trading volume in Q4 was 355,420 shares (compared to 416,382 shares in Q and 1,321,206 shares in Q4-2016), with a corresponding market value of $2.9 million (a decrease of 62.4% from $7.5 million in Q and a decrease of 69.8% from $9.4 million in Q4-2016). The valuation of domestic firms constituted 0.62% of the total market at end-q4-2017, with domestic market capitalisation amounting to $2.7 billion, down by $17.3 million from the previous quarter. At the end of Q4-2017, the market capitalisation of Insurance-Linked Securities (ILS) on the BSX stood at $24.2 billion, representing 77.6% of the global stock of outstanding ILS deals. At quarter-end, a total of 99 ILS deals (comprising 168 tranches) were listed on the BSX, with an aggregate nominal value of approximately $24.2 billion. Global market capitalisation of ILS rose to $31.2 billion, as $1.5 billion in new issuances outpaced $510 million in maturing bonds during the quarter. The overall performance of the BSX was positive during Q The table below provides a summary of selected indicators of stock market performance over the last six quarters (Q to Q4-2017), comparing the recent development of the BSX to that of the Dow Jones Industrial Index (DJII) as the global equity market benchmark (which proxies the impact of US capital market Selected Stock Market Performance Indicators * In % unless indicated otherwise Q Q Q Q Q Q Price Return 1/ BSX BSX - Insurance DJII Return Volatility Annualised Standard Deviation 2/ BSX BSX - Insurance DJII Normalised Squared Returns (in standard deviations) 3/ BSX BSX - Insurance DJII Trading Volume/Market Capitalisation 4/ BSX DJII Real Dividend Yield 5/ BSX DJII Sources: Bloomberg, BSX and the Authority s staff calculations. Notes: * The figures for the BSX and the BSX-Insurance indices cover domestic listings only. 1/ Quarterly average of month-on-month change of last prices. 2/ Quarterly average of annualised standard deviation of month-on-month change of last prices. 3/ Quarterly average of squared month-on-month changes of last prices, normalised over a rolling window of four years (16 quarters); a positive (negative) value indicates above (below) average performance conditional on market volatility. 4/ Cumulative quarterly trading volume relative to the average market capitalisation during the same time period. 5/ Quarterly average of month-on-month dividend yield adjusted for headline inflation in Bermuda and the United States, respectively. Regulatory Update October - December

11 performance on Bermuda s international business sector). Over the last quarter, the BSX index recorded a positive return of 2.89% (up from 0.44% in Q3-2017) amid lower annualised volatility of 3.01% (down from 4.57% in Q3-2017), while trading volume continued to decline, falling to 0.21% of market capitalisation. Despite an improved risk-return trade-off, the BSX index underperformed global standards, relative to the DJII, which recorded a quarterly return of 3.45% (up from 1.32% in Q3-2017) amid lower annualised return volatility of 1.47% (down from 1.72% in Q3-2017). The risk-return trade-off was less favourable for the insurance sub-index (BSX- Insurance), as the total return performance was 0.28% during the quarter (up from negative 1.51% in Q3-2017), while volatility rose to 2.26% (down from 1.56% in Q3-2017). The following charts show the BSX quarterly closing price level (indexed to Q as base year), the annualised return volatility, the dividend yield (in both nominal and real terms), and the trading volume relative to market capitalisation up to Q (Charts 1-4). While capital gains of the BSX have turned negative since the beginning of 2009, dividend pay-outs remain high and were above international markets for an eighth consecutive quarter. The aggregate dividend yield of stocks listed on the BSX over the last quarter stood at 7.10% (up from 6.25% in Q3-2017) after adjusting for headline inflation, which was significantly higher than comparable yields generated by stocks included in the DJII (0.08%). At the same time, the annualised return volatility (as a measure of risk) was higher than that of the DJII (and above the long-term average over the last four years, as indicated by the positive value of normalised squared returns in the table below). The total trading volume and corresponding market value data for the period Q Q provided in previous editions of the Regulatory Update, were on a cumulative YTD basis, and not on a quarterly basis, as reported in error. Chart 1. Price Level, indexed (Q1-2005=100) Chart 2. Annualised Return Volatility Chart 3. Dividend Yield (nominal and inflation-adjusted) Chart 4. Ratio Between Trading Volume and Market Capitalisation 9

12 E) INVESTMENT FUNDS Investment Fund Statistics (BD$ bln) Q Q Q Q Q Q Administered Funds Class A Exempt Funds Class B Exempt Funds Exempted Funds Institutional Funds Standard Funds Total Number of Funds Net Asset Value (NAV) $ $ $ $ $ $ The period Q to Q saw a decrease in the total number of funds of 3.04%, or 17 funds. The decrease had a minimal impact on the overall value of the portfolio NAV decreased 0.59%, or $96 million. A number of funds reported increased subscriptions during the last quarter and positive fund performance. N.B. - The Authority has aligned its Investment Fund Statistics with the following definitions of fund license classes per the Investment Funds Act 2006 (the Act): Administered Funds must be licensed under Part III of the Act and participants are required to invest a minimum amount of $50,000; or the fund must be listed on a Stock Exchange recognised by the Authority for the purpose of Section 11 of the Act. Class A Exempt Funds: A fund is automatically registered as a Class A Exempt fund after self-certifying that the following requirements of subsection 6A(2) of the Act have been met: the fund is open to qualified participants, the operator of the fund has appointed an investment manager for the fund that is either: licensed in Bermuda; authorised or licensed by a foreign regulator recognised by the Authority; or for the purposes of the Act, is carrying on business in or from Bermuda, or in a jurisdiction recognised by the Authority, being a person who: has gross assets under management of an amount that is not less than $100 million; or is a member of an investment management group that has consolidated gross assets under management of an amount that is not less than $100 million. Class B Exempt Funds are open to qualified participants. The fund can apply to be exempted from the requirement for authorisation where the qualification requirements of subsection 7(2) of the Act have been met. Exempted Funds: Section 9 of the Act pertaining to exempt funds was repealed due to the introduction of two new exempt funds classifications i.e., Class A and Class B above. Therefore, exempted funds are currently in the process of being reclassified. Institutional Funds are targeted at institutional/sophisticated investors and are restricted to qualified participants investing at least $100,000. They are required to have an officer, trustee, or resident representative in Bermuda, being a person who has access to the books and records of the fund. Standard Funds do not fit within any other class of fund. Such funds are not restricted to sophisticated investors and may include a more significant retail element among their investors. Consequently they are subject to more comprehensive and regulation and supervision. Regulatory Update October - December

13 F) COMPANY AUTHORISATIONS Companies, Partnerships and Permits Statistics - Applications Approved Q Q Q Q Q Q Companies* Exempted Partnerships (partnerships established in Bermuda to carry on business in or from within Bermuda) Overseas Partnerships (overseas partnerships applying for permits to carry on business in or from within Bermuda) Overseas Permit Companies (overseas companies applying for permits to carry on business in or from within Bermuda) Total Applications Approved Note: Companies includes Continuations, Exempted, Exempted Limited by Guarantee, Local, Local 60/40, Local Limited by Guarantee and LLCs. 11

14 G) INSURANCE Insurance Registrations (Q4-2017) During the fourth quarter of 2017, the Authority registered 25 insurers and nine intermediaries. This compares to 16 insurers and five intermediaries for the same period last year. Name Date Type Registrations in October 2017 Riverpoint, Ltd. 2-Oct-17 1 Beecher Carlson Bermuda, Ltd. 15-Oct-17 Broker Superior Risk Solutions (SAC) Ltd. 16-Oct-17 3 F&G Re Ltd 19-Oct-17 C SP Reinsurance Company Limited 25-Oct-17 1 Registrations in November 2017 Bernina Re Ltd. 8-Nov-17 3A Hoplon III Insurance Ltd. 10-Nov-17 SPI Thopas Re Ltd. 10-Nov-17 SPI Red Life Reinsurance Limited 10-Nov-17 1 Alize Ltd. 17-Nov-17 Agent Shoreline Ltd. 24-Nov-17 Agent Shoreline Ltd. 24-Nov-17 Broker Ascot Reinsurance Company Limited 20-Nov-17 3B ILS Property & Casualty Re II Limited 28-Nov-17 3B Brit Reinsurance (Bermuda) Limited 28-Nov-17 3B Registrations in September 2017 Securis Re IX Ltd. 1-Dec-17 SPI Securis Re VIII Ltd. 1-Dec-17 SPI Silvestris Re Ltd. 1-Dec-17 SPI Tailwind Re Ltd. 6-Dec-17 SPI Canopius ILS Ltd. 8-Dec-17 Agent Sussex Re Limited 12-Dec-17 SPI Sussex Capital Management Limited 12-Dec-17 Agent Viribus Re Ltd. 14-Dec-17 SPI Blue Lotus Re Ltd. 15-Dec-17 SPI Langhorne Reinsurance (Bermuda) Ltd 15-Dec-17 E Lutece Re Ltd. 18-Dec-17 SPI Lutece Investment Management Ltd. 18-Dec-17 Agent New Ocean Capital Management Limited 19-Dec-17 Agent New Ocean Capital Management Limited 19-Dec-17 Manager Armour Re Ltd. 20-Dec-17 3B Monarch Insurance Ltd. 21-Dec-17 1 Xpedition Re Limited 22-Dec-17 3A Excelsa Re Ltd. 22-Dec-17 SPI XXIII Capital International Insurance Limited 27-Dec-17 1 Total Registrations Insurers: 25 Intermediaries: 9 Descriptions of the various classes of insurer can be found in the Explanatory Notes section of this publication on page 18. Regulatory Update October - December

15 Quarterly Review of the Commercial (Re)insurance Sector Bermuda (Re)insurance Groups (as of end Q4-2017) The following section provides the main findings from a review of quarterly public US GAAP filings of (re)insurers that fall within the group wide supervision by the BMA (Bermuda groups). These findings reflect general trends and developments of the sector in aggregate and do not imply changes in the supervisory assessment in relation to individual firm performance. Bermuda (re)insurance groups experienced higher losses 1 in Q compared to Q The combined ratio rose by 8.4% q/q 2 standing on average at 101.4%. The market is absorbing the events from the large natural catastrophes that occurred in Q while it tries to manage capital efficiently given the losses and the new tax legislation in the US. Reserve leverage increased by 26.4% q/q and financial leverage increased by 18.8% q/q. Total equity dropped by 5.8% q/q while reserves increased by 19.1%, thus increasing the reserve leverage. The increase of assets compared to the drop in equity increased financial leverage. Net Written Premiums to Equity, which is a very rough inverse measure of solvency, increased by 13.3% q/q to reach 66.5%. Bermuda insurance groups reported positive returns on their investment holdings. Return on Investments (RoI) was close to 0.6%, an increase of 11.0% q/q, while Return on Equity (RoE) dropped to 0.5%. As a proxy for liquidity, the sum of cash and high quality AAA rated securities represents 151.7% of claims for Q4-2017, a decrease of 13.8% q/q. The total assets of Bermuda (re)insurance groups grew by 11.9% in Q Bermuda (re)insurers reported a positive gross profit of $600 million during the quarter following major losses reported in Q3-2017, but remained 43.6% lower than profits posted in Q The aggregate combined ratio stood at 101.4% compared to 93.6% in Q4-2016, with the loss ratio increasing by 17.2% q/q while the expense ratio declined by 7.0% q/q. 1 The information presented in this section relates to public filings under US GAAP of publicly traded insurance groups that have an entity registered as a Class 4 or 3B commercial (re)insurer and fall within the group wide supervision by the BMA (Bermuda groups). The presented information is based on aggregated individual firm data. 2 Note that the quarter-on-quarter (q/q) change compares the change in a value between the current quarter and the corresponding quarter of the previous year, e.g., Q and Q

16 Table 1. Select Financial Soundness Indicators (FSIs) (In % unless indicated otherwise) Change (%) Q4 Q3 Q2 Q1 Q4 FY FY QoQ YoY Capital Adequacy and Asset Quality Assets (In US$ bln) Reserves to Assets (Reserve Ratio) Reserves to Equity (Reserve Leverage) 1/ Assets to Equity (Financial Leverage) 2/ Net Written Premiums(NWP) to Equity 3/ Profitability and Actuarial Issues Gross Profit (excl. capital gains) (In US$ bln) Investment Income to Net Income Combined Ratio Average Claims to Reserves 4/ Return on Equity Return on Investment Cash and AAA Assets to Claims 5/ Source: Authority staff calculations. Note: numbers may not add up due to rounding. 1/ Reserve leverage is the ratio between reserves and shareholder s equity (defined as share capital plus additional paid-in capital and retained earnings) 2/ Financial leverage is based on total assets divided by total common equity 3/ Quarterly values contain the cumulative amount of NWPs over the last four quarters as numerator 4/ Three-quarter average 5/ Due to frequent revisions of the components of the ratio from Bloomberg, the series is stated only for firms without restatements. The general picture with the past does not change from a qualitative point of view. Due to exclusions of firms from the sample, the current table is not directly comparable to previous RU tables. For Q data, we interpolated from past quarters due to late arrival of financial information for one (re)insurer from Bloomberg. Regulatory Update October - December

17 Figure 1. Dispersion of Financial and Reserve Leverage Source: the Authority staff calculations. Note: Boxplots include the mean (yellow dot), the 25th and 75th percentiles (grey box, with the change of shade indicating the median), and the 10th and 90th percentiles (whiskers). Figure 2. Claims Volume and Premium Income (Q to Q4-2017) Claims and Net Non-Life Written/Earned Premiums (in US$ bln) Q Q Q Q Q Q Total Non-Life Earned Premium Source: Authority staff calculations. Total Non-Life Written Premium 15 Total Non-Life Claims

18 Regulatory and Legislative SUPERVISION Guidance Proposed for Actuary s Opinion on EBS Technical Provisions On 1st November 2017, the Authority sought consultation on a revised Guidance Note about Actuary s Opinions on EBS Technical Provisions. Industry feedback was due on 1st December 2017 and the final Guidance Note was issued and entered into force 31st December Similarly, on 30th November 2017, the Authority published a further update to the March 2017 Consultation Paper which introduced additional adjustments to the Bermuda Solvency & Capital Return (BSCR) with the ultimate goal of increasing the risk sensitivity of the BSCR s standard formula to better reflect how (re)insurers manage risks. Also in November, the Authority published a letter thanking stakeholders for their trial run feedback and continued support of key initiatives. The stakeholder letter provided a summary of the main findings, noting that results were broadly in line with a priori expectations. On 7th December 2017, the Authority published a Guidance Note which set out the Authority s expectations for the provision of formal professional opinions that are required on the insurance Technical Provision elements of the Economic Balance Sheet (EBS). The scope of the Guidance Note included the EBS actuarial opinion requirements for all commercial legal entities and groups covered by the relevant legislation including: Class 3A, Class 3B, Class 4, Class C, Class D, Class E (re)insurers and Insurance Groups. BMA Publishes Risk Reports, Captive/SPI Report On 2nd November, the Authority published a report entitled: Catastrophe Risk in Bermuda, Stress Testing and Modelling Practice Analysis. This report gave a high level overview of the capacity of the (re)insurance sector to absorb shocks from various catastrophe (Cat) risk events underwritten by Bermuda insurers; reviewed various stress tests to assess if Bermuda (re)insurers were adequately capitalised to withstand severe, but remote, underwriting losses from various possible Cat events; analysed exceedance probability curve trends, including the level of reliance and sufficiency of the reinsurance, and pricing dynamics; and analysed Cat modelling practices in Bermuda. Also in November, the Authority published its first Macroprudential Risk: Annual Statutory Filings Report. The report highlighted various factors impacting Bermuda s (re)insurance market for financial year 2016, ranging from capital conditions and capital structure, to liquidity indicators and asset quality indicators. The third annual Bermuda Coordinated Portfolio Investment Survey (CPIS) Report was also released in November. CPIS is a voluntary data collection exercise conducted under the auspices of the International Monetary Fund (IMF). Finally, in December, the Authority published its Captive/SPI Report This report highlighted filings received via Statutory Financial Returns submitted through the Authority s Electronic Financial Return (E-SFR) system as at 30th September The E-SFR system was officially launched in April 2016 for financial year-end returns from 31st December 2016 onwards. The E-SFR system is only applicable to limited purpose insurers Classes 1, 2, 3, A and B, and Special Purpose Insurers (SPIs). INTERNATIONAL In November 2017, the Authority attended the 2017 International Association of Insurance Supervisors (IAIS) Annual Conference which was hosted by Bank Negara, the Central Bank of Malaysia. The IAIS Secretariat and Member Authorities updated stakeholders on the major projects currently underway with regard to development the new international framework for (re)insurers and Internationally Active Insurance Groups (IAIGs). Regarding the International Capital Standards (ICS) initiative, the IAIS announced agreement on a unified path to convergence of group capital standards in furtherance of its ultimate goal of a single ICS that achieves comparable outcomes across jurisdictions. For further information on the elements of this agreement, please refer to the IAIS Newsletter The IAIS also facilitated a discussion on their work around systemic risk and consideration of an Activities Based Approach (ABA) for supervision of systemically risky activities. During a Q&A session the IAIS clarified that they have not yet determined whether ABA would supplement or entirely replace the current Entity Based Approach (EBA). The IAIS launched a public consultation process on the issue on 8th December 2017, the consultation closed for comment on 15th February Also in November, Bermuda hosted the annual meeting of the Group of International Finance Centre Supervisors (GIFCS) which was attended by nineteen jurisdictions and two observers. The first day was led by the Financial Stability Institute who delivered presentations on Fintech and Cyber Risk. The second day was spent addressing the ongoing business of GIFCS and a progress report on the Trust and Company Service Provider (TCSP) initiative. Following the annual meeting, the BMA hosted a Regulatory Panel presentation for GIFCS members and Bermuda s financial services sector entitled Ten years after the financial upheaval: where does financial stability now stand? Regulatory Update October - December

19 In December 2017, the BMA attended the NAIC fall meetings in Hawaii and noted a number of topics of interest, namely: innovation in the insurance and wider financial services sectors; implementation of the EU/US Covered Agreement; the National Flood Insurance Programme; and an update on the renewal of Qualified Jurisdiction status. In addition to the above, the Authority attended the following meetings in Q4-2017: 16th 18th October IAIS Capital and Solvency Field Testing Working Group, Basel, Switzerland 25th 26th October Financial Stability Board Regional Consultative Group Americas (FSB RCGA), Hamilton, Bermuda (hosted by BMA) 31st October IAIS Financial Stability and Technical Committee, Kuala Lumpur, Malaysia 2nd 3rd November IAIS Annual Conference, Kuala Lumpur, Malaysia 5th 6th November IAIS Supervisory Forum, New York 7th 8th November GIFCS Annual Meeting, Bermuda (hosted by BMA) 13th 14th November IAIS Macroprudential Policy & Surveillance Working Group, Rome, Italy 13th December Financial Stability Board Regional Consultative Group Americas (FSB RCGA), Nassau, Bahamas 1st 4th December NAIC Fall Meetings, Honolulu, Hawaii 6th 7th December IAIS Accounting & Auditing Working Group, Paris, France 11th 15th December - IAIS Capital and Solvency Field Testing Working Group, Paris, France 12th 13th December IAIS Insurance Groups Working Group, Basel, Switzerland 12th 14th December IAIS Financial Crime Task Force, Singapore 17

20 Explanatory Notes: Class 1: Single-parent captive insuring the risks of its owners or affiliates of the owners. Class 2: (a) a multi-owner captive insuring the risks of its owners or affiliates of the owners; or (b) a single parent or multi-owner captive: (i) insuring the risks arising out of the business or operations of the owners or affiliates, and/or (ii) deriving up to 20.0% of its net premiums from unrelated risks. Class 3: Captive insurers underwriting more than 20.0% and less than 50.0% unrelated business. Class 3A: Small commercial insurers whose percentage of unrelated business represents 50.0% or more of net premiums written, or loss and loss expense provisions and where the unrelated business net premiums are less than $50.0 million. Class 3B: Large commercial insurers whose percentage of unrelated business represents 50.0% or more of net premiums written, or loss and loss expense provisions and where the unrelated business net premiums are more than $50.0 million. Class 4: Insurers and reinsurers capitalised at a minimum of $100.0 million underwriting direct excess liability and/or property catastrophe reinsurance risk. Long-Term Class A: A single-parent Long-Term (life) captive insurance company underwriting only the Long-Term business risks of the owners of the insurance company and affiliates of the owners. Long-Term Class B: Multi-owner Long-Term captives which are defined as Long-Term insurance companies owned by unrelated entities, provided that the captive underwrites only the Long-Term business risks of the owners, and affiliates of the owners and/or risks related to or arising out of the business or operations of their owners and affiliates. A Class B license will also apply to single-parent and multi-owner long-term captives writing no more than 20.0% of net premiums from risks which are not related to, or arising out of, the business or operations of their owners and affiliates. Long-Term Class C: Long-Term insurers and reinsurers with total assets of less than $250.0 million, and not registrable as a Class A or Class B insurer. Long-Term Class D: Long-Term insurers and reinsurers with total assets of $250.0 million or more but less than $500.0 million, and not registrable as a Class A or Class B insurer. Long-Term Class E: Long-Term insurers and reinsurers with total assets of more than $500.0 million, and not registrable as a Class A or Class B insurer. SPI: A Special Purpose Insurer (SPI) assumes insurance or (re)insurance risks and typically fully funds its exposure to such risks through a debt issuance or some other financing. Intermediaries: Insurance managers, insurance brokers, insurance agents and insurance salesmen, as defined in Section 10 of the Insurance Act Regulatory Update October - December

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22 BERMUDA MONETARY AUTHORITY BMA House n 43 Victoria Street n Hamilton HM 12 Bermuda P.O. Box HM 2447 n Hamilton HM JX Bermuda tel: (441) n fax: (441) enquiries@bma.bm n website: