Regulatory Update January - March 2018

Transcription

1 Regulatory Update January - March 2018

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 (Q1-2018) 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 Q1-2018) Regulatory Update January - March 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 March 2018.* 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 August

4 Quarterly Synopsis Bermuda s banking sector s capital adequacy and leverage position continued to be strong during the first quarter of Banks fully complied with the minimum Basel III liquidity standards, meeting both the Liquidity Coverage Ratio (LCR) and the newly introduced Net-Stable Funding Ratio (NSFR). Banking profits rose during the quarter, while Return on Assets (RoA) and RoE (Return on Equity) were positive. The sector s capital position improved in Q1-2018, with the Common Equity Tier 1 (CET 1) ratio increasing from 19.9% to 20.7%, well-above the newly phased-in minimum CET 1 plus Capital Conservation Buffer (CCB) ratio of 6.38%. For 2018, banks are required to hold an additional 1.88% of capital on top of the minimum capital requirements of the CCB. The sector s Risk Asset Ratio (RAR) increased slightly to 21.5% as the decline in Risk- Weighted Assets (RWA) (down 1.3% or $112.0 million) fell at a faster rate relative to the decrease in regulatory capital (down 1.0% or $18.0 million) for the quarter. The leverage ratio increased from 7.8% to 8.2%, staying above the minimum leverage ratio of 5.0%. The overall liquidity position of the banking sector strengthened further during the quarter. The loan to deposit ratio widened by one percentage point to 45.5% during the quarter, driven mainly by the outflow of total customer deposits (down 2.0% or $367.0 million). Banking institutions met the new phased-in LCR of 90.0% along with the new NSFR requirements. The domestic liquidity position remained stable, with the BD$ Loan to Deposit ratio holding at 99.9%. Banks reported higher profits during the quarter boosted by lower operating costs. Total income fell by 1.0% to $211.7 million during the quarter, as income-related sources from non-interest income (down 6.4%) to $64.3 million offset the growth from net interest income (up 2.0%) to $147.4 million. Operating expenses were $60.5 million (or 31.3%) lower than the prior quarter. Total operating and non-operating costs were down 31.7% to $127.6 million for the quarter, helping to improve overall profits. Banks reported net profits of $83.7 million in Q1-2018, up 22.0% from a year earlier. Sector returns were stable, with annualised RoA remaining at 0.4%, while annualised RoE rose slightly to 4.1%. Total market capitalisation of the Bermuda Stock Exchange (BSX) (excluding funds) fell by $10.6 million to $421.5 billion at the end of Q The overall performance of the BSX was down following changes in trading values of several large, international companies. Total trading volume was up during the quarter, increasing by 37.2% to 487,445 shares with a corresponding market value of $8.0 million. The BSX recorded positive returns of 4.65% in Q1-2018, improving on the 2.89% recorded during the prior quarter. Despite an improved combined ratio, Bermuda (re)insurers saw their net income tempered partly due to capital losses from investments. The aggregate combined ratio was down 2.8% to 91.1% compared to the year before. Total assets of Bermuda s (re)insurance sector grew by 10.9% to $202.9 billion compared to the same quarter last year. Profits were subdued, resulting from losses associated with capital losses on investment holdings. RoI increased to 0.6%, while RoE fell to 0.9%. Following several years of a strengthening on the recovery of the global economy, the major economies grew somewhat unevenly during Q In the United States, quarterly GDP growth slowed to 2.0%. Seasonal factors as well as the weather and inventory changes contributed to the slower growth compared to previous quarter. The UK economy grew at a faster rate than initially thought in the first three months of 2018, raising hopes for a pick-up in growth after the sluggish start to the year. The Eurozone economic recovery lost steam in Q1-2018, starting the year off on a sour note after a stellar According to estimates released by Eurostat, GDP increased a seasonally-adjusted 0.4% in Q1 from the previous quarter, which was below Q s 0.7% rise and marked the slowest growth since Q Regulatory Update January - March

5 Market Analysis and Quarterly Statistics A) BERMUDA MONEY SUPPLY Bermuda dollar money supply remained unchanged at $3.5 billion for the first quarter of When compared to a year earlier, overall money supply fell 1.5% (or $54.0 million) largely due to the decline in deposit liabilities (down 1.7% or $60.0 million). Bermuda Money Supply (BD$ mln) Q Q Q Q Q Q Notes & Coins in Circulation* Deposit Liabilities 3,438 3,441 3,518 3,532 3,499 3,448 Total 3,575 3,582 3,651 3,670 3,630 3,586 Less: Cash at Banks and Deposit Companies BD$ Money Supply 3,538 3,538 3,614 3,630 3,592 3,540 % Change on Previous Period -0.01% -2.10% -0.44% 1.06% 1.47% 0.01% % Change Year-on-Year -1.50% -0.04% 2.11% 2.30% 2.52% 2.66% 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 3,438 3,441 3,518 3,532 3,499 3,448 Less: Loans, Advances and Mortgages (3,576) (3,578) (3,608) (3,641) (3,688) (3,772) Surplus/(deficit) Deposits (137) (138) (90) (109) (189) (324) Percentage of Deposit Liabilities Loaned 104.0% 104.0% 102.5% 103.1% 105.4% 109.4% Totals may not add due to rounding. The local economy s liquidity position remained unchanged in Q1. Domestic deposit liabilities and corresponding domestic loans experienced little movement during the quarter, keeping the net deficit balance even at negative $137.0 million and the loan to deposit ratio at 104.0%. However, the reliance on FX funding sources to supplement any potential shortfall in BD$ lending has eased when compared to a year ago. Foreign Currency Position - Combined Banks and Deposit Companies (Consolidated) (BD$ mln) Q Q Q Q Q Q Total Foreign Currency Assets 17,481 17,855 17,441 17,887 18,346 18,582 Less: Other Assets Less: Foreign Currency Loans to Residents 1,053 1,118 1, Net Foreign Currency Assets 16,153 16,492 16,160 16,635 17,159 17,395 Foreign Currency Liabilities 15,653 16,031 15,523 16,054 16,691 17,017 Add: BD$ Deposits of Non-Residents Net Foreign Currency Liabilities 15,783 16,201 15,708 16,226 16,862 17,179 Net Foreign Currency Position Totals may not add due to rounding. Q Net Foreign Currency Liabilities amended due to calculation error. The FX currency surplus position increased 27.0% to reach $370.0 million during Q1. The increase in the net foreign currency position was due to a faster outflow of foreign currency liabilities (down 2.6% or $417.3 million) relative to the decline in net foreign currency assets (down 2.0% or $338.5 million), further improving the overall currency position. Regulatory Update January - March

7 C) BANKING Banking Sector Assets and Deposits (BD$ mln) Q Q Q Q Q Q Total Assets 21,349 21,769 21,392 21,912 22,454 22,713 Quarterly Change (%) -1.9% 1.8% -2.4% -2.4% -1.1% 1.3% Total Deposits 18,786 19,153 18,802 19,233 19,947 20,216 Quarterly Change (%) -1.9% 1.9% -2.2% -3.6% -1.3% 3.7% The sector s total asset base decreased to $21.3 billion, down 4.9% compared to a year earlier. Most of the decline in total assets was mainly due to the fall in interbank deposits (down 32.8%), while other asset categories remained fairly stable over the last four quarters. Total customer deposits decreased 5.8% to $18.8 billion year-on-year. Asset funding sources declined over the past year, largely due to the outflow from demand deposits (down 11.6%) and saving deposits (down 5.4%). Time deposits experienced positive growth, increasing by 14.2% over the same period. 5

8 Basel III Ratios The sector s capital levels remained strong, with the RAR up 60 bps to 21.5% when compared to a year ago. The CET 1 ratio increased to 20.7%, which is 1.4% higher than the same quarter last year. Capital levels within the sector continue to surpass all applicable capital requirements. 25% 20% 20.9% 19.3% 21.4% 19.8% 22.3% 20.8% 21.0% 19.9% 21.5% 20.7% 15% 10% 7.4% 7.7% 8.4% 7.8% 8.2% 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 Q % 0.5% 20.7% 0.8% Q % (1.3%) 19.9% (0.9%) Q % 0.9% 20.8% 1.0% Q % 0.5% 19.8% 0.5% Q % 0.5% 19.3% 0.7% Regulatory Update January - March

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 2, ,222 1,534 3, ,995 1,236 2, ,293 1,079 Investments 9, ,689 1,585 9, ,860 1,424 9, ,766 1,604 Loans & Advances 8,553 3,423 3,424 1,707 8,514 3,464 3,317 1,733 8,886 3,499 3,515 1,871 Premises & Equipment Other Assets Total Assets 21,349 3,869 12,543 4,938 21,769 3,914 13,372 4,483 21,392 3,951 12,770 4,671 Liabilities Demand Deposits 9,065 1,053 6,574 1,437 9,696 1,092 7,344 1,260 9,913 1,144 7,494 1,275 Savings 6,520 1,589 3,024 1,907 6,444 1,572 3,045 1,828 6,114 1,586 2,772 1,755 Time Deposits 3, , , , , , Sub Total - Deposits 18,786 3,426 11,050 4,310 19,153 3,429 11,749 3,975 18,802 3,507 11,457 3,839 Other Liabilities Sub Total - Liabilities 19,358 3,706 11,182 4,471 19,787 3,756 11,954 4,078 19,286 3,763 11,554 3,970 Equity & Subordinated Debt 1,991 1, ,982 1, ,106 1, Total Liabilities and Capital 21,349 5,648 11,254 4,447 21,769 5,664 12,048 4,056 21,392 5,757 11,693 3,942 Q Q Q (BD$ mln) Total BD$ US$ Other Total BD$ US$ Other Total BD$ US$ Other Assets Cash Deposits 2, ,369 1,514 4, ,645 1,449 3, ,489 1,058 Investments 9, ,797 1,549 8, ,578 1,350 9, ,459 1,101 Loans & Advances 8,890 3,554 3,321 2,015 8,629 3,620 3,015 1,995 8,773 3,656 2,973 2,144 Premises & Equipment Other Assets Total Assets 21,912 4,025 12,715 5,171 22,454 4,108 13,465 4,882 22,713 4,132 14,172 4,410 Liabilities Demand Deposits 9,700 1,137 7,242 1,321 10,249 1,110 7,891 1,248 10,607 1,081 8,358 1,167 Savings 6,639 1,599 3,045 1,995 6,895 1,597 3,354 1,943 6,613 1,567 3,257 1,789 Time Deposits 2, , , , , , Sub Total - Deposits 19,233 3,519 11,627 4,087 19,947 3,486 12,559 3,903 20,216 3,433 13,121 3,661 Other Liabilities Sub Total - Liabilities 19,880 3,826 11,833 4,221 20,468 3,777 12,676 4,015 20,779 3,761 13,239 3,778 Equity & Subordinated Debt 2,032 1, ,986 1, ,935 1, Total Liabilities and Capital 21,912 5,724 11,991 4,197 22,454 5,641 12,821 3,992 22,713 5,586 13,371 3,756 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 $421.5 billion at the end of Q1-2018, down by $10.6 billion from $432.1 billion recorded in Q The decline over the quarter was mainly attributed to changes in the trading values of several large, international companies. Total trading volume in Q was 487,445 shares (compared to 3,667,274 shares in Q and 1,631,331 shares in Q1-2017), with a corresponding market value of $8.0 billion (a decrease of 79.3% from $38.7 billion in Q and a decrease of 38.8% from $13.1 billion in Q1-2017). The valuation of domestic firms constituted 0.8% of the total market at the end of Q1-2018, with domestic market capitalisation amounting to $3.3 billion, up $600.1 million over the previous quarter. At the end of Q1-2018, the market capitalisation of Insurance-Linked Securities (ILS) on the BSX stood at $25.2 billion, representing 77.3% of the global stock of outstanding ILS deals. At quarter-end, a total of 104 ILS deals (comprising 171 tranches) were listed on the BSX, with an aggregate nominal value of approximately $25.1 billion. Global market capitalisation of ILS rose to $33.3 billion, as $4.3 billion in new issuances outpaced $2.2 billion in maturing bonds during the quarter. 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 January - March

11 The BSX s overall performance remained positive during the first quarter of The table on page 8 above provides a summary of selected indicators of stock market performance over the last six quarters (Q to Q1-2018), 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 performance on Bermuda s international business sector). During the quarter, the BSX index recorded a positive return of 4.7% (up from 2.9% in Q4-2017) helped by the lower annualised volatility of 2.5% (down from 3.0% in Q4-2017), while trading volume was slightly up, rising to 0.3% of market capitalisation. The BSX index outperformed the DJII which recorded a quarterly return of 0.1% (down from 3.5% in Q4-2017) with an annualised return volatility of 2.1% (up from 1.5% in Q4-2017). The risk-return trade-off was also favourable for the insurance sub-index (BSX-Insurance), as the total return performance was 1.1% during the quarter (up from 0.3% in Q4-2017), while volatility fell marginally to 2.2% (down from 2.3% in Q4-2017). The charts below 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 the DJII for a ninth consecutive quarter. The aggregate dividend yield of stocks listed on the BSX over the last quarter stood at 7.0% (down from 7.1% in Q4-2017) after adjusting for headline inflation, which was significantly higher than comparable yields generated by stocks included in the DJII (-0.1%). 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 by ten from 543 to 533, a reduction of 1.8%. The decrease in funds along with the increase in redemptions during the period had a significant impact on the overall value of the portfolio, resulting in a decrease in the total NAV of 10.5% or $16.9 billion, from $161.5 billion to $144.7 billion. 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 $100.0 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 $100.0 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 re-classified. 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 January - March

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 into Bermuda, Exempted, Exempted Limited by Guarantee, Local, Local 60/40, Local Limited by Guarantee and LLCs. 11

14 G) INSURANCE Insurance Registrations (Q1-2018) During the first quarter of 2018, the Authority registered 19 insurers and one intermediary. This compares to nine insurers for the same period last year. Name Date Type Registrations in January 2018 Wilton Re Overseas Limited 1-Jan-18 C Balmoral Insurance Company Limited 5-Jan-18 3A Panthera Re Limited 23-Jan-18 SPI Pomorum Renters Insurance Company Limited 24-Jan-18 3 Barbican Underwriting Limited 25-Jan-18 Agent Registrations in February 2018 DSA Reinsurance Company Ltd. 6-Feb-18 E DSA Reinsurance Company Ltd. 6-Feb-18 4 Fidus Re Ltd. 14-Feb-18 SPI Radnor Re Ltd. 16-Feb-18 SPI Carolina Re Ltd 23-Feb-18 3A Athene Annuity Re Ltd. 23-Feb-18 E CICA Life Ltd. 27-Feb-18 E Registrations in March 2018 QBE Blue Ocean Re Limited 1-Mar-18 3A Tungsten RE Ltd. 2-Mar-18 1 Manatee Re II Ltd. 5-Mar-18 SPI Global Atlantic Re II Limited 8-Mar-18 3A Global Atlantic Re II Limited 8-Mar-18 C Acme Insurance Company Limited 19-Mar-18 2 Armor Re II Ltd. 23-Mar-18 SPI BCIC Ltd. 28-Mar-18 1 Total Registrations Insurers: 19 Intermediaries: 1 Descriptions of the various classes of insurer can be found in the Explanatory Notes section of this publication on page 18. Regulatory Update January - March

15 Quarterly Review of the Commercial (Re)insurance Sector Bermuda (Re)insurance Groups (as of end Q1-2018) The following section provides the main findings from a review of quarterly public US GAAP filings of (re)insurers that are members of insurance groups supervised by the Authority (Bermuda reinsurance groups). These findings reflect general trends and developments of the sector in aggregate, and are not intended to imply changes in the supervisory assessment in relation to individual (re)insurer performance. The first quarter of 2018 was marked by normal claims activity despite the fact that profitability on aggregate was below the first quarter of For Q1-2018, the combined ratio dropped by 2.8% q/q 1 standing on average at 91.1%. The pricing dynamics in the market do not seem to have changed dramatically despite the intense hurricane season of Interest rate hikes by the Federal Reserve are causing capital losses to (re)insurer s investment portfolios, something that may continue in the near future. Reserve leverage increased by 26.0% q/q and financial leverage increased by 19.0% q/q. Total equity dropped by 6.7% q/q while reserves increased by 17.5%, thus increasing the reserve leverage. The increase in 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 21.0% q/q reaching 69.2%. The investment portfolios of Bermuda (re)insurance groups produced a low RoI close to 0.6%, an increase of 3.9% q/q. RoE dropped by 44.7% q/q. As a proxy for liquidity, the sum of cash and high quality AAA -rated securities represents 145.3% of claims for Q1-2018, a decrease of 24.5% q/q. Bermuda (re)insurance groups improved their asset base by 10.9% q/q. Bermuda (re)insurers produced a positive gross profit of $1.5 billion. However, significant capital gains losses reduced net income. The aggregate combined ratio stood at 91.1% compared to 93.7% from Q The loss ratio dropped by 3.7% q/q while the expense ratio declined by 1.1%. 1 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) Capital Adequacy and Asset Quality 2018 Q Change (%) Q4 Q3 Q2 Q1 FY FY QoQ YoY 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, this form of table is not directly comparable to previous Regulatory Update tables presenting the same or similar information. Regulatory Update January - March

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 Q1-2018) 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 Exchange Control Amendments Proposed On 1 February, a joint Consultation Paper (CP) was issued by the Ministry of Finance and the BMA proposing amendments to Bermuda s exchange control legislation and regulations. The proposed amendments were in keeping with Bermuda s commitments under the Bermuda Government s commitments under the Bermuda-UK Exchange of Notes and Technical Protocol of April 2016, and in compliance with current Organisation of Economic Co-operation and Development (OECD) and Financial Action Task Force (FATF) standards. The official consultation period concluded on 21 February. Consultation Papers on Lending and Sanctions Released On 28 February, two joint CPs were issued by the National Anti- Money Laundering Committee (NAMLC) and the BMA proposing legislative amendments on Enforcement and Supervisory Matters and Anti-Money Laundering Legislation and Financial Institutions. Broadly, the CPs sought to appropriately enhance Bermuda s Anti- Money Laundering (AML)/Anti-Terrorist Financing (ATF) regime and bring it in line with international standards. Both consultation periods ended on 26 March. Enhancements to Asset Management Regime Discussed On 29 March, the BMA issued a Discussion Paper (DP) which addressed proposed enhancements to the oversight of the investment business, investment funds and fund administration sectors. While the statutes covering these sectors, the Investment Business Act 2003 and the Investment Funds Act 2006 have been subject to periodic amendments, a comprehensive review is warranted as international standards in these areas, particularly those relating to financial stability, AML/ATF and investor protection considerations, continue to evolve. The discussion period concluded on 7 May and it is expected that enhancements in the area of fund administration will be the first priority legislatively. Bermuda Solvency Capital Requirement (BSCR) Update Proposal Also on 29 March, the BMA published an update to its November 2017 BSCR Update Proposal CP. The 29 March proposal took into account consultation feedback and results of a trial-run exercise using financial data as of 31 December 2016 and reissued BSCR models for the 2017 year-end market trial-run only (there is no change to the 2017 year-end statutory filing). (Re)insurers can either file the 1 December 2017 BSCR model or the 29 March 2018 BSCR model for their statutory 2017 year-end filings. However, if a (re)insurer wishes to participate in the 2017 market trial-run (which is strongly encouraged) then the 29 March 2018 model will have to be submitted. Further, the Authority would like to note that annual filings are still required four months after the financial year-end (five months for Bermuda groups). The 2017 yearend market trial-run was extended to 31 May 2018 for all (re)insurers (previously the 2017 year-end market trial-run was due 30 April 2018 for legal entities). A stakeholder letter on feedback received during the consultation process and the two trial run rounds will be published around 31 July 2018 alongside the final version of the new rules. The new rules will enter into force on 1 January 2019, notwithstanding gradein provisions. They will apply (as applicable) to all commercial (re)insurance Classes and groups, i.e.: Class 3A, Class 3B, Class 4, Class C, Class D and Class E. The main changes from the November 2017 version of the CP are: The revision of the downward interest rate risk shocks and treatment of the Long-Term Forward Rate (LFTR) for the alternative approach for interest rate and liquidity risk, and the testing of a modified duration based approach also for interest rate and liquidity risk for Long-Term (life) insurers Reduced equity risk charges for private equity holdings that meet certain criteria Small changes to the criteria under which the use of look through is allowed Change in the grade-in formulas to allow for the full impact of the tax mitigating effects to be incorporated in the capital calculation as soon as the BSCR changes come in force INTERNATIONAL From a perspective of mutual recognition of standards, the BMA is following developments related to the National Association of Insurance Commissioners (NAIC) approach towards addressing the EU/US Covered Agreement and work being undertaken in Europe to review the Solvency II regime. With regard to developments on the transposition of the Covered Agreement, the BMA noted NAIC comments during their public hearing in New York and the spring meetings in Milwaukee, regarding next steps. The BMA intends to liaise closely with the NAIC as they progress on their drafting work. Regulatory Update January - March

19 The BMA was interested to follow the exchange of views between the European Commission (EC), the European Insurance and Occupational Pensions Authority (EIOPA) and industry on EIOPA s first and second sets of advice to the EC on specific items in the Solvency II Delegated Regulation. There will be a subsequent review due to take place in 2020/2021, the mandate of which is outlined in the broader Framework Directive. The hearing opened with speeches from Vice-President of the EC, Valdis Dombrovskis and EIOPA Chairman, Gabriel Bernardino. International meetings attended by the BMA in Q include: January (Washington DC), International Association of Insurance Supervisors (IAIS) Resolution Working Group 31 January - 2 February (Basel), Financial Stability Institute (FSI) Workshop on Bank Recovery & Resolution Planning 5-9 February (Basel), IAIS Capital, Solvency & Field Testing Working Group 7-8 February (Hyderabad), IAIS Macroprudential Policy & Surveillance Working Group 20 February (New York), NAIC Hearing to consider how to address the Covered Agreement February (Bonn), IAIS Accounting & Auditing Working Group 27 February (Basel), IAIS Policy Development Committee 28 February (Basel), IAIS Macroprudential Committee 29 February (Basel), IAIS Executive Committee March (Brussels), IAIS Capital, Solvency & Field Testing Working Group March (Washington DC), IAIS Resolution Working Group March (Hamilton), IAIS Financial Crime Task Force March (Milwaukee), NAIC National Spring Meetings 27 March (Brussels), European Commission Hearing on Solvency II 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: Large commercial insurers and reinsurers 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 January - March

21 19

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: