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1Regulatory Update April – June 2019
REGULATORY UPDATE April – June 2019
2Regulatory Update April – June 2019
Preface
This Regulatory Update reports on activities at the Bermuda Monetary Authority (BMA or Authority) and developments impacting the financial sector 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 30 June 2019.*
The Regulatory Update is only published in electronic format and can be downloaded as a PDF file on the Authority’s website www.bma.bm. If you wish to receive an e-mail 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 November 2019
3Regulatory Update April – June 2019
Table of Contents
Quarterly Synopsis ................................................................. 4
Market Analysis and Quarterly Statistics ............................ 5
A) Bermuda Money Supply ............................................... 5
B) Domestic and Foreign Currency Position .................. 6
C) Banking .......................................................................... 7
D) Bermuda Stock Exchange (BSX) ........................ 10
E) Investment Funds ............................................ 12
F) Company Authorisations .................................... 13
G) Insurance ........................................................ 14
Quarterly Review of the Commercial (Re)insurance Sector ........................................................... 15
Regulatory and Legislative ....................................... 18
Statistical Index
Bermuda Money Supply .......................................... 5
BD$ Deposit Profile –Combined Banks and Deposit Companies (Unconsolidated) ................................................... 6 Combined Banks and Deposit CompaniesForeign Currency Position (Consolidated) ................. 6
Banking Sector Assets and Deposits ....................... 7
Basel III Ratios ...................................................... 8
Combined Balance Sheet of BermudaBanks and Deposit Companies (Consolidated) .......... 9
Selected Stock Market Performance Indicators ...... 10
Chart 1. Price Level, Indexed (Q1-2005=100) ......... 11
Chart 2. Annualised Return Volatillity ..................... 11
Chart 3. Dividend Yield(nominal and inflation-adjusted) ............................. 11
Chart 4. Ratio Between Trading Volume and Market Capitalisation ..................................... 11
Investment Funds ................................................ 12
Companies, Partnerships and Permits Statistics - Applications Approved .......................... 13
Insurance Registrations (Q2-2019) ...................... 14
Table 1. Select Financial SoundnessIndicators (FSIs) ................................................... 16
Figure 1. Dispersion of Financial and Reserve Leverage .......................................... 17
Figure 2. Claims Volume and Premium Income (Q1 2018 – Q2 2019) ............................... 17
4Regulatory Update April – June 2019
Quarterly Synopsis
International Developments
US real Gross Domestic Product (GDP) increased at an annual rate of 2.0% in the second quarter of 2019, according to an estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased by 3.1%. The deceleration in real GDP in the second quarter primarily reflected downturns in inventory investment, exports and non-residential fixed investment.
The British economy shrunk for the first time since late 2012 after official data showed second-quarter GDP contracting by 0.2%. A consensus of analyst forecasts had predicted the economy would flatline during the period.
The GDP of the Eurozone barely grew during the second quarter of 2019 as the bloc’s largest economy, Germany, contracted due to a global slowdown driven by trade conflicts and Brexit uncertainty. According to an estimate released by the European Union’s statistics office, Eurostat, GDP growth in the 19-country Eurozone was 0.2% in the second quarter, a decrease from 0.4% recorded over the first three months of 2019.
Japan’s economy grew an annualised 1.3% between April-June, weaker than the expected 1.8% annualised growth.
Bermuda Market
The banking sector maintained a sound capital position for the second quarter. The Common Equity Tier 1 capital ratio and total capital ratio were higher when compared to the previous quarter, up 0.6 percentage points, and 0.5 percentage points, to 22.9% and 24.3%, respectively. The Q2 increase in the total capital ratio was due to a decrease in risk-weighted assets (down 1.6%) to $8.2 billion, relative to the marginal increase in total regulatory capital (up 0.7%) to $2.0 billion. Banks are required to hold additional capital in the form of a Capital Conservation Buffer (CCB) equalling 2.5% (fully phased-in) of total risk-weighted assets. The leverage ratio remained steady at 8.8% for the quarter.
The banking sector posted lower profits in Q2. Net income (after tax) fell by 26.4% to $76.5 million, when compared to the net income (after-tax) amount reported in the same quarter of last year. For the quarter, net income (after-tax) was down 11.7% due to the increase in total operating expenses (up 7.3%) to $146.4 million. Total income remained unchanged at $223.1 million.
Banks complied with new regulatory liquidity requirements and met the fully-phased in Liquidity Coverage Ratio (LCR) and Net-Stable Funding Ratio (NSFR).
For the (re)insurance sector, Q2 2019 was marked by higher claims activity. The combined ratio increased by 2.7% quarter on quarter (q/q) standing on average at 90.8% due to higher losses and marginal increases in the aggregate expense ratio. The loss ratio increased by 4.0% q/q while the expense ratio increased by 0.2%. Publicly traded Bermuda (re)insurance groups improved their asset base by 15.8% q/q, while they produced a gross profit of $1.1 billion.
The market capitalisation of the BSX (excluding funds) increased by $4.8 billion to $328.5 billion over the prior quarter. The volume of trades during the quarter amounted to 1,970,561 shares, up from 768,435 in Q1 2019. The BSX index posted a negative return of 0.4%, down from positive 2.7% over the prior quarter. Annualised volatility was also slightly down, from 7.1% to 6.9%. Inflation-adjusted dividend yield continued moving in a positive direction.
1 Note that for (re)insurance reporting, the quarter-on-quarter (q/q) change is effectively year-on-year, comparing the changein a value between the current quarter and the corresponding quarter of the previous year, i.e. Q2 2019 and Q2 2018.
5Regulatory Update April – June 2019
Market Analysis and Quarterly Statistics
A. BERMUDA MONEY SUPPLY
The overall money supply within the local economy increased 1.0% during the quarter due to higher inflows from local customer deposits, coupled with increased demand for notes and coins in circulation. Local customer deposit liabilities grew by 1.0% (or $34.0 million) over the quarter, but remained 1.5% (or $52.1 million) lower compared to a year earlier. Notes and coins in circulation experienced the greatest quarter-on-quarter increase, up 5.0% (or $7 million); the highest total in six years.
Bermuda Money Supply
(BD$ millions) Jun-19 Mar-19 Dec-18 Sep-18 Jun-18 Mar-18
Notes & Coins in Circulation** 145 138 142 139 140 136
Deposit liabilities: 3,420 3,386 3,451 3,480 3,472 3,438
Total 3,565 3,525 3,593* 3,618 3,612 3,575
Less: Cash at Banks and Deposit Companies 42 39 43* 40 39 37
BD$ Money Supply 3,522 3,486 3,551* 3,578 3,573 3,538
% Change on Previous Quarter 1.0% -1.8% -0.8% 0.1% 1.0% 0.0%
% Change Year on Year -1.4% -1.5% 0.3% -1.0% -1.6% -1.5%
Totals may not add due to rounding.Percentage change may not correspond due to rounding. * Revised
** This table includes the supply of Bermuda dollars only. United States currency is also in circulation in Bermuda but the amount has not been quantified.
6Regulatory Update April – June 2019
B. DOMESTIC AND FOREIGN CURRENCY POSITION
BD$ Deposit Profile - Combined Banks and Deposit Companies (Unconsolidated)
(BD$ millions) Jun-19 Mar-19 Dec-18 Sep-18 Jun-18 Mar-18
Deposit Liabilities 3,420 3,386 3,451 3,480 3,472 3,438
Less: Loans, Advances and Mortgages 3,410 3,364 3,430 3,518 3,515 3,576
Surplus/(deficit) deposits 10 22 21 (39) (43) (137)
Percentage of Deposit Liabilities Loaned 99.7% 99.3% 99.4% 101.1% 101.2% 104.0%
Totals may not add due to rounding.
Percentage change may not correspond due to rounding.
In Q2 2019 the liquidity surplus decreased. Domestic lending increased by 1.4% (or $46.3 million) outpacing the 1.0% (or $34.0 million) increase in local customer deposits.
Combined Banks And Deposit Companies Foreign Currency Position (Consolidated)
(BD$ millions) Jun-19 Mar-19 Dec-18 Sep-18 Jun-18 Mar-18
Total Foreign Currency Assets 17,268 17,454 16,847 16,106 17,760 17,481
Less: Other Assets 283 294 235 251 284 274
Less: Foreign Currency Loans to Residents 1,364 1,265 1,215 1,211 1,234 1,053
Net Foreign Currency Assets 15,622 15,895 15,397 14,645 16,242 16,153
Foreign Currency Liabilities 15,106 15,428 14,851 14,134 15,861 15,653
Add: BD$ Deposits of Non-Residents 91 94 88 89 92 130
Net Foreign Currency Liabilities 15,197 15,521 14,939 14,223 15,953 15,783
Net Foreign Currency Position 425 374 458 422 289 370
Totals may not add due to rounding.
Quarter-on-quarter, the net foreign currency position remained favourable, increasing by 13.6%. Net foreign currency assets declined by 1.7% (or $273.3 million), with most of the movement occurring in foreign currency assets (down 1.1% or $186 million). On the liabilities side, the net foreign currency liabilities fell by 2.1% (or $324.6 million), largely due to the outflow in foreign currency liabilities (down 2.1% or $321.5 million).
Year-on-year, the net foreign currency position increased by 47.1%. The net foreign currency asset position was down 3.8% (or $620.4 million). Factors contributing to the decline were lower total foreign currency assets (down 2.8% or $491.6 million). Growth in foreign currency loans to residents was up 10.5% (or $130.3 million). Net foreign currency liabilities fell by 4.7% (or 756.7 million), predominantly due to the outflow of total foreign currency liabilities, which declined by 4.8% (or $755.1 million).
7Regulatory Update April – June 2019
C. BANKING
Banking Sector Assets and Deposits (Consolidated)
(BD$ millions) Jun-19 Mar-19 Dec-18 Sep-18 Jun-18 Mar-18
Total Assets ($millions) 20,925 21,153 20,618 19,904 21,621 21,349
Quarterly Changes (%) -1.1% 2.6% 3.6% -7.9% 1.3% -1.9%
Total Customer Deposits 18,255 18,546 18,036 17,257 19,051 18,786
Quarterly Changes (%) -1.6% 2.8% 4.5% -9.4% 1.4% -1.9%
Percentage change may not correspond due to rounding.
For quarter-end, banking sector assets were down, led by loans and advances (down 4.9% or $414.6 million to $8.1 billion) and interbank deposits (down 3.0% or $92.2 million to $3.0 billion). An increase in investments (up 3.4% or $296.6 million to $9.2 billion) helped to offset some of the overall decline in total assets.
Year-on-year, total assets held by the banking sector contracted by 3.2% (or $695.8 million). The decrease in total assets was mainly due to declines in all core asset categories including: interbank deposits (down 7.9% or $260.7 million), loans and advances (down 4.1% or $343.4 million) and investments (down 0.5% or $48.5 million).
Quarter-on-quarter, most of the decline in total customer deposit liabilities came from demand deposits, (down 4.0% or $348.5 million to $8.3 billion) while savings deposits remained unchanged (at $6.0 billion). An increase in time deposits (up 1.6% or $62.1 million to $4.0 billion) negated some of the decrease.
Year-on-year, total customer deposits fell 4.2% (or $796.0 million). The decline was due to the outflow in demand deposits (down 14.3% or $1.4 billion) and savings deposits (down 8.0% or $514.5 million) offsetting the growth in time deposits (up 38.5% or $1.1 billion).
8Regulatory Update April – June 2019
BASEL III RATIOS
The banking sector reported improved capital levels for the second quarter of the year. Capital adequacy ratios, as measured by Common Equity Tier 1 (CET1) to Risk Weighted Assets, rose 1.4 percentage points compared to the same quarter last year. The Risk Asset Ratio (RAR) was up 1.2 percentage points from a year earlier.
Period RAR RAR Change CET 1 CET 1 Change
2019 Q2 24.3% 0.5% 22.9% 0.6%
2019 Q1 23.8% (0.3%) 22.3% (0.3%)
2018 Q4 24.1% (0.6%) 22.6% (0.5%)
2018 Q3 24.7% 1.6% 23.1% 1.6%
2018 Q2 23.1% 1.6% 21.5% 0.8%
24.7%
9Regulatory Update April – June 2019
Combined Balance Sheet of Bermuda Banks and Deposit Companies (Consolidated)
(BD$ Millions)2019-Q2 2019-Q1 2018-Q4
Total BD$ US$ Other Total BD$ US$ Other Total BD$ US$ Other
Assets
Cash 94 42 36 15 81 39 27 14 83 43 25 16
Deposits (Interbank) 3,023 13 1,596 1,414 3,115 13 1,535 1,567 3,606 28 2,448 1,130
Investments 9,154 39 7,666 1,449 8,857 39 7,428 1,390 8,416 39 7,185 1,192
Loans & Advances 8,052 3,243 3,091 1,718 8,467 3,268 2,997 2,201 7,919 3,304 2,913 1,702
Premises and Equipment 310 185 113 11 314 188 115 11 320 219 90 11
Other Assets 293 135 70 88 319 151 77 91 273 139 70 64
Total Assets 20,925 3,657 12,573 4,695 21,153 3,698 12,180 5,274 20,618 3,772 12,731 4,116
Liabilities
Demand Deposits 8,307 992 5,816 1,499 8,655 967 5,985 1,703 8,756 1,066 6,208 1,482
Savings 5,972 1,554 2,748 1,670 5,977 1,558 2,663 1,756 5,881 1,555 2,443 1,884
Time Deposits 3,976 862 2,075 1,040 3,914 848 2,073 993 3,398 821 1,755 822
Sub Total - Deposit Liabilities 18,255 3,407 10,639 4,209 18,546 3,373 10,721 4,452 18,036 3,442 10,406 4,188
Other Liabilities 532 274 162 95 519 264 159 95 527 270 180 77
Total Liabilities 18,788 3,682 10,802 4,304 19,065 3,638 10,880 4,548 18,563 3,712 10,586 4,265
Equity & Subordinated Debt 2,138 1,985 174 -22 2,088 1,966 143 -22 2,055 1,973 108 -26
Total Liabilities and Capital 20,925 5,666 10,976 4,283 21,153 5,604 11,023 4,526 20,618 5,685 10,694 4,239
(BD$ Millions)2018-Q3 2018-Q2 2018-Q1
Total BD$ US$ Other Total BD$ US$ Other Total BD$ US$ Other
Assets
Cash 87 40 30 16 87 39 34 15 84 37 31 16
Deposits (Interbank) 2,067 8 1,090 969 3,283 18 2,117 1,148 2,769 14 1,222 1,534
Investments 9,018 39 7,749 1,229 9,202 47 7,761 1,394 9,313 39 7,689 1,585
Loans & Advances 8,121 3,350 3,141 1,630 8,396 3,389 3,199 1,808 8,553 3,423 3,424 1,707
Premises and Equipment 321 222 88 11 326 223 92 11 326 217 95 15
Other Assets 290 138 81 71 327 146 109 72 304 140 82 82
Total Assets 19,904 3,798 12,180 3,927 21,621 3,861 13,312 4,448 21,349 3,869 12,543 4,938
Liabilities
Demand Deposits 8,436 1,083 6,207 1,146 9,694 1,073 7,415 1,206 9,065 1,053 6,574 1,437
Savings 5,730 1,572 2,526 1,632 6,487 1,596 3,105 1,786 6,520 1,589 3,024 1,907
Time Deposits 3,091 806 1,482 803 2,870 786 1,343 741 3,201 784 1,452 966
Sub Total - Deposit Liabilities 17,257 3,461 10,216 3,580 19,051 3,454 11,864 3,733 18,786 3,426 11,050 4,310
Other Liabilities 611 273 250 88 536 272 190 74 573 280 132 161
Total Liabilities 17,869 3,734 10,466 3,668 19,588 3,727 12,054 3,808 19,358 3,706 11,182 4,471
Equity & Subordinated Debt 2,035 1,986 76 -27 2,033 1,965 92 -24 1,991 1,943 72 -24
Total Liabilities and Capital 19,904 5,720 10,542 3,641 21,621 5,692 12,145 3,783 21,349 5,648 11,254 4,447
Totals may not add due to rounding.
10Regulatory Update April – June 2019
D. BERMUDA STOCK EXCHANGE (BSX)
Total market capitalisation of the BSX (excluding funds) increased by $4.8 billion to $328.5 billion over the prior quarter. The volume of shares traded during the quarter amounted to 1,970,561 shares, up from 768,435 shares traded in Q1 2019 and higher than the 1,186,428 shares traded in Q2 2018. For Q2 2019, the traded value of stocks totalled $21.8 billion, up 73.8% from $12.6 billion in Q1 2019 and increased by 21.0% from $18.1 billion in Q2 2018. The valuation of domestic firms continued to be stable at 0.9% of the total market for Q2 2019, with domestic market capitalisation amounting to $3.0 billion, up 12.8% from $2.6 billion from the previous quarter and down 8.3% from $3.2 billion compared to the same quarter last year.
At the end of Q2 2019, the market capitalisation of BSX listed Insurance-Linked Securities (ILS) stood at $32.5 billion. At quarter-end, a total of 299 ILS deals (net of programmes) were listed on the BSX, with $3.0 billion in new issuances outpacing $1.2 billion in maturing bonds. During Q2 2019, the US Federal Emergency Management Agency (FEMA) issued its second catastrophe bond to provide additional coverage for the National Flood Insurance Program (NFIP), providing $300 million of protection across two tranches.
2018 2019
Q1 Q2 Q3 Q4 Q1 Q2
Price Return 1/
BSX 4.7 2.1 2.1 -10.1 2.7 -0.4
BSX - Insurance 1.1 -1.7 -0.8 -5.1 8.8 -1.7
DJII 0.1 0.3 1.9 -3.2 2.6 0.6
Return Volatility
Annualised Standard Deviation 2/
BSX 2.5 2.7 2.8 5.5 7.1 6.9
BSX - Insurance 2.2 2.2 2.3 4.1 8.3 8.3
DJII 2.1 2.4 2.5 2.7 2.8 3.0
Trading Volume/Market Capitalisation 3/
BSX 0.3 0.3 0.5 0.4 0.5 0.3
DJII 9.2 8.0 6.8 10.4 8.4 7.6
Real Dividend Yield 4/
BSX 7.0 6.5 6.9 8.9 9.9 10.1
DJII -0.1 -0.5 -0.5 0.1 0.6 0.4
Sources: Bloomberg, BSX and the BMA 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 the last prices.
3/ Cumulative quarterly trading volume relative to the average market capitalisation during the same time period.
4/ Quarterly average of month-on-month dividend yield adjusted for headline inflation in Bermuda and the United States, respectively.
Selected Stock Market Performance Indicators*
In % unless indicated otherwise.
11Regulatory Update April – June 2019
The following charts and the table show the BSX quarterly closing price level (indexed to Q1 2005 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 Q2 2019 (Charts 1-4). Both the charts and the table compare 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 posted a negative return of 0.4%, down from positive 2.7% over the prior quarter. The DJII also experienced a decline in returns over the same period, falling from 2.6% to 0.6% during the quarter. The Q2 2019 annualised volatility for the BSX was marginally lower at 6.9% (down from 7.1% in Q1 2019), while the quarterly trading volume to market capitalisation was 0.3% (down from 0.5% in the prior quarter). The Q2 2019 annualised return volatility for the DJII has steadily increased over the past five quarters, increasing to 3.0%. The quarterly return for the insurance sub-index (BSX-Insurance) fell from 8.8% to negative 1.7% over the prior quarter, while return volatility was unchanged at 8.3%.
The BSX’s inflation-adjusted dividend yield continued to trend upward, with dividend payouts outperforming the DJII over the past 15 consecutive quarters. The aggregate dividend yield of stocks listed on the BSX was up 0.3 percentage points to 10.1% over the prior quarter after adjusting for headline inflation and remains significantly higher than comparable dividend yields generated by stocks listed on the DJII (0.4%).
Note: The total trading volume and corresponding market value data for the period Q1 2011 – Q4 2016 provided in previous editions of the Regulatory Update were on a cumulative YTD basis and not on a quarterly basis as reported.
Chart 1. Price Level, indexed (Q1 2005=100)
Chart 3. Dividend Yield (Nominal and inflation-adjusted, in percent)
Chart 4. Ratio between Trading Volume and Market Capitalisation (In percent)
Chart 2. Annualised Return Voldatility (In percent)
12Regulatory Update April – June 2019
E. INVESTMENT FUNDS
The period Q1 2019 to Q2 2019 saw a significant increase in the total number of funds (up 23.23%) due to new registratons of private funds. The portfolio saw a slight increase in the total NAV (0.70%), over the same period, primarily as a result of inflows of subscriptions.
*NAV figures above do not yet include Private Funds.
Fund Statistics Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1 2018
Administered Funds 5 5 6 6 6 6
Class A Exempt Funds 67 67 67 66 64 64
Class B Exempt Funds 39 39 39 41 40 39
Institutional Funds 252 254 258 259 262 264
*Private Funds 134 8 – – – –
Standard Funds 134 131 138 145 146 146
Total Number of Funds 623 508 513 525 527 533
Net Asset Value ($BD billion) $161.40 $160.28 $157.24 $165.04 $168.19 $144.66
13Regulatory Update April – June 2019
F. COMPANY AUTHORISATIONS
*Note: ‘Companies’ includes – continuations into Bermuda, exempted, exempted limited by guarantee, local (including 60/40), local limited by guarantee and LLCs.
2018 2019
Q1 Q2 Q3 Q4 Q1 Q2
Companies* 202 208 213 131 83 130
Exempted Partnerships (partnerships established in Bermuda to carry on business in or from within Bermuda)
10 76 24 87 102 126
Overseas Partnerships (overseas partnerships applying for permits to carry on business in or from within Bermuda)
0 0 0 1 0 0
Overseas Permit Companies(overseas companies applying for permits to carry on business in or from within Bermuda)
4 20 2 8 5 4
Total Applications Approved 216 304 239 227 190 260
Companies, Partnerships and Permits Statistics – Applications Approved
14Regulatory Update April – June 2019
G. INSURANCE
During the second quarter of 2019, the Authority registered 18 (re)insurers and four intermediaries. This compares to 14 (re)insurers and no intermediaries for the same period last year.
Name Date Type
Registrations in April 2019
CATERPILLAR INSURANCE CO. LTD. 2-Apr-19 B
Home Re 2019-1 Ltd. 15-Apr-19 SPI
Pompano Re Ltd. 15-Apr-19 SPI
Nautilus Indemnity Limited 15-Apr-19 B
Nautilus Reinsurance Limited 15-Apr-19 B
Convex Re Limited 29-Apr-19 4
Registrations in May 2019
Shoreline Brokers Ltd. 8-May-19 Broker
Radnor Re 2019-2 Ltd. 20-May-19 SPI
Yang Ming Insurance Co 21-May-19 2
Newport Re Ltd. 27-May-19 3B
Ed Broking (Bermuda) Limited 30-May-19 Broker
Registrations in June 2019
TriVision Reinsurance Company, Ltd. 10-Jun-19 B
TriVision Reinsurance Company, Ltd. 10-Jun-19 2
Oswald Affinity (SAC), Ltd. 10-Jun-19 3
Viaduct Re Ltd 12-Jun-19 SPI
Sugaree Insurance Company Limited 19-Jun-19 2
HSBC Insurance SAC 1 (Bermuda) Limited 20-Jun-19 A
Bellemeade Re 2019-3 Ltd. 24-Jun-19 SPI
Daiichi Sankyo Reinsurance Limited 26-Jun-19 1
Canopius Reinsurance Limited 28-Jun-19 3A
Arch Credit Risk Services (Bermuda) Ltd. 28-Jun-19 Agent
i-Intermediary Ltd. 28-Jun-19 Broker
Descriptions of the various classes of (re)insurer can be found on page 21.
Insurance Registrations (Q2-2019)
15Regulatory Update April – June 2019
Quarterly Review of the Commercial(Re)insurance Sector – Bermuda (Re)insurance Groups* (as of end Q2-2019)
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.
The second quarter of 2019 was marked by higher claims activity compared to the second quarter of 2018. For Q2 2019, the combined ratio increased by 2.7% q/q standing on average at 90.8% due to higher losses and marginal increases in the aggregate expense ratio. The loss ratio increased by 4.0% q/q while the expense ratio increased by 0.2%.
Bermuda (re)insurance groups improved their asset base by 15.8% q/q while producing a gross profit of $1.1 billion.
Reserve leverage decreased by 2.9% and financial leverage dropped by 0.3% q/q. Total equity increased by 16.2% q/q while reserves increased by 12.3%, thus reducing reserve leverage. Assets increased at a slower rate (15.8%) compared to the increase of equity reducing the financial leverage. Net Written Premiums to Equity, which is a very rough inverse measure of solvency, dropped by 4.3% q/q reaching 60.1%.
The investment portfolios of Bermuda (re)insurance groups produced a low Return on Investment close to 0.8%, an increase of 10.5% q/q. Return on Equity was 3.5% in Q2 2019. As a proxy for liquidity, the sum of cash and high quality “AAA”-rated securities represents 135.4% of claims for Q2 2019, an increase of 22.4% q/q.
*Only represents publicly traded Bermuda groups.
16Regulatory Update April – June 2019
In % unlessindicated otherwise
2019 2018 2018 2017 Change (%)
Q2 Q1 Q4 Q3 Q2 FY FY Q/Q Y/Y
Capital Adequacy and Asset Quality
Assets(In US$ billions)
122.8 118.1 107.3 106.9 106.1 107.3 103.8 15.8 3.4
Reserves to Assets (Reserve Ratio)
53.8 55.2 55.4 55.2 55.2 55.4 55.5 -2.6 -0.3
Reserves to Equity
(Reserve Leverage) 1/ 187.6 197.7 192.8 193.4 193.1 192.8 193.2 -2.9 -0.2
Assets to Equity
(Financial Leverage) 2/ 349.1 358.0 348.2 350.3 350.1 348.2 347.8 -0.3 0.1
Net Written Premiums to Equity 3/ 60.1 61.3 63.9 63.2 62.8 63.9 59.1 -4.3 8.2
Profitability and Actuarial Issues
Gross Profit (excl. capital gains) (In US$ billions)
1.1 0.9 0.1 0.5 1.0 2.6 0.2 7.8 –
Investment Income to Net Income 45.9 36.1 1027.1 115.5 53.4 340.4 12307.3 -14.1 –
Combined Ratio 90.8 91.1 106.4 99.0 88.4 95.9 107.0 2.7 -10.4
Average Claims to Reserves 4/ 2.5 2.5 2.8 2.4 2.4 2.4 2.5 4.5 -3.0
Return on Equity 3.5 4.1 0.1 1.4 2.8 1.7 0.0 26.0 -
Return on Investment 0.8 0.7 0.7 0.7 0.7 2.8 2.2 10.5 26.6
Cash and “AAA” Assets to Claims 5/ 135.4 118.5 123.2 123.8 110.6 120.2 126.9 22.4 -5.2
Table 1. Select Financial Soundness Indicators (FSIs)
Source: BMA 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 the exclusions of firms from the sample, the current table is not directly comparable to previous RU tables. Due to delayed information, two firms were removed.
17Regulatory Update April – June 2019
Figure 1. Dispersion of Financial and Reserve Leverage
Financial Leverage (in percent)
Claims and Net Non-Life Written/Earned Premiums (in US$ billions)
Reserve Leverage (in percent)
Source: BMA 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).
Note: Numbers have been restated for Q3 and Q4 2018.
Figure 2. Claims Volume and Premium Income (Q1 2018 – Q2 2019)
Source: BMA staff calculations.
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Regulatory and Legislative
Supervision
BMA Continues 50th Anniversary Celebrations
The BMA continued its yearlong 50th Anniversary celebration by giving back to the community in Q2 2019. Students from Heron Bay Primary learned about Bermuda’s colourful currency at the BMA’s Note and Coin Exhibit at BMA House on 15 May. Then, on 16 May, the BMA hosted its second ‘Day of Giving’ with Tomorrow’s Voices, a registered charity that operates Bermuda’s only Early Intervention Autism Centre for children. The BMA’s community activities for Q2 2019 were rounded off by another numismatic lesson, this time for Elliott Primary students on 18 June.
Three New Classes of Insurance Licence Proposed
A Consultation Paper was released on 14 May 2019 setting out the BMA’s proposal for two new classes of Limited Purpose Insurer and a new category of intermediary.
The first proposed class was a collateralized reinsurer. Noting the global significance and continued evolution of Insurance-Linked Securities (ILS), the BMA proposed to establish a new fully collateralized reinsurer in 2019. The new class would complement the BMA’s current regimes, however, would be targeted at more complex business models.
Second, the BMA also proposed to introduce a non-sandbox innovative class (IIGB licence). Given the specific complexities and valuation challenges around digital assets, the IIGB licence would be aimed primarily at insurers incorporating digital assets into their business models (as opposed to innovations which could be incorporated into existing classes, or business models providing indemnity coverage for digital assets in fiat currency).
Finally, a new class of intermediary – Insurance Market Place – was proposed. An Insurance Market Place would be a forum or platform, established for the purpose of bringing insurance buyers and sellers together to buy and sell insurance coverage, or trade insurance contracts, via auction or other arrangements. As part of the consultation, an Insurance Market Place Code of Conduct (the Code) was published on 15 May 2019. The Code established duties, requirements and standards for registered
Insurance Market Places, including procedures and practices to be observed. The established deadline for compliance with the Code is 1 January 2021.
New Fund Administration Provider Business Act 2019
In May, the BMA issued a Consultation Paper and draft Bill, setting out how it intended to enhance the regulatory framework for Bermuda’s Fund Administrators. While the majority of existing provisions within Part III of the Investment Funds Act 2006 would be incorporated into the new regime, the Consultation Paper stated relevant provisions would be updated to be consistent with comparable provisions in legislation recently adopted for other sectors. In addition, it confirmed the BMA’s intent to introduce new provisions related to carrying on fund administration business in or from within Bermuda and safeguarding ‘other assets’ for clients. Following consultation, the BMA advised that a finalised version of the Fund Administration Provider Business Act 2019 was expected to be introduced in the Legislature in July and brought into force in due course.
Amendments Proposed for Digital Asset Business Act 2018 (DABA)
Also in May, the BMA requested views from interested stakeholders about proposed changes to its regulatory framework for Digital Asset Businesses (DABs). The purpose of the proposed amendments to the Act is to provide for new categories of DABs together with other prudential matters. A Digital Asset Custody Code of Practice was also issued to address the unique challenges for custodians of digital assets.
BMA Conducts Joint Stress Test with Prudential Regulatory Authority (PRA)
On 18 June, the BMA announced it was conducting a joint exercise with the UK’s Prudential Regulatory Authority (PRA). The joint exercise centred on natural catastrophe and economic scenarios for property and casualty (re)insurers. It demonstrated how both regulators remain committed to transparency, supervisory cooperation and information-sharing in line with the Insurance Core Principles of the International Association of Insurance
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Supervisors (IAIS). It also enabled a deeper understanding to be reached about the interdependencies between the UK and Bermuda markets.
Consultation Papers Issued for Trust and Corporate Service Providers
Also in June, the BMA published two Consultation Papers proposing updates to the supervisory regimes for trust and corporate service provider businesses. The consultation covered updates to both the Trusts (Regulation of Trust Business) Act 2001 and the Corporate Service Provider Business Act 2012, along with the associated Codes of Practice and Statements of Principles. The purpose of the suggested changes was to address various supervisory matters and some housekeeping changes. It is anticipated that these amendments will enhance the practical application of the Acts and help Bermuda’s supervisory framework continue to meet evolving international best practices.
BMA’s Executive Chair Receives Lifetime Achievement Award
The BMA’s Executive Chair, Jeremy Cox, received the Fred Reiss Lifetime Achievement Award at the 2019 Bermuda Captive Conference in June. “Jeremy is a key figure in the Bermuda market for his leadership of the BMA during a period when it has won global recognition and respect,” said Conference Chair Mike Parrish. Mr. Cox said, “I am deeply touched and honoured to receive the Award and to be part of such a group of talented recipients.” Mr. Cox was also the Conference’s keynote speaker.
INTERNATIONAL
In April, the BMA attended the National Association of Insurance Commissioners’ (NAIC) Spring National meetings in Orlando, Florida. Amendments to the Credit for Reinsurance Model laws were a common theme throughout many of the Committee and Task Force meetings. BMA discussed the latest state of play on this exercise and the views of Bermuda with NAIC counterparts. In addition, the BMA met with Commissioner Altmaier and staff from the Florida Insurance Commission, Deputy Commissioner Slape of the Texas Insurance Commission and John Rehagen, Director of Insurance Company Regulation of the
Missouri Insurance Commission.
Also in April, the BMA hosted the International Association of Insurance Supervisor (IAIS) Supervisory Forum, which was attended by a number of representatives from supervisory authorities worldwide. Session topics included: trends in the reinsurance industry; the use of new technology by supervisory bodies; management of insurance run-off; and supervision of insurers’ exposure to cyber and climate risks. Local industry speakers also presented on areas of the reinsurance industry and global trends in the market.
In May, the BMA attended the International Organization of Securities Commissions’ (IOSCO) annual meeting in Sydney, hosted by the Australian Securities and Investments Commission (ASIC). Meetings included IOSCO´s Growth and Emerging Markets (GEM) Committee, its four regional committees and the Affiliate Members Consultative Committee (AMCC). Participants shared on various aspects of IOSCO´s priority work streams including: crypto-assets; FinTech; sustainability; data privacy; market fragmentation; asset management and retail distribution; and digitalisation. In regards to crypto-assets, the Board agreed to publish a consultation report on crypto-asset trading platforms. This report assists members with evaluating issues concerning investor protection while engaging on such platforms. The work of the IOSCO FinTech network was also discussed, with decisions being made in regards to the network’s work streams, including: distributed ledger technology; ethics in artificial intelligence and machine learning; RegTech; and encouraging innovation. IOSCO members further discussed how the Organization could assist emerging markets with FinTech matters.
Throughout the quarter, the BMA continued to engage with number of IAIS working groups and committees. In June, the BMA attended IAIS committee meetings and its Global Seminar in Buenos Aires, Argentina. The IAIS Executive Committee (ExCo) approved the release of an extensive consultation package including the outcome of the 2018 public consultation on ComFrame (for internationally active insurance groups) and material related to the Holistic Framework for Systemic Risk. ExCo discussions also touched on the progress of the 2019 G-SII Data Collection Exercise. The BMA’s Managing Director, Supervision, Craig Swan, participated in a panel discussion on new
20Regulatory Update April – June 2019
technologies, trends and developments in the market, and implications for policyholders and supervisors. Panellists discussed key collaboration themes between regulators and industry, the consumer experience and consumer ethics, and flexibility in subsequent regulation. Mr. Swan highlighted the need for regulators to engage with the topic of FinTech or else be left behind, citing the example of expanding the technological skillset within the BMA. Progressive measures across jurisdictions such as innovation sandboxes were also highlighted by the BMA and other panellists. Other international events attended by the BMA in Q2 2019 include:
• May – IAIS/Financial Stability Institute (FSI) seminars on cyber risk and new technologies, Panama City
• May – Financial Stability Board (FSB) Regional Consultative Group Americas meeting, Buenos Aires
• June – Organisation for Economic Cooperation and Development (OECD), Insurance and Private Pensions Committee meeting, Paris
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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
• Special Purpose Insurer (SPI): A 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 1978
Fund licence classes
• Administered Funds must appoint a fund administrator licenced under Part III of the IFA 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. Administered funds are not restricted to qualified participants.
• Class A Professional Funds are limited to qualified participants; the fund must have an officer, trustee, or resident representative in Bermuda, being a person who has access to the books and records of the fund; the fund must appoint service providers in accordance with the IFA [Note: the investment manager appointed to the fund must be either licenced in Bermuda; authorised or licenced by a foreign regulator recognised by the Authority; or i) carrying on business in or from
22Regulatory Update April – June 2019
Bermuda, or ii) 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]; and the fund must file its audited GAAP/IFRS financial statements on an annual basis.
• Class B Professional Funds are limited to qualified participants; the fund must have an officer, trustee, or resident representative in Bermuda, being a person who has access to the books and records of the fund; the fund must appoint fit and proper service providers in accordance with the IFA; and the fund must file its audited GAAP/IFRS financial statements on an annual basis.
• Institutional Funds are limited 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; the fund must appoint fit and proper service providers in accordance with the IFA; and the fund must have an annual audit.
• Private Funds are restricted to 20 participants or less; the operator of the fund cannot market to the public; the fund must appoint a custodian and a service provider licenced in Bermuda; and the fund must file management accounts or audited financial statements on an annual basis.
• Standard Funds do not fit within any other class of fund. Such funds are not restricted to qualified participants and may include a significant number of retail investors; the fund must appoint fit and proper service providers in accordance with the IFA; and the fund must have an annual audit. Standard funds are subject to a higher degree of regulatory and supervisory oversight.
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BERMUDA MONETARY AUTHORITY
BMA House • 43 Victoria Street • Hamilton HM 12 BermudaP.O. Box HM 2447 • Hamilton HM JX Bermudatel: (441) 295-5278 • fax: (441) 292-7471email: [email protected] • website: www.bma.bm