Growth in Bermuda’s insurance and reinsurance sector masks underlying problems, a report by ratings agency Standard & Poor’s has warned.

The island’s flagship industry posted a 21 per cent increase in consolidated gross premiums written in the first quarter of this year.

But S&P’s report on the first three months of 2016 said that reinsurance pricing continues to decline and that the increase was driven by a handful of companies that made major acquisitions over the past 18 months.

The S&P report said: “When the results are re-examined and with additional outlier companies such as Axis Capital Holdings Ltd removed, the industry’s growth would have been flat.”

Aggregated gross premiums written totalled $16.12 billion in the first quarter, compared to $13.38 billion in the same period the previous year.

S&P said: “This was driven by pockets of strength across a few lines of business such as accident and health insurance, UK motor reinsurance and mortgage reinsurance.

“At the same time, there was weakness in most other lines such as agriculture, marine, energy, property and property catastrophe.

“S&P Global Ratings believes this shows continuing trends of fierce competition and a soft global reinsurance market that have caused the Bermudians to look to diversify premium streams.”

The S&P report said that the combined XL Group and Catlin Group increased gross premiums written by 76 per cent, while RenaissanceRe’s acquisition of Platinum Underwriters increased gross premiums written by 34 per cent and the link-up of Endurance Specialty Holdings and Montpelier Re Holdings increased gross premiums written by 24 per cent.

S&P said: “If we were to exclude the former companies, growth would be 4 per cent year over year with outliers such as Axis Capital Holdings — GPW grew 17 per cent year over year — and PartnerRe Ltd, where GPW declined 6 per cent year over year.

“Axis cited strength in both insurance and reinsurance segments with increases in multiple lines of business driven by quota shares and multiyear deals.

“PartnerRe experienced top-line pressure across most of its lines of business. In addition, if we were to remove Axis, the Bermudian industry growth would have been less than 1 per cent.”

But the S&P report added that underwriting profitability “remained strong”.

“The carriers continued to benefit from favourable reserve releases but to a lesser extent during first quarter 2016 than first quarter 2015,” the report stated.

“Reserve releases were lower and totalled $511 million, or 5.6 per cent favourable impact on the loss ratio, compared with $615 million, or 7.8 per cent favourable impact on the loss ratio,

“If we were to exclude the reserve releases, the accident-year loss ratios remained somewhat flat at 60 per cent in both periods.

“The acquisition expense ratio worsened due to increased paid commissions, which did not surprise us given the fierce competition in the market to write profitable business and the premium companies are paying to assume such risk.”

The report added that return on shareholder equity also declined, from 12.8 per cent in the first quarter of 2015 to 8.7 per cent for the same period this year.

S&P said: “We believe that ROEs were depressed this quarter because of the difficult market conditions and investment income being drags on net income, which dropped by 28 per cent from the same period in 2015 — $1.27 billion versus $1.76 billion.”

And the S&P analysis added: “We expect the Bermudians to continue to focus on strengthening their value proposition and enhancing their client relationships, recognising the changing market dynamics as a number of cements are centralising their reinsurance purchases.”