The net income of companies operating in the island’s long-term insurance market plummeted by 26 per cent in 2022, a new report by the Bermuda Monetary Authority reveals.

Operationally, sector firms reported a net income of $11 billion for the year compared with a net income of $14.9 billion reported in 2021.

The BMA said the decrease was driven by a significant drop in investment income in 2022, with firms reporting only $500 million of investment income versus the $23.6 billion reported in 2021.

The BMA’s Bermuda Long-term Insurance Market Analysis and Stress Testing Report, the first of its kind, provides an overview of the current landscape of the island’s long-term insurance sector and outlines key market indicators in terms of assets, liabilities, solvency, profitability and liquidity.

It also provides an overview of the stress testing analysis conducted by the BMA.

The BMA said financial indicators deteriorated in 2022 on all return indicators, with returns on assets reducing by nearly 30 per cent, return on equity down about 20 per cent and return on investments reduced to nearly nothing.

Underwriting income of $101.1 billion in 2022 remained relatively stable, with a moderate decrease of 1.6 per cent year-on-year, the BMA said.

Claims increased by 24.5 per cent to $61.3 billion in 2022, up from $49.2 billion in 2021, resulting in payments of $110.5 billion to policyholders over the two years.

At year-end 2022, firms had written gross written premiums of $134 billion for the year and net written premiums of $96.6 billion.

Companies grew their total assets by $23.5 billion, or 2.2 per cent, in 2022 to $1,089.5 billion.

At the end of 2022, cash holdings, sovereign bonds, and corporate bonds constituted 65.1 per cent of the asset allocation for Bermuda’s long-term sector, followed by mortgage and asset-backed securities at 17.8 per cent.

This compares with holdings of 70.7 per cent for cash and sovereign and corporate bonds in 2021 and to holdings of 14.3 per cent for mortgage and asset-backed securities in 2021.

Total liabilities stood at $974.3 billion at year-end 2022, up 3.8 per cent from $938.4 billion in the prior year.

In aggregate, the excess assets over liabilities were 11.8 per cent in 2022, a decrease compared with the 13.6 per cent reported in 2021.

Capital and surplus decreased 9.7 per cent, from $127.6 billion to $115.2 billion.

At year-end 2022, approximately two-thirds of the long-term sector’s business was related to longevity and financial business and the remaining business was related to mortality and critical illness.

The United States accounted for more than 60 per cent of Bermuda's long-term insurers' reserves, followed by Asia; European business (including Britain) represented less than 5 per cent of the insurance reserves.

The BMA said the objective of stress testing was to assess the capital adequacy of the insurers under adverse financial markets and stressed liquidity conditions; the scenarios provide an analysis of the long-term insurance sector’s vulnerability to certain shocks.

It said: “More specifically, the purpose of the tests is to assess the impact of the severe but plausible losses on the insurer’s statutory balance sheet. Thus, these tests help assess the financial capacity of an insurer to absorb the manifestation of key financial risks.”

The BMA added: “The authority is undertaking a deep-dive review into the results of the new liquidity stress test and intends to publish quantitative results in future reports.”

The organisation said Bermuda’s long-term insurance industry had experienced meaningful growth, primarily driven by demand from direct insurers or institutions using reinsurance for exposure, risk, balance sheet volatility and capital management in light of the challenging economic environment and an ageing population with improved mortality.

The BMA said future reports will expand on the data and exhibits presented in the inaugural report, including the addition of future reporting years providing more years of comparison, incorporating additional or new data from corporate social responsibility enhancements where possible, providing additional insights into asset holdings, providing additional insights into the stress test results, including quantitative data on the new liquidity stress test scenarios and considering new or enhanced stress test scenarios.