By NEIL HARTNELL Tribune Business Editor ROYALSTAR Assurance is expecting to generate a $2-$3 million net profit for 2011 despite enduring a tough year, its managing director yesterday saying the company had to-date "paid out almost 200 per cent" of the original investment made by its shareholders in 2002 to acquire it. Speaking to Tribune Business after A. M. Best, the international insurance credit rating agency, had reaffirmed the Bahamian property and casualty underwriter's top rating, Steve Watson said the average $4.2 million net income generated by RoyalStar Assurance over the past nine years translated into an annual Return on Equity (RoE) of close to 12 per cent. Stripping out $10 million of preference share capital, and the annual dividends paid to these debt holders, and Mr Watson said RoyalStar's annual Return on Equity was closer to 14 per cent. Noting that few businesses, both in the Bahamas and around the world, were generating such shareholder returns, Mr Watson said RoyalStar's achievements since the current Bahamian/Caribbean owners bought the former Royal & Sun Alliance operation had to be "a good performance in anyone's book". Noting that RoyalStar had managed to "quadruple" its capital base since that 2002 deal closed, Mr Watson said the company's consistent profitability had been a key factor behind A. M. Best reaffirming its A- (Excellent) and 'a-' financial strength and issuer credit ratings, respectively. "We started in October 2002 with $10 million of capital, and now we have around $40 million," the RoyalStar managing director told Tribune Business. "We've grown the capital base by $30 million. Some $20 million of that is from retained earnings, and $10 million from preference shares, and we've paid out $18 million in dividends. "So, since the company was formed, we've managed to grow the capital base very nicely; growing it four times', while premium income has risen by 10-15 per cent. That's not large." The difference between the size of the top and bottom line increases, Mr Watson said, showed that RoyalStar's relatively conservative strategy of focusing on underwriting performance and net profit, as opposed to just growing top-line gross premiums, had paid off. Consistent profitability on an annual basis meant a growing capital base that gave RoyalStar Assurance options, enabling it to choose any direction it desired to grow its business without requiring additional financing. "We're debt free, have never borrowed money, and most of the capital is cash," Mr Watson explained. "The quality of the capital is also of the highest order." Acknowledging that Hurricane Irene-related claims payouts would be "a big drag on results, no doubt it" for 2011, together with some Cayman Islands-based road accident liabilities, the RoyalStar chief nevertheless added: "We should still be profitable. "It's a little bit too early to say, but we should be somewhere in the region of $2-$3 million. We should still be profitable, and given a difficult 2011 that's a good outcome." Combining the $20 million in retained earnings with the $18 million cumulative dividend payouts to shareholders, Mr Watson said, indicated that RoyalStar had generated some $38 million in collective profits between 2002-2010 year-end. "That averages out at around $4.2-$4.3 million a year, which for us is about right," he added. "In 2004 we lost money, because of Frances, Ivan and Jeanne. A good year for us is $5 million, and $5 million provides a Return on Equity somewhere in the region of 12 per cent. "If you back out the $10 million in preference shares, and the associated dividends, $4.25 million on $30 million gives a Return on Equity of 14 per cent." With most companies throughout the world generating RoEs in the low single digits, Mr Watson told Tribune Business: "If you're generating in excess of a 10 per cent RoE, you ought to be fairly happy. I don't see too many businesses in the Bahamas and globally generating RoE too much more than 10 per cent these days." Mr Watson's 13-year tenure with RoyalStar (including some four years with the former Royal & Sun Alliance) comes to an end this summer, when he leaves to be replaced by the company's chief financial officer, Anton Saunders. Telling Tribune Business he was "very satisfied" with the company's progress, Mr Watson recalled: "When we became RoyalStar, we were looked at very much as a small company with a large number of individual investors who did not necessarily have the same interests." Awareness of the RoyalStar brand, and what it stood for, "was very low", but Mr Watson added: "I'd hazard a guess now that not too many people have not heard of RoyalStar." Describing this as "a great achievement", Mr Watson attributed the branding to the 24/7 accident assistance presence of its green trucks; marketing; gasoline giveaways; and motoring advice. "You look at the capital expansion from $10-$40 million, and in the period since RoyalStar we've had seven-eight hurricanes between the Bahamas and Cayman, and the financial crisis," Mr Watson told Tribune Business. "It's been a very, very difficult period for many businesses, particularly the property and casualty business, yet we've managed to quadruple the capital base and pay out almost 200 per cent of the original investment as dividends. That's good to be a good performance in anyone's book. I don't think too many would disagree with that." Explaining the rationale for its RoyalStar ratings, A. M. Best said yesterday: "The ratings reflect RoyalStar's consistent overall profitability, excellent capitalisation and established presence within the Caribbean market. "RoyalStar continues to produce positive operating results, which are a function of the company's prudent underwriting philosophy and steady stream of investment income." But the rating agency added: "Since RoyalStar writes all of its business in the Caribbean, it is exposed to frequent and severe weather-related events. Although this makes RoyalStar somewhat dependent on reinsurance as part of its overall risk management program, the company's solid reinsurance program reduces its net probable maximum loss to a manageable level. "These positive rating factors are partially offset by Royal Star's geographic concentration, dependency on reinsurance, continued exposure to weather-related catastrophe events and sluggish economic conditions in the Bahamas. Furthermore, the Bahamas and other Caribbean insurance markets have become increasingly competitive as indigenous and outside insurers seek to gain market share in the region. "Key rating drivers that may lead to positive rating actions on RoyalStar include continued strong underwriting results in conjunction with surplus appreciation, and improvements in the Bahamas' macroeconomic environment. Negative rating triggers could include prolonged adverse operating results that are exacerbated by a series of large catastrophic events."