The Tribune

By NEIL HARTNELL

Tribune Business Editor

ROYALSTAR Assurance's managing director yesterday told Tribune Business the general insurer had "outperformed everyone in the market by a considerable way" over the past nine years, although $1.4 million in net Hurricane Irene claims dropped its 2011 total comprehensive income by 15.7 per cent.

Steve Watson, speaking to this newspaper as he prepares to end 13 years as the underwriter's head executive, said its strategy of "sacrificing growth for profitability" had paid dividends, having more than quadrupled the capital base to $41.582 million and returned $16 million to shareholders since it was acquired from Royal & Sun Alliance.

Noting that RoyalStar had weathered a "very difficult year", in which the Bahamian general insurance market had been hit by a series of heavy fire-related claims, plus Hurricane Irene, Mr Watson said the company had still managed to generate $3.478 million in total comprehensive income.

While a reduction on the $4.127 million generated in the 12 months to end-December 2010, Mr Watson told Tribune Business that RoyalStar had produced $2.478 million underwriting profit in 2011 despite Hurricane Irene's $3 million gross impact, with the bottom line supplemented by $1 million in investment income.

Explaining that RoyalStar typically aimed to generate $5 million in comprehensive net income in a catastrophe-free (hurricane free) year, representing a 12-13 per cent Return on Equity (RoE), Mr Watson said last year's 9 per cent RoE - while lower than the insurer's original projections - was "reasonable".

And he added that while RoyalStar's top line, gross written premiums, increased by 6 per cent year-over-year in 2011, up from $60.445 million to $64.135 million, average written premium amounts on its motor insurance portfolio dropped by 7 per cent as consumers continued to shift in favour of 'third party' coverage.

"We've clearly sacrificed growth for profit," Mr Watson told Tribune Business of RoyalStar's philosophy. "We're prepared to grow in circumstances that are such that we can both grow and make a profit, but are not going to grow [the top line] if we can't make money.

"We are flexible as to what the market does. If rates go up and we can make a profit, we will expand. If rates don't go up and we can't make a profit, we won't expand."

Mr Watson pointed to RoyalStar's Hurricane Irene experience, both in terms of claims volumes and amounts, as evidence of the success created by the strategy.

The general insurance underwriter, he explained, had started reducing its exposure on two of the hardest-hit islands, Abaco and Eleuthera, in 2004 following Hurricanes Jeanne and Frances, believing premium rates were not high enough to compensate for the risk exposure.

"We reduced our exposure in Abaco and Eleuthera, because the rates are too low, and can't make a profit," Mr Watson said. "We've reduced our exposure there significantly since 2004, and had very small Hurricane Irene losses as a result."

He told Tribune Business that RoyalStar received 271 claims, worth a collective $3 million gross, as a result of Hurricane Irene. The latter figure was "netted down" to $1.4 million, the Bahamian carrier's share of the payout, the remaining $1.6 million being borne by its reinsurance partners.

Without that $1.4 million net payout to its clients, RoyalStar would have been close to its annual target, generating total comprehensive income of close to $4.9 million for 2011 - a figure well in excess of the $4.127 million produced in the 2010 hurricane-free comparative period.

"We expect to make around $5 million, up or down, somewhere around that range, with a Return on Equity of 12-13 per cent," Mr Watson told Tribune Business of RoyalStar's annual financial goals.

"That's what we expect to do if there's no hurricane. If there is a storm, it will affect the calculation. If the question was posed two-three days before Irene struck, when it appeared to be on course for New Providence, I'd have been very pleased with a result around $1.5 million.

"Because it did not hit New Providence, the loss was not as big as it could have been for us. Everyone is satisfied with the level of profitability. It's less than we budgeted for, but with the economy, Irene and the big fire losses - we could have picked those up, but didn't - I think the result is very pleasing. I'd have liked it to be a banner, record year, but it was a very difficult year. It was a very strong performance in very trying circumstances."

Mr Watson said RoyalStar's goal had always been "to try and produce a profit" even in a hurricane year, and the company was now "structured" to achieve this.

He acknowledged, though, that the carrier's auto insurance portfolio had "suffered" as a result of the declining economy, as consumers switched from new to 'used' vehicles, and substituted more expensive comprehensive policies for third party coverage.

This, Mr Watson explained, had resulted in a decline in average premiums, although the volume of vehicles insured had remained flat. "It depends on the model and age gap, but it's a single digits drop - on average, 7 per cent," Mr Watson said of the reduction in average auto premiums. "We can't control that."

Yet, on the other side, with the value of insured vehicles declining, RoyalStar was benefiting from reduced claims payouts. "The flip side is that claim costs have come down," he explained. "If you have a car that's reduced in value from $10,000 to $5,000, the payout for a total loss will only be $5,000.

"The flip side is that premiums are down, but so are claims. We make money by making sure premiums are more than claims. As long as claims are falling more quickly than claims, and the relationship does not get out of synch, the effect on the bottom line is limited. But it's not good to have a drop in the top-line."

The issues with its motor vehicle portfolio resulted in RoyalStar's net written premiums declining by 8 per cent year-over-year to $19.951 million, compared to $21.684 million the year before.

Reflecting on his 13 years with the general insurer, prior to handing over the reins to Anton Saunders at end-June, Mr Watson said he was leaving RoyalStar in a "very strong position", having overseen its transition from UK-owned to majority Bahamian-owned, with Sunshine Insurance/Star General holding a 52 per cent stake through their joint investment vehicle.

"The company's got $41.582 million in capital, and we started out with $10 million in 2003," he told Tribune Business. "We've got fantastic solvency margins based on our net written premiums. The assets are high quality assets, and a lot of it is cash. We're a flexible, efficient, well-run business, and in a very strong position."

Between cash in hand and at banks, and term deposits, RoyalStar holds some $28 million of its $68.546 million in assets as cash. Noting that RoyalStar had generated $40 million in net income over the past nine years, Mr Watson added: "We've also paid dividends in the region of $16 million in addition over the last eight-nine years.

"It's been a difficult eight-nine years. We have had Hurricanes Irene, Frances, Jeanne, Floyd, Michelle, Ivan and Paloma, some of which have impacted our business in the Cayman Islands, plus the financial crisis. It's not exactly been a particularly favourable macroeconomic environment, but the results have been very good.

"It's been a fantastic collective team effort, and I think the shareholders are appreciative of what's gone on and are aware of the fact that we have outperformed everyone in the market by a considerable way."