The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas First’s top executive yesterday said it is targeting a 15 percent return on equity (ROE) in non-hurricane years to ensure it smooths out “volatility” and remains attractive to investors.

Patrick Ward, the property and casualty insurer’s president and chief executive, told Tribune Business it had seen nothing to disturb recent projections that 2018 profits would come in at around $10m.

Confirming that Bahamas First was “absolutely” focused on a 15 percent ROE target, Mr Ward explained that such returns were necessary to ensure the company remained an attractive investment option compared to alternatives.

“We’re in the risk business. We’ve got to have that premium return to justify the capital,” he said. “The volatility around insurance company investments suggests we have to have ROE in that range when compared to alternative investment avenues shareholders may have.”

Bahamas First, in a recent letter to shareholders, said 2018’s ROE was around 13 percent based on internal financials suggesting it had generated around $10m in total comprehensive income for the 12 months to end-December.

“The unaudited result for 2018 points to a comprehensive income in the range of $10m for the group,” the letter said. “At this level of income, the ROE would be approximately 13 percent for 2018, in isolation, and close to 15 percent for the average of the most recent three-year period.

“Having regard to the fact that two of the three years within this average calculation involved material natural catastrophe claims, we are confident that our current business model can consistently achieve the ROE targets set by the board.”

Mr Ward yesterday said Bahamas First had seen nothing to alter its profit forecasts, although its financials are currently being reviewed by external auditors prior to their annual sign-off and publication.

“Nothing has happened so far to change that,” he added of the expected $10m bottom line. “We’re in the middle of finishing the audit, but at this point there is nothing I can say that would change or alter that expectation.

“We had no hurricane losses or incidents last year in either Cayman or The Bahamas. From that perspective, we didn’t have any extra claims activity that will have any impact on the results. In any year when you don’t have significant hurricane losses you should be running good technical results.”

The last major payout experienced by Bahamas First, and indeed all other local property and casualty underwriters, was for losses associated with Hurricane Matthew in October 2016. Some also experienced elevated claims in 2017 as a result of having exposures elsewhere in the Caribbean to hurricanes Irma and Maria.

Describing 2018 as a “much-needed reprieve” from major storm activity, Bahamas First’s letter to shareholders said its core underwriting (insurance) results in this nation and the Cayman Islands “were either in line with expectations, or positively ahead of our original projections”.

“For the second year running we were able to generate an increase in our gross written premiums, primarily fuelled by increased property rates in both locations, and the steady growth in business for our health segment in Cayman,” the insurer said.

“Competitive pressures, particularly around product pricing, are a constant in both jurisdictions but we remain focused on the need to maintain an appropriate balance between growth and margin integrity.

“The economic environment in Cayman continues to be very encouraging and we expect fairly robust growth in the overall economy well into the future. In The Bahamas, the economic conditions have stabilised, and emerging signs of improvement continue to support a more promising outlook.”

Bahamas First said the “unwelcome” VAT increase, which saw the rate rise from 7.5 percent to 12 percent with effect from July 1 last year, “seems to now be fully embedded into the daily reality of most residents of The Bahamas”.

Mr Ward yesterday told Tribune Business that Bahamas First had “not passed on in full” to consumers the extra cost it has incurred from absorbing VAT associated with residential homeowner premiums that are now treated as ‘exempt’.

While this had benefited consumers, he warned that Bahamas First and others may be unable to continue absorbing these costs if - and when - a major hurricane strikes to produce thousands of insurance claims.

“Our clients are benefiting from their premiums not having the 12 percent VAT included on homeowner coverage, and that’s a welcome development for most people,” Mr Ward said. “For other lines of business the population has become accustomed to paying VAT on premiums.

“From the industry perspective we’ve seen the impact on the cost base from the additional VAT component. At this stage, certainly speaking for ourselves, we’re not passing that cost on in full. The full test will be in a catastrophe situation when we have thousands of homeowners claims, and the impact will be significantly more than in a year when we don’t have a catastrophe loss.”

Bahamas First’s shareholder letter said the only disappointing element of its 2018 results was the “unrealised losses” on its Commonwealth Bank investment in The Bahamas, as the year-end share price did not recover to 2018 levels, coupled with its Cayman-based international bond portfolio.

Mr Ward said the bond portfolio’s decline reflected what was happening to prices globally. He added that the “overall mood” in the Bahamian economy appeared to be improving, though, with Bahamas First always seeking to “do better than the year before” with its financial results hurricanes notwithstanding.

“On a global basis, both the property and casualty (P&C) and health insurance sectors continue to be subject to a relentless pace of disruption, and this will no doubt continue into the foreseeable future,” Bahamas First warned in its letter to shareholders. “Leveraging technology and innovation will be a key element of our strategic focus as we endeavour to thrive in this emerging environment.

“We have already taken active steps to implement more advanced systems for our P&C business segment during 2019 for full deployment in 2020. The successful completion of this project will provide us, and our business partners, with a platform for enhanced customer experiences and a more efficient operating environment, while bringing us closer to our digitisation goal.”