The market segment outlook for the global reinsurance segment has been revised to positive from stable after the sector saw robust profit margins in 2023, according to AM Best, which attributed the sector’s improved performance to higher attachment points and tighter terms and conditions after a period of drastic repricing.
Despite some signs of reinsurance rate deceleration or slight rate softening at the most remote layers of protection, underwriting discipline is being maintained, according to an AM Best’s report titled “Market Segment Outlook: Global Reinsurance.”
“Unlike previous hard market cycles, the current one is not characterized by a shortage of available capital. Negative rating actions on reinsurers in recent years have not been triggered by surplus declines but rather by technical underperformance,” the ratings agency said.
Repricing and Derisking
“Recently improved and stabilized underwriting margins followed a string of disappointing results in the years after heavy weather-related losses in 2017 (notably Hurricanes Harvey, Irma, and Maria),” AM Best said.
“Repricing efforts were compounded by actions aimed at tightening terms and conditions, with a diminished appetite for aggregate protection, a focus on named perils, a shift from proportional to excess of loss covers, and a sharp increase in attachment points.”
The AM Best report noted that the tightening of terms and conditions was critical, and at least as important as the rate increases, in bringing about the sustainability and stabilization of reinsurers’ technical margins.
In addition, several reinsurers reduced their exposures to natural catastrophe perils, especially in high frequency layers – actions that “translated gradually into positive and more stable underwriting profits.”
“In 2023, for a third year in a row, the global reinsurance segment generated positive underwriting results, with several reinsurers reporting combined ratios below 90.0,” AM Best said. (Combined ratios below 100% indicate underwriting profits).
Investment Gains
In 2022, similar good underwriting results “were heavily countered by unrealized investment losses in fixed income portfolio.” AM Best said these investment losses have been mostly recouped due to higher reinvestment rates and in 2023 most players reported excellent ROEs, which exceeded 20% in several cases.
“AM Best believes that the exceptional returns on equity experienced in 2023 are unlikely to be repeated at such a high level, but expects reinsurers to focus on underwriting discipline in the near term,” commented Carlos Wong-Fupuy, senior director, AM Best, in a statement accompanying the report.
Path Toward Stabilized Profits
The report noted that improved and stabilized underwriting margins followed a string of disappointing results in the years after heavy weather-related losses in 2017 (notably Hurricanes Harvey, Irma, and Maria).
“Stabilized underwriting profits became visible in 2021, with the hardening of the market confirmed by the dislocation of the renewal season in early 2023. Cedents and reinsurers realigned their roles, with reinsurers retaking their historical role as providers of balance sheet protection rather than earnings stabilizers.”
AM Best said that loss ratios during the first quarter of 2024 were affected by large losses, including the collapse of the Francis Scott Key Bridge in Baltimore – but underwriting margins and annualized ROEs remain strong.
No New Entrants Expected
Despite the attractive returns experienced in recent periods, AM Best does not expect any significant new entrants to the market. “Well-respected management teams have been unable to raise capital to set up the new start-ups that we would have seen in prior hard market cycles. This lack of disruption by new entrants enables the preservation of discipline by seasoned players still recouping losses from previous years.”
From an investor’s perspective, AM Best said, there is a critical distinction between an established reinsurer with a proven track record, scale, and diversification, and the formation of a new company with a limited business profile.
“Signs of consolidation and flight to quality are clear, with selected major reinsurers attracting new capital, acquiring other businesses, and expanding their scope (new product lines or geographies), while maintaining underwriting discipline,” AM Best continued. “These trends are being reinforced by cedents favoring not only financial strength but also a comprehensive offering to cater to their complex needs.”
AM Best noted that demand for coverage remains strong due to heightened natural catastrophe loss activity and general economic uncertainty.
A Disciplined Segment
Capacity from the insurance linked securities (ILS) segment, which has been flat for the last five years, has shown some signs of expansion, which, AM Best said, is mainly driven by record issuance of catastrophe bonds in 2023.
“ILS previously was seen as a direct competitor to rated balance sheets, but is now perceived as more of a strategic partner. This is particularly true given the ILS segment’s focus on the most remote layers, as well as retro capacity needed to support traditional reinsurers’ risk appetites.”
At the same time, dedicated reinsurance capital has been expanding steadily over the past decaded, with the exception of 2022 when the unrealized investment losses in fixed income portfolios followed sharp increases in interest rates and reduced the capital and surplus of global reinsurers.
Challenges Ahead
AM Best said its positive outlook takes into account the challenges the global reinsurance segment still faces. “Heightened natural catastrophic activity, the increasing relevance of cyber risks, geopolitical uncertainty, and economic and social inflationary pressures remain key topics of discussion crucial in the ratings assessment.”
Generally, global reinsurers have been able to leverage their enterprise risk management (ERM) frameworks to adjust their strategies to a changing market environment, the report said.
“Global reinsurers tend to easily adapt their business mix and risk profiles to evolving market conditions. Well diversified organizations can use a number of levers to timely enter and exit particular pockets of the market based on performance expectations.”
AM Best cited the examples of the shift from high frequency layers in the property natural catastrophe arena (during the January 2023 renewals) as well as increased caution recently when writing certain US casualty lines.
“Concerns regarding adverse development of US casualty books seem to be limited to particular years,” said AM Best, noting that reserve strengthening charges have been comfortably absorbed by profit margins in other lines of business.
Source: AM Best
Topics Trends Profit Loss Reinsurance
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