Bermuda re/insurers’ may have reached peak underwriting profitability
Bermuda re/insurers may have reached peak underwriting profitability as rate increases from the hard market are expected to moderate in 2024, Fitch Ratings has predicted.
But the ratings agency predicted in its 2024 market update that returns will continue to be favourable through the mid-year renewals and said claims from natural catastrophes have been priced into the 2024 rates.
“The hardening market continued at the January 2024 reinsurance renewal, although it was much more orderly than the chaotic experience one year ago as the supply/demand imbalance narrowed,” the report said. “The hardening environment is also supported by relatively limited new capacity entering the market and deteriorating loss-cost trends from social inflation.
“Pricing was flat to up in most lines, although some retrocession experienced rate declines as robust capacity returned to the market.
“Reinsurers generally held firm on the tighter terms and conditions negotiated in 2023. Fitch expects market conditions to remain favourable for reinsurers at the 2024 midyear renewals, although with mostly flat rates as pricing is generally adequate.”
The report also affirmed that the Insurance Linked Securities market boomed in 2023: " Capital levels of insurance-linked securities (ILS) reached a record in 2023, as returns in the sector became increasingly attractive, with particularly strong catastrophe bond issuance.
"Fitch expects favourable conditions to lead to continued growth in the alternative reinsurance capital market in 2024."
Fitch predicted that the underlying combined ratio was expected to stabilise or improve slightly in 2024, “as rate increases wane and loss-costs continue to increase”.
It predicted that the average combined ratio for Bermuda re/insurers in 2023 would be 85% to 86%, “a meaningful improvement” from the 92.7% recorded in 2022. Much of the decrease was driven by the decline in catastrophe losses, which were expected to drop to 3-4 percentage points on the 2023 combined ratio from 9.8 points in 2022.
Fitch said shareholders’ equity grew 23% at the end of the third quarter from the 2022 year-end, with ROAE "comfortably above" the cost of capital, and was expected to approach 20% in 2023.
“Returns were driven by increased underwriting and investment income, equity market gains and stabilisation of unrealised bond losses. Capital levels were supported by common equity issuances to support growth, and reduced return of capital.”
Fitch warned that Bermuda’s implementation of a 15% corporate tax would marginally reduce its economic advantage, but said the island’s established position in the global (re)insurance marketplace will likely endure. Additionally, the recent life insurer-focused solvency review also will help the domicile maintain its Solvency II (S2) equivalence with the EU.
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