Bermuda re/insurers set for brighter future, but threats remain, says ratings agency

Bermuda re/insurers are set for a brighter future after years of underwriting underperformance, according to S&P Global Ratings.

In an article released today, the ratings agency, which this week revised its view on the overall reinsurance sector from negative to stable, said Bermudian re/insurers are reemphasising underwriting discipline, including their pricing strategies, and diversification into less volatile lines.

“We think these efforts have not only enabled re/insurers to absorb earnings volatility but also have yielded stronger underwriting profits, as performance in the past two years and in the first six months of 2023 indicates” S&P said. “This provides stability to the credit ratings.”

The article said: “Bermudian reinsurers and insurers (re/insurers) have faced their share of difficulties in the past six years, including large natural catastrophe losses, risks from the pandemic and high inflation, and the Russia-Ukraine conflict.”

“These factors prompted re/insurers to reemphasise underwriting discipline, including their pricing strategies, and diversification into less volatile lines.”

S&P said the rated re/insurers posted a collective combined ratio of 93.5% in 2022, an improvement from 97% in 2021 and from the previous five-year average of 101.5%.

“The positive trend continued in the first half of 2023, with the combined ratio improving further to 85.9%.

“Nevertheless, heightened natural catastrophe losses, persistently high inflation, and potential shortfalls in loss reserves could create roadblocks,” S&P said. “We think it will be key for Bermudian re/insurers to have solid underwriting discipline, employ effective risk selection strategies, and exercise prudence in claims/reserve management.”

S&P noted that re/insurers had diversified their lines, “recognising its role in mitigating business volatility and strengthening earnings”.

“These re/insurers are expanding their presence in less volatile insurance lines, and some are even broadening their geographic reach. We believe the need to diversify has emerge din response to elevated catastrophe losses, as well as to take advantage of favourable pricing in certain insurance lines and to enhance underwriting cycle management.

The report noted that Axis Capital had exited property and property catastrophe reinsurance while Argo and SiriusPoint had reduced their exposures to severity risk and Lancashire, “renowned to be a property catastrophe writer” was diversifying its business mix.

Conversely, RenaissanceRe’s planned purchase of American International Group’s treaty insurance business, including Validus, would “provide RenaissanceRe with greater access to more than $3 billion of premiums, of which it expects to keep about $2.7 billion”. S&P added: “In our view, this will further strengthen RenaissanceRe’s competitive position, increase its scale, raise its relative importance to its clients and brokers, broaden its footprint.”

The report concluded: “While the future remains promising, hurdles remain. On the one hand, the substantial rate changes, especially in short-tail lines, coupled with fundamental shifts in underwriting and improved investment returns, should bode well for the Bermudian re/insurers.

“On the other hand, they’re still facing the lingering pain of catastrophe losses, increasing frequency of secondary perils, and persistently high inflation and its potential effect on loss reserves.

“We believe that maintaining underwriting discipline and effective risk selection will be key to navigating these issues.”