Bermuda-US reinsurers should improve underwriting results in 2023, says AM Best

Bermuda and US reinsurance groups should be able to sustain and improve on their aggregate combined ratio from 2022 provided the industry does not suffer outsized catastrophe losses in the second half of 2023, according to ratings agency AM Best.

The agency said its composite of 21 Bermuda and US reinsurance groups produced a 3.1-point improvement in their combined ratio, which fell to 92.9%. That was largely driven by a rise in net premiums written, which rose 16% in 2022 following a 20% rise in 2021.

“This growth reflected an improved rate environment for most business lines, particularly property exposures,” AM Best said in its market segment report on US-Bermuda reinsurers. “AM Best projects that premiums for the composite will further increase in 2023, as demand remains high, and rates in key lines of business continue to rise, particularly for catastrophe-exposed business.

Greg Dickerson, director, AM Best, said: “These favourable trends, combined with catastrophe activity that impacted primary carriers more than reinsurers during the first half of the year, suggest that the composite should be able to sustain, and even improve upon 2022 results.”

Despite the high natural catastrophe activity in 2022, the composite’s 2022 accident year (excluding prior year reserve development) combined ratio of 94.7 was 7.5 points better than the 102.2 ratio in 2021. The year-over-year improvement was due largely to steady improvement in reinsurance pricing, terms, and conditions, Best said.

The report also noted that significant realised and unrealised investment losses led to an aggregate net loss for the US-Bermuda composite in 2022, following positive net income in 2021. The composite posted a -2.4% return-on-equity ratio, versus 10.8% in 2021, when net income benefited from substantial pre-tax realised/unrealised investment gains.

However, the recovery in investment markets suggests that while it will take some time to recoup unrealised fixed income losses, “net investment income will benefit immediately from significantly higher reinvestment rates in fixed income asset classes.”

AM Best added: “This provides a strong earnings tailwind in 2023 and beyond. The composite will nevertheless need to generate solid underwriting results in 2023 if it is to cover its cost of capital.”

The ratings agency said Hurricane Ian last September, which caused an estimated $60 billion in insured losses, represented “a breaking point for US and Bermuda reinsurers, which entered the subsequent January renewal season with renewed determination to restore pricing, terms and conditions to levels supporting achieving adequate risk-adjusted returns.”

AM Best said capacity remains constrained in working layers of natural catastrophe programmes, aggregate covers and peak catastrophe zones in the US, noting some reinsurers had cut back on their catastrophe exposures or have exited the market altogether.

Despite that, AM Best said deployed capacity may be starting to expand in the US and Bermuda reinsurance market including catastrophe exposed business.

“However, unlike previous hard market cycles, capital inflows have not included a meaningful contribution from new company formations,” the report said. “Rather, a few established franchises have either raised capital, made acquisitions or increased their allocations to the property catastrophe business.

“AM Best expects that capital inflows to the reinsurance sector in the US and Bermuda markets will continue to be driven by established franchises with strong track records, while opportunities for new company formations will remain limited.

“M&A over the next several years may continue to be driven by reinsurers’ desire to strengthen their positions in the primary markets, especially in specialty areas, as long as the rate environment remains attractive.”