Reinsurance recovery continues to build

Bermuda’s reinsurance sector’s recovery from a period of poor results is built on a foundation of solid underwriting and tighter terms and conditions. 

Bermuda’s reinsurance sector continued its recovery in 2024 from the annus horribilis of 2022 when catastrophe losses and a downturn in the investment markets created a perfect storm for the industry.

Hurricane Ian, which struck Florida in September 2022 and caused $65 million in insured damage, was the low point for the industry, causing hefty third quarter and full-year losses across the sector.

But the difficult conditions, which punctuated six years of underperformance in which the industry failed to cover the cost of capital, marked a turning point, beginning with the January 1, 2023 renewals when rates and attachment points were increased and terms and conditions were tightened.

That renewal season was a difficult one for insurers, reinsurers and brokers, but marked the moment when Bermuda reinsurers changed from being protectors of earnings for cedants to protectors of their capital, as Association of Bermuda Insurers and Reinsurers chief executive officer John Huff put it.

At the same time, it marked a point when many Bermuda reinsurers accelerated a move away from the volatile catastrophe reinsurance market and deployed some of their capital into more stable sectors.

The long-awaited hard market continued through 2023, with the June 1 and July 1 renewals proving to be less rancorous than the January 1 renewals.

Year end 2023 brought uniformly strong results compared to 2022, with companies either bouncing back from losses or recording increases which were hundreds of percent higher (Tables 1 and 2).

In January 2024, Fitch Ratings estimated that the combined ratio for Bermuda re/insurers in 2023 would be between 85 and 86 percent in 2023 compared to 92.7 percent in 2022, with catastrophe losses down from 9.8 percent of losses to 3.4 percent.

“Shareholder equity grew 23 percent by the end of September 2023 from year end 2022 due to increased underwriting and investment income, equity market gains, stabilisation of unrealised bond losses, common equity issuances to support growth and reduced return of capital,” Fitch said.

Looking ahead, Fitch said in January 2024: “For Bermuda-based re/insurers followed by Fitch, the meaningful underwriting improvement seen in 2023 will be limited in 2024 as premium rate increases decelerate.

“The hardening market continued at the January 2024 reinsurance renewal, with rates flat to up in most lines as the supply/demand imbalance narrowed, supported by relatively limited new capacity entering the market and deteriorating loss-cost trends from social inflation.

“We expect market conditions to remain favourable at the 2024 midyear renewals, although with stabilising rates as pricing is generally sufficient. Re/insurers are also expected to mostly maintain the tighter terms and conditions negotiated in 2023.”

Outlook goes from stable to positive

So far, those predictions have largely held. Participants in the Bermuda:Re+ILS Reinsurance Roundtable in June reported that at the January 1 renewals rates remained largely stable, with some price reductions at the top end of towers. But they also said some cedants had added to their top limits as they prepared for what is expected to be a hyperactive hurricane season.

Most market participants have said that the 2023 rate increases meant there was some room for rate reductions for individual cedants with good claims records, and that attachment points and terms and conditions were largely holding up. The erosion in rate and attachment points which occurred when previous hard markets softened was not being seen, said ratings agency AM Best. In June it raised its outlook for the reinsurance sector from stable to positive, saying hard pricing conditions were likely to last longer than in previous cycles due to:

• Claims being driven by medium-sized losses and secondary perils. 

• The segment remaining well capitalised with solvency positions not being under meaningful pressure. 

• Adequate capacity meaning existing players were well-positioned to benefit from the hard market, which acted as a deterrent to new startups being funded.

The ratings agency added: “Risk-adjusted rate increases clearly slowed at mid-year 2024 (and for the best-performing books, they were even slightly negative), which has led to mixed reactions— particularly from US and Bermuda reinsurers as opposed to the largest Europeans—towards highly exposed areas such as the Florida market.

“After the de-risking measures adopted in the last couple of years, AM Best believes that the segment is in a much stronger position than in the last to absorb the impact,” the report added.

Cautious optimism

Despite some flattening in rates, CEOs remain cautiously optimistic about the rest of 2024 and beyond.

“We believe there is ample opportunity for continued profitable growth within the construct of our current portfolio and appetite,” Aspen CEO Mark Cloutier said after releasing his company’s first half results in which operating results and gross written premiums improved.

Arch Capital and RenaissanceRe delivered stellar results, with RenRe CEO Kevin O’Donnell calling it “one of the most favourable business environments in our history”.

For the full 2023 year, the sector as a whole bounced back from a tough 2022, when many companies suffered losses or saw their profits sharply pared. RenaissanceRe was notable for bouncing back from a $1 billion loss to a $2.5 billion profit.

For the first half of 2024, few companies recorded the kind of improvements seen in 2023, but Axis, which repositioned from catastrophe reinsurance to specialty saw net income rise 88 percent, while Hamilton recorded a 226 percent rise in profits.

That does not mean the industry is entirely problem-free.

AM Best noted that a single large catastrophe could still upend the sector, and at the time of writing the evolving hurricane season has several months to go. Forecasters have predicted an above-average season, with Colorado State University predicting 23 named storms, of which six are major storms. As of August 20, two hurricanes had made landfall in the US.

A steady picture

The so-called secondary perils continue to mount and several Bermuda reinsurers reported that large losses from these hazards had increased claims in the first half of the year.

Of some concern to specialty and casualty re/insurers are past year adverse developments, which forced some companies to add to reserves, while directors and officers’ lines remained in the doldrums.

In past markets, Bermuda would have seen an influx of new re/insurers taking advantage of the hard market, but this has not occurred, in part because many re/insurers had capacity waiting to be deployed. AM Best said the insurance-linked securities market had been a beneficiary of new capital.

Several existing Bermuda re/insurers have raised capital in the investment markets, and Fidelis and Hamilton both had successful initial public offerings (IPOs) in late 2023. Aspen, which filed for an IPO in December 2023, has held off on a listing, but may consider taking the plunge by the end of this year.

After RenaissanceRe’s blockbuster purchase of Validus from AIG in 2023, the reinsurance market has been relatively quiet. Several insurers launched new share repurchase programmes in 2024, returning capital to their patient investors.

So far, affected Bermuda re/insurers appear to have taken on board the Bermuda Corporate Income Tax which will levy a 15 percent tax on profits from 2025. While the Tax Reform Commission has yet to make recommendations on other changes to the tax system, it is thought there will be some focus on lowering the costs of living and doing business. The tax collection agency needs to be set up while details on tax credits need to be finalised.

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