US, Bermuda reinsurers expected to continue strong performance in 2024

US and Bermuda reinsurance groups are expected to sustain 2023’s strong underwriting performance in 2024 provided that predictions for highly elevated Atlantic hurricane activity does not materialise, according to ratings agency AM Best. 

The ratings agency said the reinsurance companies recorded their third straight year of improved underwriting profitability in 2023, benefiting from less severe natural catastrophes as well as changes to structures and higher attachment points. 

The market segment report – US-Bermuda Reinsurers’ Results Maintain Positive Momentum - said reinsurance catastrophe pricing has moderated but capacity remains “selectively constrained”, while strong investment results have bolstered underwriting margins. 

“The composite’s 2023 combined ratio of 85.1 was a 6.4 percentage point improvement over the prior year. Total net premiums written for the composite grew by 3.3% in 2023, down from 15.5% growth in 2022 and 19.7% in 2021.”

Greg Dickerson, director, AM Best, said:  “We expect that premiums for this US-Bermuda composite will increase in 2024 to levels closer to 2023, reflecting the high ongoing demand for reinsurance capacity, bolstered by underlying exposure growth. 

Significant realized and unrealized investment gains and higher net investment income also contributed to strong net earnings in 2023. The composite posted a 23.0% return-on-equity (ROE) ratio in 2023, versus a -2.4% ROE in 2022, when substantial pre-tax realised/unrealised investment losses more than counterbalanced the group’s solid operating performance.

AM Best’s composite of US and Bermuda reinsurance groups for which reinsurance accounts for the bulk of their portfolios is made up of seven reinsurance groups. The Bermuda-based companies are Arch Capital, Everest Group, PartnerRe and RenaissanceRe. 

The report noted that changes in structures and higher attachment points meant “catastrophe losses were borne disproportionately by primary carriers rather than their reinsurers”.

It added that reinsurance pricing had stabilised at “generally attractive levels in 2024” after sharp rises in 2023. “Importantly, there has been no indication that terms and conditions have been relaxed,” said the report.

It added that it expected risk adjusted capitalisation to remain more than sufficient to support organic growth   opportunities in 2025. 

AM Best noted that four Bermuda reinsurers in the composite would be affected by the introduction of the Bermuda Corporate Income Tax in 2025, which will impose a 15% tax on the profits of multinationals with annual revenues of more than €750 million.   

It said that the return on equity of the four Bermuda reinsurers in the Composite improved by between 5% and 8% as a result of early recognition of the future tax benefits  expected to be realised from open tax loss carry forwards. 

The CIT allows companies in scope to establish deferred tax accounts (DTAs) for provisions in the CIT Act which allow for an equitable transition to the new regime, including an economic transition adjustment. 

AM Best said the DTAs  accounted for between 4% and 7% of equity as of year-end 2023. AM Best said DTA levels of less than 10% were manageable and it expected these assets to be concerned into tangible equity over time, as the OTLCs are used to offset taxes on future earnings.  

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