In June, AM Best revised its outlook for the global reinsurance sector from Stable to Positive, marking the first such shift for the segment. The change is attributed to a renewed focus on technical profitability in recent years.
According to AM Best, unlike previous cycles, a combination of climate trends, a complex risk environment, and sustained higher interest rates suggests that the improved underwriting margins may persist for a few more years, provided underwriting discipline continues.
The segment’s strong technical profits are largely due to comprehensive de-risking measures, better alignment between reinsurers and primary carriers, and improved pricing. AM Best notes that a move away from high-frequency layers, tighter contract wording, and a more defined scope of cover have refocused reinsurers on providing capital protection rather than stabilizing earnings.
These changes followed several years of underwhelming underwriting performance, during which reinsurers struggled to meet their cost of capital, even amid historically low interest rates until about three years ago.
Hard pricing conditions are expected to endure longer than in past cycles due to several factors. Persistent high claims activity, as highlighted by AM Best, is driven by the accumulation of medium-sized losses and secondary perils, rather than by major catastrophic events.
The segment remains well-capitalized, and although companies have taken steps to manage their capital more efficiently, their solvency positions have not faced significant pressure. This contrasts with a temporary reduction in capital and surplus caused by unrealized investment losses on fixed-income instruments following the rise in interest rates in late 2022
According to AM Best, when global reinsurers have faced negative rating pressures, the primary cause has been technical underperformance rather than balance sheet strength.
The current hard market cycle has not been marked by capital depletion. AM Best points out that the market disruption during early 2023 renewals was driven by a sharp withdrawal of capacity.
Companies restricted the deployment of existing capital while maintaining comfortable buffers on their balance sheets. This environment has favored well-established, strongly capitalized players, who have been able to benefit from the hard pricing environment without significant interest in funding new start-ups.
AM Best noted that its decision to assign a positive outlook to the global reinsurance segment is largely based on the positive technical results seen for three consecutive years, with expectations for sustainability over the next few years.
Following major losses in 2017, the combined ratio for the segment exceeded 110. Repricing, de-risking, and diversifying strategies took time to stabilize, but by 2021, the segment began generating positive profit margins, although still relying on favorable reserve development.
The much-improved underwriting performance in 2022 was offset by unrealized investment losses due to rising interest rates, leading to return on equity (ROE) figures near zero, as noted by AM Best.
For 2023, the average combined ratios for reinsurance subsegments in Europe, the US & Bermuda, and Lloyd’s were all below 90. The adoption of IFRS 17 by most non-US and Bermuda-domiciled groups in 2024 has introduced new challenges for performance benchmarking across the globe.
Despite the benefit of discounting claims reserves under IFRS 17, European reinsurers reported a combined ratio nearly two points higher than their US and Bermuda counterparts, at 87.0 compared to 85.1. AM Best reports that the Lloyd’s market, with a larger share of highly profitable primary specialty business, achieved even better results, with a combined ratio of 84.0.
Across the global reinsurance segment, results were still supported by favorable reserve releases, despite material reserve strengthening in US casualty business written between 2016 and 2019.
Bottom-line results have improved significantly, with several companies reporting ROEs exceeding 20%. Bermuda-domiciled carriers benefited from a one-off deferred tax asset following the implementation of the Bermuda Corporate Income Tax Act of 2023.
European players generally have lower ROEs than their US and Bermuda counterparts, but this could be due to changes in accounting standards, non-recurrent effects, or the more stable and diversified profile of the Big Four, whose results have historically been less volatile.
AM Best attributes the strong results to improved technical returns, combined with higher reinvestment rates.
AM Best believes that the corrective measures taken in recent years, along with current market and economic conditions, will support sustainable profit margins in the medium term. Higher return expectations from investors, combined with the lack of new market disruptors, should maintain ongoing hard market conditions.
Despite above-average catastrophe loss activity during the second quarter of 2024 and a few large losses, such as the collapse of the Baltimore Bridge in March, results remain strong and on track for another profitable year, according to AM Best.
The pace of hardening slowed during mid-year renewals, but Guy Carpenter’s Global Property Cat Rate-On-Line Index has already surpassed the hard levels seen in 2006, following hurricanes Katrina, Rita, and Wilma.
While the current Atlantic hurricane season is being monitored, severe convective storms – the most common small to medium-sized peril – are less seasonal and their frequency continues to rise.
Outside the natural catastrophe space, AM Best has raised concerns about the performance of legacy US casualty and some life insurance books, particularly after reserve strengthening actions. The industry is watching closely to see how widespread these issues might be and how effectively affected carriers are addressing them.
AM Best believes that the global reinsurance segment is more resilient than in previous cycles, thanks to positive underwriting margins, higher reinvestment rates, and diversification. While the potential adverse development of historical liability books could impact performance metrics, it is unlikely to materially affect risk-based capitalization in a segment characterized by strong Best’s Capital Adequacy Ratio (BCAR) scores or earnings.
Concerns about social inflation in US liability have led to stricter underwriting, client selection, and price adjustments for new business.
The stellar results recorded in 2023 are unlikely to be repeated, and most companies’ targets for 2024, while optimistic, are more modest. However, AM Best notes that performance for the first half of 2024 is comparable on an annualized basis, providing a comfortable margin for uncertainty.
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