Despite heightened catastrophe losses and economic uncertainty, Fitch Ratings expects improved underwriting performances for Bermuda re/insurers in 2023, driven mainly by accelerating premium rates, alongside a market reset in pricing, terms and conditions.
The rating agency states that the underwriting performances of Bermuda re/insurers are positioned to improve as the aforementioned accelerated premium rate increases outpace loss-cost inflation.
It writes, “Re/insurers have demonstrated very strong underwriting discipline to improve the sustainability of underlying profitability, having suffered poor performance since 2017 amid elevated catastrophe losses.
“For eight Bermuda-based re/insurers that Fitch follows, the 2022 combined ratio will approximate 93%-94%, slightly better than the 95.0% posted through 9M22 and 95.9% in 2021.
“Catastrophe losses will represent 10–11 percentage points on the 2022 combined ratio, primarily from Hurricane Ian.”
Fitch anticipates that pricing will remain favourable through midyear 2023 renewals, particularly in the dislocated Florida market.
Further, it adds that market pricing surged at the January 2023 reinsurance renewal, shifting to a true hard market in property and some specialty lines with supply constrained and demand growing.
Notably, terms and conditions saw structural changes that benefited re/insurers, says Fitch.
Analysts at JMP Securities reiterated this sentiment in a report earlier in the year, suggesting that reinsurers are “firmly in control” of pricing and terms following the January 1 renewal period, with favourable conditions likely to remain in place beyond 2023.
Meanwhile, M&A activity in Bermuda was muted somewhat last year, with Fitch attributing this to companies favouring organic growth amid increased reinsurance volatility.
Though, it suggests that M&A could resume favourable performance in primary specialty lines and robust reinsurance renewals that improved expected returns for catastrophe risk and supported (re)insurers’ equity market valuations.
According to Fitch, Bermuda re/insurers shareholders’ equity declined 22% in 9M22 from YE 2021 as underwriting gains were offset by net unrealised investment losses on bonds as interest rates rose.
However, the rating agency writes, “Most companies hold bonds to maturity and would thus not expect to realise losses, except under a stress liquidity event.”
Fitch maintains neutral fundamental sector outlooks on both global reinsurance and U.S. property/casualty insurance, both of which include coverage for Bermuda market (re)insurers.
