S&P Global Ratings has released a new note, saying that the underwriting performance of Bermudian re/insurers has been lacklustre over the last five year with only a few companies being profitable.
However, the organisation posited that better days could be ahead after half a decade of underperformance. It said that pricing momentum has been spurred by heightened catastrophe and Covid-19 losses.
It said that industry losses sparked rate increases in the past few years, which will likely continue as we head into the 2023 reinsurance renewals. Low interest rates in 2020 and 2021 gave ample opportunity to raise capital to be deployed into the hardening market.
It added that recent interest rate increases and the Russia-Ukraine conflict have created market volatility that can be seen in re/insurers’ balance sheets, yet these rising interest rates will help investment income recover as well.
S&P Global Ratings wrote: “Sunny days could still be on the horizon, however, since industry losses sparked rate increases in the past few years, which will likely continue as we head into the 2023 reinsurance renewals. Low interest rates in 2020 and 2021 gave ample opportunity to raise capital to be deployed into the hardening market.”
It added: “Recent interest rate increases and the Russia-Ukraine conflict have created market volatility that can be seen in re/insurers’ balance sheets, yet these rising interest rates will help investment income recover as well.”
S&P said that Bermuda will remain a prominent global reinsurance hub, expanding its reach into growing lines of business such as mortgage and cyber reinsurance. It added that the performance of the past five years has been lacklustre, but expected hardening reinsurance rates and new underwriting opportunities could be the lifeline needed for Bermudian re/insurers to regain their footing and begin to earn their cost of capital once again.
It wrote: “We expect capitalization to remain a strength for these companies. While rising interest rates and ensuing unrealized investment losses will likely erode capital buffers, they will also bolster investment income. In addition, we expect improving reinsurance pricing will support stronger underwriting earnings, bolstering the industry’s capitalization. Despite uncertainty and seemingly nonstop headwinds, we believe Bermudian re/insurers will continue to adapt and hunt for market opportunities.”
Meanwhile, it said that the earning cost of capital remained a high hurdle for the industry in Bermuda.
It wrote: “Similar to the global reinsurance industry, the Bermudian re/insurers have struggled to earn their cost of capital in the past five years except in 2019. This was largely due to the heightened catastrophe losses that have riddled the past several years, loss creep, investment volatility in fourth-quarter 2018, and COVID-19 losses, which were largely concentrated in 2020 for Bermudian re/insurers. It seems the trend has continued in 2022 because of capital market volatility.”
