Unlike previous hard reinsurance market cycles, this current one is not characterised by a shortage of available capital, according to analysts at global ratings agency, AM Best.
The agency recently revised its sector outlook for the global reinsurance industry from stable to positive, citing an expectation of robust reinsurer profit margins and saying it expects underwriting discipline will be maintained.
Analysts noted that negative rating actions on reinsurers within recent years have not been “triggered” by surplus declines, but rather by technical underperformance.
“The best performers continue to expand on the back of oversubscribed capital raises and retained earnings but are still deploying resources in a very prudent manner. The largest European players maintain very active special dividend and share buy- back policies. Investors are more likely to allocate new funds either in rated balance sheets with scale and a proven track record or, opportunistically, in ILS structures where liquidity is critical,” analysts noted.
In addition, the agency highlighted how the end of a long period of record-low interest rates drastically changed the economic landscape, with heightened competition for resources between the reinsurance segment and other investment alternatives.
From what we understand, this was inflamed by the past underperformance of the segment and its perceived volatility, especially given current climate trends and geopolitical instability.
However, despite the de-risking measures on reinsurance portfolios, Best noted that it will take some time for investors to reduce the risk premium they are currently applying to reinsurers.
Nonetheless, analysts pinpointed that the unrealised investment losses in fixed income portfolios that followed sharp increases in interest rates, and reduced the capital and surplus of global reinsurers in 2022 had been largely reversed by the end of 2023.
“Except for that particular year, dedicated capital for the global reinsurance segment has steadily expanded over the last decade. The recovery might have been even more pronounced if not for sizeable dividend distributions by the largest groups,” analysts said.
Furthermore, it appears that dedicated reinsurance capital has been expanding at a steady pace, however the buffers previously in place during periods that saw extremely low interest rates have decreased, with organisations managing their capacity more efficiently.
Until 2021, AM Best estimated capital utilization (the percentage of existing capital needed on average to support a Best’s Capital Adequacy Ratio (BCAR) of 25% at a 99.6% VaR, considered “Strongest”) at around 80%.
“Going forward, we expect that indicator to hover around 90%. We believe that the existing margins remain sufficiently healthy, especially considering the current levels of profitability and the amounts of capital being returned to investors,” analysts concluded.
