AM Best’s latest reinsurance segment market report states that while established capital remains supportive, new capital remains cautious, as the ratings agency highlights the distinction between available and deployed capital.
The report reminds readers that not all available capital translates automatically into deployed capital.
“Despite all the noise around unrealized investment losses and elevated catastrophe losses, the segment maintains sufficient capital to support its current ratings,” says AM Best.
While some reinsurers have reported temporary reductions in capital buffers, the ratings agency expects this to revert in the near term as assets backing reserves and investments begin to benefit from higher fixed-income rates.
“Moreover, some reinsurers have chosen to divert capital from property reinsurance and deploy it into primary/specialty lines of business, effectively reducing the total deployed capital. Furthermore, reinsurers continue to partner with third-party capital providers to optimize risk limits on their balance sheet,” reads the report.
Reinsurance capital declined roughly 8.6% from 2021 to the end of 2022, although AM Best expects most of this will be recouped throughout 2023.
At the same time, net investment income for the reinsurance segment is approaching and in some cases has even exceeded the prior year’s total, and reinsurers have reported improved underwriting results across the board, notes AM Best.
The ratings agency also notes the elevated level of cat loss activity and subsequent higher losses for primary insurers, driven by the resetting of attachment points higher up as reinsurers moved away from frequency events and aggregate covers.
Of course, some players have looked to fill the gap created by those who have exited the market, but as noted by AM Best, raising capital in the current economic environment has proven difficult.
“Established, high-quality, and diversified organizations have been able to raise capital to support expansion efforts through the hard cycle,” notes the firm.
“New entrants, despite varying business plans and strong management teams supporting them, have had more difficulty obtaining funding. Although new entrants could eventually obtain funding, they are unlikely to obtain enough to move the market in a meaningful way,” adds AM Best.
Outside of property and casualty and in the life reinsurance market, new capital does continue to flow, notes AM Best, driven by strong demand as a result of the record level of annuity sales in the US, and also the continued divestment of large blocks of capital-intensive and interest rate-sensitive business in the US and Canada.
