Amid central banks’ inflation-fighting measures, leading reinsurance firms have showcased capitalisation resilience, with an expected rebound in traditional capital to 2021 levels by year-end, despite substantial equity declines, according to AM Best’s report.
AM Best’s analysis indicates that the top 25 global reinsurance groups experienced a nearly 17% reduction in shareholders’ equity due to rising interest rates, driving their available capital down from USD 475 billion to USD 411 billion.
The decline was primarily attributed to unrealised investment losses on fixed-income holdings, which comprise over 60% of the average investment portfolio.
Although equity holdings were also impacted, constituting less than 8% of the portfolio, they have shown partial recovery in the first half of 2023.
However, despite these challenges, AM Best highlights that the balance sheet strength of major reinsurance players has not been unduly compromised.
The rating agency’s assessments underline the robustness of the reinsurers’ balance sheets on an economic basis, supported by the quality of credit portfolios, effective asset liability management (ALM) strategies, and strong liquidity indicators.
While some reinsurers experienced pressure on their ratings due to disappointing operating performance, the overall balance sheet strength remained intact.
The prolonged period of low interest rates had previously maintained capital at comfortable levels for these reinsurers. In recent years, AM Best estimated that companies held 15% to 20% of capital above the minimum required to maintain their Capital Adequacy Ratio (BCAR) at the “strongest” level.
However, the challenges of 2022, including unrealised asset losses, eroded these buffers, leading to tighter capital positions.
Despite this tightening, AM Best’s report asserts that the credit quality of most reinsurers’ fixed-income portfolios remains high, with a relatively short duration.
The report particularly highlights the European Big Four reinsurers, whose larger exposure to life risks and longer-term liabilities played a role in the outsized impact on their capital. Looking ahead, the anticipated rise in investment returns is expected to be beneficial for these companies.
In conclusion, while the global reinsurance sector faced a substantial reduction in available capital due to monetary policy actions and rising interest rates, AM Best predicts a rebound in traditional capital levels to approach those seen in 2021 by the end of 2023.
This resilience is attributed to sound financial management strategies, strong credit portfolios, and the anticipation of improved investment returns. Third-party capital is also expected to remain above 2021 levels, reinforcing the sector’s overall stability and preparedness for future challenges.
