Decelerating reinsurance rate increases aren’t a worry for AM Best analysts who have revised the global reinsurance segment outlook to positive from stable, citing “robust profit margins” as a driver of the outlook change.

Reinsurers’ profits jumped following a period of “drastic repricing,” along with higher attachment points and tighter terms and conditions, AM Best said in a market segment report published today.

While the pace of reinsurance rate jumps is decelerating, “underwriting discipline is being maintained and profit margins remain healthy enough to absorb higher loss activity than recently experienced,” according to the newly issued outlook report.

“Demand for coverage remains strong due to heightened natural catastrophe loss activity and general economic uncertainty,” added Carlos Wong-Fupuy, senior director, AM Best, in a statement about the outlook change.

“We also considered the expectations of a slower reduction in interest rates than originally anticipated, which are likely to support strong returns in the short term,” he said.

The report notes that 2023 was the third straight year that the global reinsurance segment has generated positive underwriting results, with some reinsurers reporting combined ratios below 90.0. In addition, most reinsurance players produced excellent returns-on-equity last year—some exceeding 20 percent. While reinsurers had similarly good underwriting results a year earlier in 2022, the underwriting results were offset by investment losses—specifically by unrealized investment losses in fixed income portfolios. The 2022 investment losses have been mostly recouped due to higher reinvestment rates, the report says.

During an annual insurance conference of another rating agency last week, S&P Global Ratings Managing Director John Iten also cited significantly improved earnings as the driver of S&P’s latest sector outlook change—from negative to stable—noting that that revision happened back in September last year. “That was based on stronger pricing that really started back at the 1/1/ 2023 renewals, and reinsurers were finally in 2023 earning their cost with capital, which had not been the case for four years” prior to that, he said.

Iten noted that 10 percent of individual reinsurers’ outlooks are currently positive and there are no negative outlooks, with the remainder of rated reinsurers’ ratings carrying stable outlooks.

Echoing the AM Best report, Iten noted that rate changes, which were particularly strong in property-catastrophe reinsurance, have moderated this year. “But they’re still strong,” he said, also highlighting the changes in business mix that saw reinsurers pulling away from coverage for frequent events with higher attachment points.

The AM Best report noted that the sharp increase in attachment points, along with diminished reinsurance appetites for aggregate protection and revised coverage wordings focused on named perils, followed several years of heavy losses beginning in 2017 (the year of hurricanes Harvey, Irma and Maria).

“Stabilized underwriting profits became visible in 2021, with the hardening of the market confirmed by the dislocation of the renewal season in early 2023. Cedents and reinsurers realigned their roles, with reinsurers retaking their historical role as providers of balance sheet protection rather than earnings stabilizers,” the report notes.

“AM Best believes that the exceptional returns on equity experienced in 2023 are unlikely to be repeated at such a high level, but expects reinsurers to focus on underwriting discipline in the near term,” Wong-Fupuy said.

Reinsurers’ first-quarter 2024 loss ratios were impacted by large losses, including the collapse of the Francis Scott Key Bridge in Baltimore, but the report notes that in spite of the losses underwriting margins and annualized ROEs remain strong.

No Disrupting New Entrants Expected

The report also notes that there have been no significant entrants to the reinsurance market even though returns would seem enticing. “Well-respected management teams have been unable to raise capital to set up the new startups that we would have seen in prior hard market cycles,” the report says, noting that without the disruption of new entrants, “seasoned players” can maintain discipline and recoup losses from previous years.

“From an investor’s perspective, there is a critical distinction between an established enterprise with a proven track record, scale, and diversification, and a new company formation starting with a limited business profile,” the report says, noting that “selected major reinsurers” are attracting new capital, acquiring other businesses, and expanding the scope of their businesses even further to new product lines or geographies.

During the S&P annual conference last week, a reinsurance executive, Ken Brandt, chair, president and chief executive officer of TransRe, addressed the question of why startups have not emerged. Brandt noted that the traditional formula for insurance industry startups in the past was to start on the reinsurance side, where barriers to entry are low. And many started in property-cat reinsurance when catastrophes were infrequent and income could flow into the startup quickly.

“That made sense. That all ended in 2017. First wildfire started, [and] all the [cat] losses started rolling through the reinsurance sector. It stopped becoming an easy entryway into reinsurance or insurance,” Brandt said. “Outside capital is smart,” he added. “They looked at the results, [and] they’re cautious about just jumping in because you’ve got one good year against five bad years.”

Brandt does expect merger activity in the reinsurance sector in the future. “If you’re going to be in global reinsurance, it is a game of scale. You do have to have a fair amount of scale to be attractive to a lot of these global insurance company buyers,” he reasoned.

The AM Best report also describes reinsurer capital levels, ERM frameworks and reinsurers’ ability to quickly adjust strategies to changing market environments.

“A key challenge for global reinsurers is finding the right balance between prudently deploying capital to support only those risks that can be priced adequately while maintaining a relevant role in an increasingly uncertain world due to geopolitical factors, climate trends, and societal or technological changes,” the report notes.