Opportunities for new reinsurance firm formations to remain limited: AM Best

AM Best expects that capital inflows to the reinsurance sector in the US and Bermuda markets will “continue to be driven by established franchises with strong track records, while opportunities for new company formations will remain limited.”

As per a new AM Best report, Hurricane Ian represented a “breaking point” for US and Bermuda reinsurers, which entered the January renewal season with “renewed determination to restore pricing, terms, and conditions to levels supporting achieving adequate risk-adjusted returns.”

The rating agency explained that capacity remains constrained in working layers of natural catastrophe programs, aggregate covers, and peak catastrophe zones in the US, despite the pricing momentum and improved terms and conditions in these areas.

AM Best added, “Some companies have either cut back on their property catastrophe exposures or exited the property catastrophe reinsurance market altogether.

“Underwriters have generally applauded recent legal reforms in Florida aimed at curbing fraud and curtailing legal expenses. However, concerns about the sustainability of these reforms have caused reinsurers to remain cautious about committing to the notoriously complex Florida property market.”

The rating agency’s report suggested that an important distinction needs to be made between “available capacity” and “deployed capacity,” as many underwriters still maintain a buffer of excess capital rather than deploying it in catastrophe-exposed lines.

AM Best noted that in areas outside of catastrophe-exposed property lines, capacity is less scarce.

“The US and Bermuda (re)insurers remain interested in growing their specialty and casualty portfolios, particularly in primary lines, where pricing is viewed as broadly attractive, especially in the E&S markets,” the firm continued.

AM Best said that as another sign that available capacity is not pressured, publicly traded US and Bermudian reinsurers have not materially retrenched their dividend policies or share buyback programs.

“Deployed capacity may be starting to expand in the US and Bermuda reinsurance market, including catastrophe-exposed business,” the firm said.

However, unlike previous hard market cycles, AM Best observed that capital inflows have not included a meaningful contribution from new company formations.

Instead, a few established franchises have either raised capital, made acquisitions, or increased their allocations to the property catastrophe business.

AM Best’s report went on, “One of the more prominent examples of this trend is RenaissanceRe Holdings Ltd., which continued to raise capital to support its third-party capital ventures, several of which are levered to the catastrophe reinsurance markets.

“RenaissanceRe further signalled its commitment to the reinsurance market when it announced in May 2023 that it would acquire AIG’s treaty reinsurance business, which includes Validus Reinsurance Ltd. and its consolidated subsidiaries, in a deal valued at nearly $3 billion.

“Everest Group, Ltd. also raised $1.5 billion of equity capital in May 2023 to support growth in its own underwriting operations.”

AM Best highlighted that another indicator that property catastrophe deployed capacity may be expanding is Berkshire Hathaway’s comment in May 2023 that it had increased its property catastrophe exposure by 50% since year-end 2022, with room for further growth.

The rating agency added, “Notably, Berkshire Hathaway, which has around $300 billion of total underwriting capacity, said publicly that it had been “disappointed” in the January 1 renewal season, but that April 1 renewals were much improved.

“This led to the company significantly growing its catastrophe reinsurance exposure, including a USD1 billion allocation to Florida’s Citizens’ reinsurance program.”

AM Best thus anticipates that capital inflows to the reinsurance sector in the US and Bermuda markets will continue to be driven by established franchises with strong track records. At the same time, opportunities for new company formations will remain limited.

“M&A over the next several years may continue to be driven by reinsurers’ desire to strengthen their positions in the primary markets, especially in specialty areas, as long as the rate environment remains attractive,” AM Best concluded.

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