No new class of reinsurers despite best returns since 1993: AM Best

Although risk-adjusted returns in the reinsurance sector are reaching a three-decade high, this hard market is different than previous ones, and a new class of reinsurers has yet to materialise with investor interest in supporting non-life startups lacking, reports AM Best.

In the past, large-scale events such as Hurricane Andrew in 1992, the 2001 September 11 attacks, and the trio of hurricanes in 2005, led to a class of new reinsurers entering the market as these events depleted existing capital and pushed up rates, at a time of heightened investor interest.

After years of benign natural catastrophe activity, losses in the property catastrophe space have been elevated since 2017, which has driven up reinsurance pricing and led to an improvement in terms and conditions for reinsurers.

Throughout 2023 the market continued to harden, and rates and terms and conditions have continued to improve, albeit at a decelerating rate, through the mid-year 2024 reinsurance renewals.

According to AM Best, the reinsurance segment is generating risk-adjusted returns not experienced since 1993, but despite the prevalence of existing hard-market conditions that were present when prior new classes materialized, a new class of reinsurers has yet to form in the current hard market.

Dan Hofmeister, Associate Director, AM Best, commented, “A class of startup reinsurers usually quickly forms to capitalize on the interruption in the reinsurance demand-supply equilibrium. Many of these new reinsurer formations merge or are acquired as the market cycle returns to the soft phase of the cycle.”

The ratings agency notes that this hard market is different from prior ones in that it was not the result of a single, large event, but instead by the accumulation of a series of property cat events, which led to underwriting losses and earnings events for the majority of market players.

Regardless of the causes and differences of this hard market, AM Best feels that it will take “at least a few years” for both pricing and conditions to soften. And while it’s come as a surprise to many that a Class of 2023 or Class of 2024 failed to materialise, the ratings agency notes that this was not for lack of effort or talented executives, but that ultimately, none of the rumoured entrants made it past the fundraising stage.

“AM Best has issued a number of preliminary credit assessments on business plans from high profile management teams, which have had similar difficulties in fundraising,” said Carlos Wong-Fupuy, senior director, AM Best. “Many of them note that large, passive capital investors, such as sovereign wealth funds, endowments and pension funds, still have healthy levels of interest in the industry.”

AM Best’s report also states that private equity-venture capital investors aren’t currently interested in supporting startup non-life reinsurers.

Part of the reason for this lack of interest, according to AM Best, may also include competitive conditions in the reinsurance market and the availability of insurance-linked securities (ILS) that may have more appeal in a hard reinsurance market given their concentrated nature.

“The existence of a healthy ILS market appears to have diminished the franchise value of property catastrophe business to investors. Investors today appear much keener to allocate funds to shorter-term ILS instruments to capitalize on the hardened underwriting conditions, rather than in a rated balance sheet. As long as these alternative entry points exist, we don’t foresee capital flowing into the new reinsurers to support hardened property rates and conditions,” says AM Best.

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