Postcard from Bermuda: Moving out of the penalty box
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Postcard from Bermuda: Moving out of the penalty box

Reinsurers are reporting stellar 2023 results – what they do with the earnings will be crucial.

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Ice Hockey Penalty Box closeup

Reinsurers are likely to report stellar 2023 performances across the board after years of poor returns – but the sector must continue working to maintain investor trust, according to delegates gathered at the Bermuda Risk Summit.

Carriers were unanimous in their relief at having come through the difficult years, secured improved pricing and terms and conditions and delivered healthy profits.

A number of questions now arise, however. Carriers are faced with the decision over what do with their record-breaking earnings: reinvest, redeploy capacity, bolster reserves, return to shareholders – or a combination.

The reinsurance industry, having attracted negative investor sentiment over the past five years, now has a chance to improve its image – but for now, as one delegate put it, the sector is “still in the penalty box”. The strategy carriers choose now will have a profound impact on that investor relationship.

Crucially, delegates stressed the need to maintain market discipline and not “waste” the work of the past 18 months in a bid to grow market share.

Speaking on a panel at the Risk Summit, Hiscox Re & ILS CEO Kathleen Reardon said: “The whole industry needed these 2023 results, not only to build more confidence with our shareholders, but also the employees and the clients that we have. We need to be here for the long run.”

Aspen CEO Mark Cloutier said the company had landed a combined ratio in the mid-80s and expected its 2023 return on equity to be more than 20%.

“I would argue that we are achieving the level of returns that we should be achieving in order to take the risk.

“It’s pleasing to see the big dividends and big share buybacks because I think that could be the most prudent thing to do right now given the supply and demand equation that we're in,” Cloutier said.

Record profits 

Signs of a bumper 2023 have been flowing through Q4 reporting season over recent weeks.

Bermuda (re)insurers were on track to deliver underlying combined ratios of around 85-86% for 2023, Fitch estimated – a “meaningful improvement” from 92.7% in 2022. Cat losses were likely to represent 3%-4% on the combined ratio, rather than 9.8% the year before.

Regarding investor returns, shareholders’ equity grew 23% year on year for the first nine months of 2023, and return on average equity came in “comfortably above” the cost of capital. It is expected to approach 20% for 2023.

In short, reinsurers are currently enjoying a recovery in their level of capital – although it is important to note that this does not represent a vast increase in new capital in the sector.

This capital recovery has meant for the first time in several years, reinsurers have had strong enough results to comfortably manage the impact of casualty reserve noise that could have been more negative news in another year.

Among Bermudians, both Axis and Everest took the opportunity provided by the good results to salt away additional reserves for liability books.

European reinsurers have also reported vastly improved profits and used at least some of this to bolster reserves. Swiss Re added $2bn for casualty over 2023, while Munich Re and Hannover Re both increased reserves more generally for “prudency” reasons.

The London-listed carriers Hiscox, Beazley and Lancashire have all reported healthy profits after growing their reinsurance premiums over the past year, as their return on equity hit the high 20s or even low 30s. Some of them swerved casualty reserve issues, but all have offered special dividends or share buybacks to return capital to investors.

Renewals discipline  

Despite the improved performance among reinsurers, the desire to maintain discipline is strong, and is already having an influence on pricing expectations for this year’s key renewals at 1 April, 1 June and 1 July.

A canvas of Bermudian reinsurance sources this week revealed no significant change in expectations for the Japanese treaty renewals set out in our late February report on the market.

A number of sources expect the renewal process to be “stable” or even “boring”, although as some large cedants reduce the amount of cat cover they buy, there is a question of whether reinsurers will all be signed down on programmes equally or if some will be rewarded with greater shares than others.

For the Florida renewal at 1 June, sources in Bermuda said there is no expectation of the chaos seen in recent years. Demand is still expected to grow as previously reported, but reinsurers – with renewed confidence in the sustainability of the cat product in Florida – are likely to meet that demand.

More broadly across North America at 1 June, sources expect risk-adjusted flat or slightly increased pricing, given the improvements made to property treaties in the past year and the increased appetite of reinsurers to write the business.

Market factors 

Outside of reinsurers’ aim to maintain discipline for the good of their investors, there are other factors at play that could help to prevent softening.

One element is that restructuring – not just repricing – delivered their improved results, and these structural changes tend to be stickier. Higher retentions cut reinsurers’ exposure to smaller attritional losses and secondary perils.

This development was hard-won by reinsurers and there are no signs of a return yet to the low-attaching business that so badly dented their returns in recent years.

Maintaining those structures will be just as important as price for reinsurers this year, and there is a consensus that the changes were necessary for a sustainable market.

Structural changes should prove stickier, while a lack of capital inflows may offset strong ILS competition.

Other elements that could help to maintain discipline include the lack of a new wave of capital providers or investors, along with persistent fears around casualty reserving and loss development.

At the same time, competition – such as that seen for higher-layer cat business at 1 January – is beginning to heat up, and reinsurers face particular pressure from the cat bond sector.

The lack of significant capital constriction, given the freeing up of the retrocession market is also a consideration.

At this early stage in the year, it is difficult to tell how the reinsurance market will respond to the pressures set out above. If reinsurers want to ensure continued investor support, they must remember the hard lessons of the soft market years.


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