Bermuda margins may peak in ‘24 as claims & rate trends inflect: Fitch
Price discipline, rising investment yields and strong demand for reinsurance should push Bermuda's stable of re/insurers to a peak in underwriting margins in 2024, with the timing of claims disinflation possibly taking the steam out of the continuing upward earnings tick, analysts the Fitch rating agency have declared.
“Bermuda (re)insurers’ underwriting profitability is likely peaking as price increases moderate and loss-cost inflation persists,” Fitch analyst Brian Schneider wrote. “However, returns will continue to be favourable as market conditions remain attractive.”
For the near-term, as in 2023, rate gain beats claim trend, but with both sides of the equation likely to moderate during a disinflationary year.
“Underwriting margins are likely to peak in 2024 as near-term price increases continue to exceed loss-cost trends,” analysts wrote. Fitch expects “headwinds linked to high economic inflation to ease” and pricing to remain sufficient to plug the negative impact of climate change on nat cat bills.
2023 was a big step forward on profits. The combined ratio has likely fallen to 85-86% from 92.7% in 2022, with cat losses down to 3-4 percentage points of the total from 9.8 points in 2022. Return on average equity likely approached 20% in 2023, “comfortably above the cost of capital.”
In reinsurance, the 1.1.2024 renewals showed the market continuing to harden with pricing “flat to up in most lines” with caveat for some rate declines in retrocession amid “robust” capacity, Fitch claimed. But the supply/demand balance “narrowed” and new capacity looks “relatively limited,” ensuring a more orderly process than seen in 2023. Tightened T&C earned in 2023 held for the 1.1.2024 exercise.
“Fitch expects market conditions to remain favourable for reinsurers at the 2024 midyear renewals, although with mostly flat rates as pricing is generally adequate,” analysts wrote.
Newly achieved reinsurance margins could begin to draw more capital to the scene for the various mid-year renewal processes chiefly for Asia in April and Florida in June/July, demand should remain strong as primary cedants face off against increased risk and inflation-driven increases in insured values, Fitch claimed.
Downward price pressure could nonetheless be found at the market's last testing. Th higher layers of property cat reinsurance treaties and retrocession both provided cedants with some relief, a phenomenon which Fitch puts partially to the rise of alternative capital, most notably cat bonds, during 2023.
“Higher layers of property catastrophe risk have ample reinsurance capacity from both traditional insurers and alternative capital providers,” Fitch said. Likewise retro has been able to benefit from “a robust return of retro capital supply from both ILS market capacity, particularly catastrophe bonds, and traditional reinsurers.”
While the boom in cat bond issuance in 2023 greased the retrocession market and put downward pricing pressure on the higher layers of soe reinsurance towers, issuance from Bermuda names in 2023 grew only “modestly” from 2022, with nearly $1.1 billion of limit issued, up from $1.0 billion in 2022.
Fitch called out several Bermuda sponsors who returned to the cat bond market after a hiatus at least replace maturing deals, including XL Bermuda, Hamilton and Convex. Upstart reinsurer Conduit ran a debut issue. RenaissanceRe added to its outstanding, then added the full ILS assets under management of AlphaCat to its stable on the Validus Re acquisition.
Casualty lines may be the ones to watch, following concerns expressed by reinsurers that inflation may have put claim and reserve trend on the wrong side of rate, Fitch notes. “As such, we remain cautious that casualty reserve deficiencies could weaken the capital base of select companies,” Fitch analysts wrote. Demand for legacy solutions in liability could remain high, in turn.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
