Best Says Softening Market Unlikely Amid Significant Recovery

The global reinsurance industry demonstrated asignificant recovery of prior-year capital losses in 2023, driven by strong technical results, unrealized capital gains, and higher reinvestment rates, according to A.M. Best.

In a new report, the rating agency reports that traditional reinsurers capitalized on the improvement in their technical results throughout 2023, as higher rates and stricter terms began to earn out on portfolios.

Best suggests that investment losses in 2022 were partly reversed in 2023. When combined with higher fixed-income reinvestment rates, investment portfolios generated strong overall investment income for the market. The improved underwriting and operating results also helped to bring about the significant recovery in 2023, although this was partly counterbalanced by market participants' capital distributions.

Last August, Best projected 12.2 percent year-over-year increase in traditional reinsurance capital to $461 billion for 2023, but as the North American hurricane season ended, reinsurers were on pace to nearly double that projected increase.

This said, the dynamic between available and deployed capital remains, and according to the rating agency, some reinsurers have yet to determine their capital strategies, while others elected to pay special dividends out of their regulated balance sheets—most notably, Berkshire Hathaway-owned National Indemnity's special dividend of roughly $83 billion in third-quarter 2023.

"With still-high discount rates and significantly improved operating results, reinsurers need to determine whether to release capital or double down in the hard market," said Dan Hofmeister, associate director, A.M. Best. "Regardless, our original projected increase of 12.2 percent in traditional reinsurance capital still appears adequate, albeit with some potential variation if reinsurers avoid deploying the new capital generated in 2023."

Best reports that third-party reinsurance capital is expected to increase modestly by 4 percent for 2023, according to Guy Carpenter, aided by record-high issuances of catastrophe bonds in 2023. Overall reinsurance capital for 2023 is expected to be $561 billion, which is less than 2 percent below the prior high watermark of $570 billion, set in 2021.

Even with much more orderly January 1 renewals, market participants have not indicated any softening in market conditions. Furthermore, although multiple high-profile management teams have announced their intention to launch new reinsurers, no material business plans have been funded at this point.

"Even if funding is ultimately achieved, it would dwarf the retained earnings growth among established players in 2023 and would thus be unlikely to soften the market," said Carlos Wong-Fupuy, senior director, A.M. Best.

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