Global reinsurance capital at new record high of $620bn+ but hard market set to continue: AM Best

Rating agency AM Best has forecast a continuation of current hard reinsurance market conditions into 2025 despite global reinsurance capital reaching a new high this year.

In a new market report released ahead of the start of 1 January renewal discussions next month, the rating agency said traditional reinsurance capital is expected to rise to $515bn this year, with total industry capital exceeding $620bn once an additional $105bn-$110bn of third-party capital has been factored in.

This compares with total industry capital of $568mn in 2023 which was just below the previous industry record of $571mn set two years earlier.

Aside from Berkshire Hathaway’s National Indemnity, the majority of traditional capital growth was generated in Bermuda as many companies on the island posted robust operating returns. The report noted RenaissanceRe and Everest Group in particular for completing new capital issuances in 2023.

AM Best’s Bermuda reinsurers composite reported shareholders equity growth of 33.7 percent, on a 23 percent average RoE in 2023 -- the report added that if Bermudian reinsurers continue to perform at this pace, the gap in capital levels compared to US-domiciled firms may narrow.

At year-end 2022, traditional reinsurers’ capital utilisation increased to 103 percent from 82 percent (exceeding 100 percent indicates that risk-adjusted capitalisation levels have dropped below the strongest level). However, AM Best expects this to revert over the near term as unrealised losses were recouped by year-end 2023.

While the segment remains “well capitalised with no meaningful pressure on solvency positions”, AM Best said it still expects hard pricing conditions to last longer than in previous cycles.

This is largely because the current hard cycle has not been driven by capital depletion.

“The market dislocation in the early 2023 renewals was caused by a sharp withdrawal of capacity. Companies restricted the deployment of their existing capital, while maintaining very comfortable buffers in their balance sheets,” the rating agency said.

“This has meant not only that well established, strongly capitalised players have been in a strong position to benefit from the hard pricing environment, but also that there hasn’t been significant appetite to fund new start-ups.”

The lack of a ‘Class of 2024’ is attributed in part to disappointing results during the previous soft cycle deterring investors, with capital instead now focusing either on already well-established and successful rated balance sheets with a proven track record, or on short-term insurance-linked securities vehicles.

AM Best said higher interest rates have contributed to this behaviour, with investment alternatives proving to be much more attractive on a risk-adjusted basis than in the past.

The rating agency said this year’s renewals have been smoother than in 2023, largely attributable to better management of cedants’ expectations rather than reduced demand.

While risk-adjusted rate increases clearly slowed at mid-year 2024, AM Best said underwriting discipline, strict terms and conditions, and emphasis on client selection are being maintained.

“What we are seeing is the organic consolidation of a segment able to generate profits to finance further expansion,” the rating agency said.

“Dominated by the largest players, scale, diversification, and flexibility to adapt to fluid market conditions have become keys to success. Sophisticated risk management, strong balance sheets, and partnerships with the ILS/retrocessional markets are contributing to consistent and more stable results.

“Although a cautious deployment of capital and a certain level of retrenchment have been necessary to restore profitability, the market position, balance sheet strength, and expertise that the leading players enjoy put them in an ideal position to gradually assume more of the emerging risks that are becoming dominant in a rapidly evolving economy.”