Best’s Special Report: Despite Record Returns for Reinsurers, New Company Formations and Investors Are Not Following Suit

JULY 08, 2024 09:12 AM (EDT)

Best's Special Report: Despite Record Returns for Reinsurers, New Company Formations and Investors Are Not Following Suit

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OLDWICK - JULY 08, 2024 09:12 AM (EDT)
Despite returns reaching a three-decade high for reinsurers, a new class of companies has yet to materialize in the segment, defying past trends, according to a new AM Best report.

A Best's Special Report titled, "The 2023 Reinsurer Class: The Class That Never Was," notes that the reinsurance segment is generating risk-adjusted returns not experienced since 1993. However, a new class of reinsurers has yet to form despite existing hard-market conditions that were present when prior new classes materialized. In past years, a large-scale loss has precipitated the shift by depleting existing capital and forcing reinsurance prices higher, typically whetting the appetite of investors in the process.

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

In addition to Sept. 11, hurricanes Andrew (1992), Ike (2008) and Katrina, Rita, and Wilma in 2005 serve as the more-notable examples of catastrophe events that led to a class of reinsurers entering the segment. Elevated property catastrophe activity since 2017 (after an extended period of relatively benign years), coupled with a substantial increase in secondary perils, caused reinsurance pricing and reinsurance contract terms and conditions to improve notably, continuing, albeit at a decelerating rate, through the June 1, 2024, renewal.

This hard reinsurance market is different from many of the prior hard markets in that it was not caused by a single, large loss, but by the accumulation of a series of property catastrophe events, which led to significant underwriting losses and resulted in earnings events for almost all reinsurers.

"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."

According to the report, private equity-venture capital investors do not appear to be interested in supporting startup non-life reinsurers. Primary drivers behind this 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.

To access the full copy of this Best's Special Report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=344273.

To view a video with AM Best Associate Director Dan Hofmeister on this report, please visit http://www.ambest.com/v.asp?v=ambreinsurerclass723.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.