Best’s Commentary: Strong Recovery in Total Reinsurance Capital Countered by Surplus Distributions

The global reinsurance industry demonstrated a significant recovery of prior-year capital losses in 2023, driven by strong technical results, unrealized capital gains and higher reinvestment rates, according to a new AM Best commentary.

In its Best’s Commentary, “Strong Recovery in Total Reinsurance Capital Countered by Surplus Distributions,” AM Best states 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. 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.

AM Best projected in August 2023 a 12.2% year-over-year increase in traditional reinsurance capital to USD 461 billion for 2023 (see the related Best’s Market Segment Report, “Dedicated Reinsurance Capital Fluctuates Amid Volatile Market Dynamics”), but as the North American hurricane season ended, reinsurers were on pace to nearly double that projected increase. However, the dynamic between available and deployed capital remains, and according to the commentary, 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 USD 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, AM Best. “Regardless, our original projected increase of 12.2% in traditional reinsurance capital still appears adequate, albeit with some potential variation if reinsurers avoid deploying the new capital generated in 2023.”

Third-party reinsurance capital is expected to increase modestly by 4% 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 USD 561 billion, which is less than 2% below the prior high watermark of USD 570 billion, set in 2021. Even with much more orderly renewals expected for January 2024, 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.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=339409.

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. For more information, visit www.ambest.com.

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