Dedicated reinsurance capital saw increase, with no signs of slowing down – AM Best

Dedicated reinsurance capital rose by 7% in 2023 to $568 billion, with a further increase anticipated in 2024, according to a new report from AM Best.

Traditional reinsurance capital grew by $57 billion, or 14%, year over year, reaching $468 billion in 2023. This increase was largely driven by robust returns reported by Bermudian companies, with substantial capital growth, excluding Berkshire Hathaway’s National Indemnity.

AM Best projects continued growth in the reinsurance market through 2024, estimating total dedicated reinsurance capital for year-end 2024 at between $620 billion and $625 billion. This projection includes an anticipated 10% rise in traditional capital.

Despite these increases, since 2018, traditional reinsurance capital has accounted for less than 60% of the consolidated shareholders’ equity of companies identified as reinsurance writers, dropping to 49% in 2023 as reinsurers increasingly expand into primary and specialty insurance lines.

Third-party reinsurance capital saw a smaller increase of 3.7% in 2023, reaching $100 billion, according to the report. AM Best collaborates with Guy Carpenter to estimate the total capital supporting the reinsurance industry, with AM Best estimating traditional capital and Guy Carpenter estimating third-party capital.

The third-party reinsurance capital estimate for 2024 is projected to be between $105 billion and $110 billion, driven by growth in catastrophe bonds and collateralized reinsurance.

Dan Hofmeister, associate director at AM Best, noted that capital in the industry has grown rapidly due to higher retained earnings and reduced mark-to-market investment losses. He added that the absence of startup reinsurers has allowed traditional reinsurers to maintain their market shares without needing to adjust to softening conditions.

According to Hofmeister, the reinsurance market is well-positioned to handle a reasonable level of losses and continue growing capital.

The reinsurance market realigned during the January 2023 renewals following years of underwhelming underwriting and operating returns that did not meet the cost of capital. Some reinsurers exited the property catastrophe space, while others adjusted their risk profiles by raising rates and increasing attachment points.

This shift led to operating returns at levels not seen in nearly three decades. Through the first half of 2024, the property reinsurance market has stabilized, with slight softening at the highest attachment points.

AM Best forecasts that the reinsurance market will continue to thrive in 2024, with higher investment returns and similar underwriting risk positions to those in 2023. The market is expected to generate returns on capital exceeding 10% by year-end 2024, although these could be tempered by dividends and an active hurricane season.

However, the market appears capable of absorbing a reasonable level of underwriting losses while still achieving capital growth.

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