Total return reinsurers 'significantly underperforming' traditional Bermuda reinsurers

Written by Adam Cadle

01/09/2020

Total return reinsurers are significantly underperforming the reinsurers that comprise the Bermuda composite, AM Best has said, despite having the potential to generate significantly higher investment returns than traditional reinsurers.

As outlined in its latest special report, Emergence of ‘Total Return Reinsurers’, AM Best explored the financial results of its composite of five total return reinsurers that have operated for at least five years and compared these against the results of the rating agency’s long-standing Bermuda reinsurance composite.

An average five-year combined ratio (2014-2019) of 111.2 was recorded for the total return composite compared with 98.4 for the Bermuda composite.

"Several factors seem to be driving the underperformance of the companies in the total return composite, including higher loss and expense ratios, driven partly by concentrations in medium-term casualty lines and given the companies’ relatively short tenure compared with the Bermuda reinsurers," AM Best stated.

"Return on equity for the total return composite has been volatile and disappointing as well, with a five-year average of -0.3%."

According to the report, all of the total return reinsurers have adjusted their investment allocations, such that 20-50% of invested assets now are allocated to risk assets, a "sea change" from the 80-90% seen in the total return model’s initial allocations.

"The change could help diminish volatility in investment results and increase market acceptance, given the claims-paying ability invested in lower-volatility assets," the reprot stated.

Additionally, recent reinsurance rate hardening could allow total return reinsurers to deploy recently freed capital from their investment reallocations to write profitable reinsurance business.

“The long-term viability of the total return reinsurer model hinges primarily on management’s ability to realise the theoretical returns that can be generated by effectively deploying capital and taking risk on both sides of the balance sheet,” Steven Chirico, director, AM Best said.

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