The reinsurance market has reached an equilibrium, with increased capital supply from accumulated earnings meeting higher demand for reinsurance protection from cedents. As such, margins will peak in 2024, although reinsurers should continue to produce a favorable return on equity of near 20%, comfortably above the cost of capital (8%–10%).
This plateau led Fitch Ratings to recently revise its global reinsurance outlook to “neutral” from “improving.”
Despite a moderately softer and more competitive market, underwriting discipline should be maintained. The disciplined environment is supported by limited new capacity entering the market as supply from traditional and alternative sources remains ample, deteriorating U.S. casualty loss-cost trends from social inflation and heightened catastrophe and climate change risk. This environment should remain supportive of continued organic growth opportunities over potential acquisition activity.
Record profits in 2023 and the first half of 2024 from the best underwriting conditions in over 20 years, steady investment income, enhanced balance sheet resilience through rising capitalization buffers and strengthened reserve adequacy provide a strong base for the sector to withstand potential pressure from prices declining from multi-year highs and rising claims costs. Capitalization is projected to remain very strong, allowing sustained high levels of capital repatriation in 2025, while providing ample headroom to absorb any unexpected earnings volatility.
Fitch expects flat to modestly lower margins in 2025 after the 2024 peak, assuming no major losses and anticipating strict terms and conditions are maintained and broadly flat retrocession costs. Continued price adequacy and conservative loss picks in 2025 should offset rising claims costs from natural catastrophes and social inflation. Pricing efforts from primary insurers on underlying business of quota-share treaties should assist underwriting margins, but substantial premium increases are unlikely as economic inflationary pressures ease, especially in commercial lines.
Property Market Flat; Casualty Concerns Drive Rates Up
Fitch anticipates a moderate market softening in 2025, particularly in property catastrophe, unless there is significant loss activity in H2 2024. Property rates face downward pressure, but risk-adjusted returns remain appealing, with potential pricing gains in loss-affected lines. Reinsurers’ appetite remains limited for lower layers, aggregate treaties and per risk covers, where elevated property losses persist, as reinsurers are not interested in returning to providing cedents earnings protection.
Market discipline will persist despite increased competitiveness, with reinsurers being selective in expanding their book of business to maintain price adequacy. Stricter terms and conditions achieved in 2023 are likely to hold firm, although some flexibility may emerge around attachment points. Retrocession placements should remain positive for reinsurers with sufficient capital available.
While economic inflation has eased, casualty pricing will continue to rise due to heightened U.S. risk concerns from social inflation and litigation finance trends, with elevated damage awards from nuclear verdicts that exceed $10 million. This is particularly the case for commercial auto and general liability from the 2015-2019 soft market accident years, but also from growing concerns around the more recent 2021-2023 period. This will help to push casualty rate rises to keep up with higher loss costs.
Furthermore, the potential for larger latent liability losses from exposures including opioids, microplastics and synthetic chemical substances known as PFAS continue to be a significant concern for the casualty reinsurance market.
Reinsurance Demand Remains Strong
Global demand for reinsurance is structurally rising as primary insurers cover increasing insured values from inflation and exposure growth and contend with increased risk, including from catastrophes and climate change and uncertainty in economic and geopolitical conditions.
Demand for protection, financial solutions, longevity, and mortality reinsurance support growth in life & health business. Low, stable economic growth in developed markets, projected at 1.4% per annum for 2024-2026 by Fitch, further supports demand from primary insurers and top-line growth for reinsurers, particularly in quota-share programs.
Expected continued rate increases in the underlying primary insurance business should help to support reinsurance rates, especially through proportional treaties. Furthermore, increased investment yields are helping to offset higher claims inflation, as capacity maintains its underwriting discipline.
Record Alternative Capital Supports Reinsurance Demand
Capital levels of insurance-linked securities (ILS) continue to reach record levels, as returns in the sector remain attractive. Catastrophe bonds have been particularly favored as these securities have performed better than other ILS during the recent periods of high catastrophe losses. Fitch expects continued strong supply growth in the alternative reinsurance capital market into 2025, barring substantial ILS catastrophe losses in H2 2024.
Increased alternative reinsurance capacity reflects the exceptionally favorable rate environment for property catastrophe risks in 2024, following the significant price correction in the prior year and corresponding attractive expected returns available in the market.
The catastrophe bond market experienced a continued robust market for issuance, setting a record with over $12 billion H1 2024, with several new sponsors using the capital markets for additional sources of reinsurance capacity. As of mid-year 2024, the catastrophe bond market reached a new height of outstanding issuance at about $46 billion, or roughly 42% of all deployed alternative capital.
Catastrophe bond returns have been particularly strong in 2024, with investors benefiting from attractive yields on recently issued transactions and the generally higher positioning of the catastrophe bonds in cedent catastrophe reinsurance towers. Limited recent loss activity for catastrophe bonds with per occurrence triggers reflect the generally remote attachment points used in the market. However, ILS capacity supporting aggregate reinsurance have come under pressure from heightened severe storm activity in the US.
M&A Subdued in Hard Market
After several sizable deals that closed in 2023, the reinsurance M&A environment has not seen any major announcements so far in 2024. While higher market valuation multiples of re/insurers has increased the currency of acquiring companies, the same holds true for most potential acquisition targets. This makes acquisitions expensive and less likely to be executed, acting as a constraint to the consideration of large-scale M&A activity.
Continued favorable pricing and beneficial terms and conditions for reinsurers, has maintained the focus on organic growth opportunities and away from M&A. In addition, industry participants face several impediments to complete M&A deals, including significant integration risks, concerns regarding casualty reserve adequacy and uncertainty with respect to regulatory approvals.
However, when the market inevitably softens and organic opportunities subside, companies that have accumulated capital from sizable profits could look to acquire re/insurers that were less successful in taking advantage of the hard market.
Potential for Increased IPOs
The IPO front was mixed. Hamilton Insurance Group Ltd. began trading on the NYSE in November 2023, generating net proceeds of about $81 million that the company used to expand business. Hamilton’s IPO improved its financial flexibility and increased its access to capital markets after having been a private company since its formation in 2013, which was led by founding partners of hedge fund Two Sigma Investments LLC.
Conversely, Aspen Insurance Holdings Ltd. decided not to proceed with its IPO in 2024, after having filed a series of regulatory documents with the SEC in 2023. The company was reported to also have been considering a potential merger transaction as an alternative to going public. Ultimately, valuations for the company proved to be insufficient for its owner Apollo Global Management Inc., which took the company private in 2019.
Aspen has demonstrated notable improvement following portfolio optimisation efforts that included discontinuing business lines and exposure management initiatives to improve profitability and lessen volatility. The company could reassess the market in 2025 and move forward with a transaction should conditions be more conducive.
Such an improved environment could also be an opportunity for newer companies, such as Convex Group Ltd. and Vantage Group Holdings Ltd. to go public. Ascot Group Ltd. is also viewed as a potential IPO candidate in 2025.
Was this article valuable?
Here are more articles you may enjoy.
DeSantis Vetoes Repeal of ‘Free Kill’ Medical Malpractice Bill 
Mondelez Sues Aldi, Alleging Grocery Chain Copies Packaging to Confuse Customers 
Hack of Contractor Was at Root of Massive Federal Data Breach 
Cotality: Over 33 Million Properties at Risk of Hurricanes, Creating ‘Liquidity Traps’ 
