Global Reinsurers Must Maintain Discipline To Cement Strong Performance Amid Casualty Risks
This report does not constitute a rating action.
Taoufik GharibNew York+1-212-438-7253
Johannes BenderFrankfurt+49-693-399-9196
Michael ZimmermanEnglewood+1-303-721-4575
The global reinsurance industry earned its cost of capital in 2023 for the first time in four years, and we expect it to do so in 2024-2025, solidifying our stable view of the sector.
Reinsurers' earnings prospects are sound for 2024-2025 after strong operating results in 2023 and the first half of 2024, with the highest profit margins in many years amid favorable pricing in short-tail lines, healthy investment income, and strengthened capitalization with a buffer at the 99.99% confidence level.
Reinsurers’ strategic positioning helped them mostly dodge last year’s elevated natural catastrophe losses from secondary perils, though they remain exposed to potential outsize losses from primary perils.
Casualty pricing remains under scrutiny as U.S. liability loss reserves remain susceptible to inflation risk, especially from the soft underwriting years of 2014-2019.
S&P Global Ratings' stable view of the global reinsurance industry reflects a long upward trek from the difficult conditions of just a few years ago. Reinsurers delivered strong operating performance in 2023, benefiting from strong pricing in the property and property catastrophe short-tail lines, together with solid investment income. Pricing in these lines is peaking in 2024, after years of rate increases and finally the structural changes of 2023, including stricter and more favorable terms and conditions (T&C) and risk repricing.
These profitable dynamics persist this year, though short-tail lines' pricing has given some ground as last year's earnings and recovering asset values have bolstered reinsurers’ capital positions and boosted their risk appetite.
Casualty reserves remain a key risk as several reinsurers report adverse developments in certain U.S. casualty lines, such as general liability, excess casualty, and professional indemnity, related to the problematic 2014-2019 underwriting years. And while the reinsurance industry dodged most of the elevated natural catastrophe losses in 2023 and the first half of 2024, it remains exposed to potential outsize and severe catastrophe losses. Reinsurers must therefore maintain discipline to hold on to favorable fundamentals and keep ahead of plentiful risks.
Our stable view of the global reinsurance sector reflects our expectations of credit trends over the next 12 months, including the distribution of rating outlooks, existing sectorwide risks, and emerging risks. As of Aug. 30, 2024, we assigned 74% of the top 19 global reinsurers stable rating outlooks, 26% positive rating outlooks, and none negative rating outlooks.
Reinsurers must maintain discipline to hold on to favorable fundamentals…
Expected strong operating profits, aiding reinsurers in earning their cost of capital in 2024-2025.
Robust capitalization redundant at the 99.99% confidence level at year-end 2023, providing a cushion for potential stresses.
Favorable reinsurance pricing, supported by still-tight T&C in short-tail lines, overall underwriting discipline, and increasing reinsurance demand.
Strong investment income due to high bond yields.
Elevated natural catastrophe losses influenced by inflation, urbanization, and climate change.
Economic inflation, although abating, and social inflationary concerns, as reflected in adverse loss cost trends in certain U.S. casualty lines.
Financial market volatility and geopolitical tensions potentially affecting both sides of the balance sheet.
Relatively high cost of capital and retrocession cost.
Reinsurers' strong results in 2023 reflected years of underwriting efforts, along with favorable pricing and decade-high investment yields that benefited the industry’s bottom line. These conditions have extended into 2024, though pricing in certain lines began to moderate as of the midyear renewals.
Last year the top 19 global reinsurers generated a strong combined ratio of 91.5%, significantly better than the previous five-year average of 99.8%. This positive trend continued into the first half of 2024, with reported undiscounted combined ratios in the low 80s to the low 90s.
(%)
2018
2019
2020
2021
2022
2023
2024f
2025f
Net combined ratio
100.6
104.7
96.6
96.2
91.5
92-96
(Favorable)/unfavorable reserve developments
(4.8)
(1.3)
(2.1)
(2.8)
(1.7)
(2.0)
(1)-(2)
Net natural catastrophe losses' impact on the combined ratio
9.7
7.4
6.1
9.5
9.2
4.4
8-10
Accident-year combined ratio, excluding natural catastrophe losses, reserve developments, and pandemic losses
95.7
94.5
91.9
90.0
88.7
89.1
86-87
Return on equity
3.1
9.4
2.0
9.3
2.5
21.4
Low to mid teens
Net investment yield
2.6
3.0
2.4
2.3
1.9
3.4
3.5-4.0
The top 19 global reinsurers are Arch, Ascot, Aspen, AXIS, China Re, Convex, Everest, Fairfax, Fidelis, Hannover Re, Hiscox, Lancashire, Lloyd's, Markel, Munich Re, RenaissanceRe, SCOR, Sirius, and Swiss Re. The 2020 combined ratio included 8.8 percentage points related to COVID-19 losses. Return on equity in 2024f and 2025f will depend on investment performance. 2018-2022 data is based on GAAP and IFRS4. For 2023, 2024f, and 2025f, we used the undiscounted combined ratios for IFRS17 filers. f--Forecast. Source: S&P Global Ratings.
Nowadays, most reinsurers have adopted a hybrid business model as they expand into primary specialty insurance, including U.S. surplus lines, to diversify their risk and reduce volatility in their underwriting results. Another important factor affecting underwriting is natural catastrophe losses, whose impact on reinsurers’ underwriting results was cut in half in 2023 compared with the previous five years. This improvement mainly stemmed from the structural changes in the reinsurance market in 2023 and strategic actions taken during renewals, such as moving up the attachment points, scaling down limits offered to cedents, reducing exposure to frequent natural disasters (lower-return periods), tightening T&C, not offering aggregate covers, and repricing risk.
As a result, reinsurers generated strong underwriting gains in 2023 and the first half of 2024, with the highest profit margins in many years. In contrast, primary insurers, especially in the U.S., retained more risk, grappling with increased retentions and therefore bearing the brunt of the natural catastrophe losses from secondary perils like severe convective storms, which surged to unprecedented levels.
Given these strong returns, the reinsurance sector's earnings exceeded its cost of capital in 2023 for the first time in the past four years and the second time in the past seven years. Last year, the return on capital was 14.4%, 6.5 percentage points higher than the 7.9% cost of capital. The last time the industry generated such returns was in 2009.
Full-year 2024 performance will largely depend on the June 1-Nov. 30 Atlantic hurricane season, which the National Oceanic and Atmospheric Administration forecasts will be above average. Reinsurers can’t claim victory yet, but we expect the sector will earn its cost of capital in 2024-2025.
Despite signs of moderation in property pricing, we think overall conditions are still favorable, and we expect the industry will continue to post strong results with a combined ratio of 92%-96%, including a catastrophe load of 8-10 percentage points and a return on equity (ROE) in the low to mid-teens in 2024-2025, barring any outsize catastrophe losses. We also forecast the sector will benefit from rising investment income, with expected net investment yields of 3.5%-4.0% in 2024-2025.
In aggregate, the top 19 global reinsurers’ capital adequacy, per our new risk-based capital model, was 6.1% redundant at the 99.99% confidence level at year-end 2023, compared with a 9.7% deficiency at the ‘AAA’ confidence level, under our old capital model, at year-end 2022. In our view, capital has benefited from record earnings, the unwinding of unrealized losses on fixed-income investments, and the introduction of our new capital model, which has benefited our assessments of most reinsurers’ capital positions.
Under this new capital adequacy model (see "Insurer Risk-Based Capital Adequacy--Methodology And Assumptions," Nov. 15, 2023), we removed haircuts on property/casualty (P/C) loss reserve discounting and stopped deducting P/C deferred acquisition costs, which improved our measure of reinsurers' total adjusted capital. We also captured the benefits of risk diversification more explicitly in our analysis, which supports capital adequacy. The recalibration of our capital charges to higher confidence levels somewhat offsets these improvements.
We expect that strong underwriting and investment income, along with further unwinding of investment losses for those with longer-duration investment exposures, will continue to support capital adequacy in 2024-2025. Capital is a pillar of strength in the industry and is allowing reinsurers to write more business. Capital strength also provides a buffer against potential outsize natural catastrophes and other stresses.
According to Aon PLC, global reinsurance capital reached an all-time high of $695 billion at the end of the first quarter of 2024. Strong operating earnings, recovering asset values, and new inflows of alternative capital led the increase.
Alternative capital on its own also reached new heights, at $110 billion in the first quarter of 2024. It remains a key component of the property catastrophe market, filling in the gaps of traditional reinsurance, and primarily catastrophe bond issuances have fueled this growth. We expect investors will continue to favor catastrophe bonds because they have better structures, clearer coverage, and more liquidity than other vehicles, such as collateralized reinsurance, sidecars, and industry loss warranties.
While collateralized reinsurance and sidecars have also shown renewed growth in 2024, investors in the recent past have taken hits from elevated losses and the resulting trapped capital in these vehicles, which has created doubts about the sponsors’ (reinsurers') risk-modeling capabilities. As a result, there has been a flight to quality, with investors seeking to deploy capital with well-established and sophisticated risk managers.
With traditional reinsurance capacity coming at a high price tag, alternative capital, particularly catastrophe bonds, can provide extra relief to buyers of protection, and we expect this dynamic will continue.
Alternative capital on its own also reached new heights, at $110 billion in the first quarter of 2024.
Reinsurance pricing is still largely favorable in short-tail lines, though midyear renewals started to show rate decreases in some lines of business, policies, and regions. Short-tail lines' pricing hit multidecade highs after significant increases during the 2023 renewals, and it largely remained steady during this year’s January and April renewals.
In Florida, which renews in June, average risk-adjusted pricing for short-tail lines fell by 5%-10%, according to Aon. The pressure on rates is in part due to reinsurers' broadly increased capacity, which benefited from strong results in 2023 and the subsequent increase in appetite.
The increase in capacity helped meet a rise in demand from insurers. Guy Carpenter estimated an additional $35 billion to $40 billion of global property catastrophe limits were purchased through the first half of 2024. Reinsurers are seizing the opportunity to capitalize on favorable pricing, which will likely hold for the foreseeable future.
Reinsurance pricing is still largely favorable in short-tail lines…
Overall casualty pricing rose during the 2024 renewals, given the industry’s eye on adverse reserve developments in certain long-tailed lines from the 2014-2019 accident years. Ultimate loss trends are still materializing for these casualty lines, and we expect they will remain a key factor in future renewals as well.
Last year was the fourth consecutive year with global insured natural catastrophe losses topping $100 billion, yet reinsurers avoided the bulk of the cost. The dynamic in 2023 and 2024 is unique because most catastrophes have resulted from secondary perils, mostly severe convective storms, which typically fall short of the thresholds required to trigger reinsurance policies because of their higher frequency and lower severity.
However, reinsurers could come under pressure this year if primary perils such as hurricanes or earthquakes, which are less frequent than secondary perils but can cause more severe losses, become more prevalent (see “Reinsurers Dodge Severe Convective Storm Losses Amid Rising Threats,” Aug. 7, 2024).
The favorable pricing in property catastrophe business and strong operating earnings in 2023 and the first half of 2024 brought back risk appetite in the segment during this year’s renewals, though not too long ago, some reinsurers were exiting this line altogether (see “Reinsurers Show Growing Appetite For Natural Catastrophe Risks,” Aug. 30, 2024). And while reinsurers gave some ground in the midyear renewals, they have held firm to their 2023 structural changes, maintaining high attachment points with limited appetite for aggregate covers.
However, reinsurers will need to remain disciplined in their underwriting as climate change, urbanization, inflation, and increased property exposures, specifically in catastrophe-prone regions, continue to evolve.
Central banks are still hoping to achieve a "soft landing" by cutting interest rates as economic inflation, as measured by the consumer price index (CPI), continues declining from its 2022 peaks. The European Central Bank lowered interest rates by 25 basis points (bps) on June 6, 2024, following the Bank of Canada’s cut of 25 bps on June 5. Similarly, on Aug. 1, the Bank of England delivered its first interest rate cut in more than four years, also of 25 bps.
However, the Federal Reserve hasn’t pulled the trigger on rate cuts yet as the U.S. economy continues to outperform its global peers. Still, potential weakening of the U.S. labor market, along with ensuing consumer spending and recessionary risks, will likely move the timetable forward. S&P Global Ratings economists expect the Fed will likely begin with a 25 bps rate cut in September 2024 and anticipate a total of 150 bps in cuts through year-end 2025.
Given central banks’ active monetary policies, economic inflation is moderating by varying degrees depending on the country, which could alleviate some pressure on reinsurers’ loss reserves.
Adverse loss reserve trends have emerged, particularly in certain U.S. casualty lines.
However, significant inflation in the past few years has put longer-dated casualty liabilities most at risk for adverse developments. Furthermore, increased litigation cost and higher jury awards--particularly in the U.S.--often referred to as "social inflation," remain a primary risk for long-tail casualty reinsurance loss reserve adequacy.
2026f
U.S.
Real GDP growth
5.8
1.7
1.8
CPI growth
4.7
8.0
4.1
2.1
Core CPI growth
3.6
6.2
4.8
2.2
U.K.
7.6
4.3
0.1
0.6
1.2
9.1
7.3
2.8
Switzerland
4.2
2.7
0.7
1.5
1.4
1.3
1.1
Eurozone
5.6
8.4
5.4
Germany
0.0
0.3
3.2
8.7
6.0
France
6.4
0.9
5.9
5.7
Japan
1.0
(0.3)
3.3
China
8.5
5.2
4.6
0.2
0.5
South Korea
4.0
5.1
India
7.0
8.2
6.8
6.9
5.5
6.7
4.5
The consumer price index (CPI) is an annual average. f--Forecast. Source: S&P Global Ratings.
While short-tail lines seem to be a bright spot for global reinsurance, risks surrounding certain casualty lines' loss reserves are looming. The dual impact of economic and social inflation compounds these risks, particularly in the U.S. Although CPI inflation has moderated, social inflation remains a threat. The complexities of modeling prospective social inflationary trends, coupled with the long-tailed nature of certain casualty risks, pose unique challenges for reinsurers in adequately pricing and prudently reserving for such risks.
In the past six years (2018-2023) and through the first half of 2024, the top 19 global reinsurers in aggregate reported favorable reserve developments. But the extent of this benefit relative to overall underwriting performance has gradually diminished. Adverse loss reserve trends have emerged, particularly in certain U.S. casualty lines. In 2023, several reinsurers, including Swiss Re, SCOR, Everest, AXIS Capital, and Markel, strengthened their loss reserves, primarily in certain casualty lines for accident years 2014-2019--a period characterized by soft pricing conditions.
In addition, unlike for short-tail lines' loss reserves, the financial impact of unfavorable reserve developments in casualty lines can hamper reinsurers’ underwriting results over multiple years, as the full extent of the ultimate losses usually takes time to materialize. Reinsurers have been able to combat inflation risks by quickly adjusting and negotiating better pricing and T&C to reflect emerging trends. Moreover, reinsurers have mitigated some of this risk through sophisticated enterprise risk management, including prudent reserving and the use of structured solutions such as adverse development covers and loss portfolio transfers.
Nonetheless, reinsurers still need to closely watch U.S. casualty reinsurance reserves to avoid repeating the 2002-2005 experience, where several international P/C insurers and reinsurers failed predominantly due to deficient reserves for casualty lines. This followed a period of inadequate pricing industrywide, compounded by weak risk management.
The global life reinsurance sector’s earnings rebounded to pre-COVID-19 levels in 2022-2023. The sector’s ROE improved to 8.8% in 2022 and 11.6% in 2023, from 4.1% in 2020 and 3.7% in 2021. Strong performance in the mortality, morbidity, and longevity lines benefited the sector, alongside improving investment returns. Earnings prospects are also good, with an expected ROE of 9%-11% in 2024-2025.
Still, life reinsurance remains highly sensitive to assumption changes, as shown by SCOR’s announced adverse U.S. mortality experience in the first half of 2024, which highlights the sector’s sensitivity to assumptions for biometric risks. Oversight of assumptions and underwriting risk controls is crucial to managing volatility.
Overall, however, we think the fundamentals of life reinsurance remain sound, supported by high barriers to entry along with less price sensitivity and far fewer players than in P/C reinsurance. Reinsurance buyers are sophisticated, precluding the need for intermediaries, and demand is driven less by available capacity and more by balance-sheet management. Demand has also been increasing with primary writers seeking capital relief.
The U.S. remains the sector’s biggest market, with about 40% of global premiums and stable cession rates from primary insurers. Longevity business also continues to show strong demand in markets such as the U.K. and the Netherlands. For instance, the annual premium for bulk purchase annuities in the U.K. was about £50 billion in 2023, and we forecast it could remain there for the next three years.
However, we expect most large reinsurers to continue providing longevity risk solutions instead of funded reinsurance, which we assume is mainly provided by players that have significant expertise in asset management, including various reinsurers and insurers owned by private equity firms.
We also anticipate the industry will benefit from growth in some Asian markets, specifically emerging markets, which are experiencing increased insurance penetration, supporting robust growth of primary life business. Meanwhile, mergers and acquisitions and alternative capital aren’t transformative in life reinsurance. Therefore, we think competition will remain largely stable over the next few years.
Our stable view indicates that the reinsurance sector is still on strong footing in pricing and T&C and still in a favorable position to earn its cost of capital. As always, risks remain, particularly in certain U.S. casualty lines. Reinsurers must be disciplined to cement their progress amid the step-change in short-tail reinsurance conditions. Otherwise, 2023 and 2024 could end up the peak of the underwriting cycle.
Taoufik GharibNew York+1-212-438-7253taoufik.gharib@spglobal.com
Johannes BenderFrankfurt+49-693-399-9196johannes.bender@spglobal.com
Michael ZimmermanEnglewood+1-303-721-4575michael.zimmerman@spglobal.com
Saurabh B KhasnisEnglewood+1-303-721-4554saurabh.khasnis@spglobal.com
Simon AshworthLondon+44-20-7176-7243simon.ashworth@spglobal.com
