Reinsurers headed toward meeting their cost of capital in 2025: AM Best

Unless the market experiences an additional $16 billion in net reinsurance losses between now and year-end, AM Best’s composite of top global reinsurers are set to meet their cost of capital in 2025.

In a new report released at the Rendez-Vous de Septembre in Monte Carlo, the rating agency noted that while the return on equity (ROE) for its composite of leading global reinsurers remained strong and above the cost of capital at year-end 2024, individual ROEs declined from the previous year, reflecting the impact of IFRS 17 and higher taxes.

AM Best explained, “Reserve leverage, the main source of ROE, declined and was partially offset by the composite’s significant operating income, which in turn was propelled by underwriting and investment income.

“The adoption of IFRS 17 by the Big Four European reinsurers, especially Swiss Re in 2024, and its peers earlier, reduced reserve leverage significantly; the reduction in leverage was also due to improved operating results, which thereby increased retained earnings.”

Guilherme Simoes, senior financial analyst, AM Best, added, “This can be explained by the higher pricing and tighter terms and conditions, along with a shift away from risk exposure, which, in combination, led to a growth in retained premiums with a lower pace of increase in reserves.”

Still, despite high natural catastrophe losses impacting the property market and social inflation affecting the casualty market, the composite recorded its second-highest ROE in seven years.

With this in mind, AM Best expects that the 2025 operating performance of global reinsurers will be lower than in 2024, although still positive.

The rating agency said that ROEs on an individual company basis are expected to still stay well above the current cost of equity capital of 9.5% (at year-end 2024) and at around the mid-teens range for 2025.

Simoes continued, “Based on 2024 results for this global reinsurers group, and using the current marginal tax rate and interest rate, it would take additional reinsurance net losses of around USD 16 billion beyond the California wildfires for the composite’s ROE to equal the cost of capital of 9.5%.

“Assuming similar cat losses as in 2024, it is unlikely that ROEs will drop to cost of equity capital by year-end 2025.”