A composite of top global reinsurers appears headed toward meeting their cost of capital in 2025, unless the market experiences an additional $16 billion in net reinsurance losses between now and year end, according to a new AM Best report.

The Best’s Special Report, “Global Reinsurers’ Return-on-Equity Decreases but Remains High,” is part of AM Best’s look at the global reinsurance industry around of the Rendez-Vous de Septembre in Monte Carlo. Other reports, including AM Best’s ranking of top global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life/annuity, health and regional reinsurance markets, are available online.

While the return on equity (ROE) level for a composite of AM Best’s top global reinsurers remained strong and exceeded the cost of capital at year-end 2024, the individual ROEs were lower than prior year due to the effects of IFRS 17 and taxes.

The report uses the five-stage DuPont ROE formula to analyze the ROE sources for an AM Best composite of global reinsurers, which represented approximately 90% of total reinsurance industry gross premium written and includes companies using U.S. GAAP and IFRS 17 standards.

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.

“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,” said Guilherme Simoes, senior financial analyst, AM Best.

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, according to the report. Headwinds included increased dividends and share buybacks, as well as unrealized capital losses, which contributed negatively to the group’s surplus growth.

Market estimates show that the January 2025 California wildfires consumed about 40% of the reinsurance market’s natural catastrophe budget for the year. AM Best expects that 2025 operating performance of global reinsurers will be lower than in 2024, although still positive. 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 midteens range for 2025.

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

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=357652.

For previously published global reinsurance reports, please go to AM Best’s Reinsurance Information center. In addition, please visit the AM Best TV event playlist for coverage of AM Best’s reinsurance market briefing from Rendez-Vous de September in Monte Carlo and executive interviews during the conference, along with video interviews on AM Best’s global reinsurance reports.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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