Maturing alternative capital partnerships help reinsurers exceed cost of capital: AM Best

Reinsurers are benefiting from maturing partnerships with alternative capital providers, helping them to consistently exceed their capital costs, a new report from rating agency AM Best has highlighted.

For the third consecutive year, global reinsurers have generated returns well above the cost of capital, which AM Best states is due to positive underwriting results that have been driven by repricing and derisking of reinsurance portfolios.

According to the agency’s report, the reinsurance industry’s weighted average cost of capital increased to 8.23% in 2025 from 7.67% in 2024, and then rose further again in the first quarter of 2026, to 8.63%.

After years of a hard market environment, high levels of capital and capacity across the global reinsurance space are now driving a softening trend, which heavily accelerated in 2026.

In addition, most major reinsurance firms had exceptional returns in 2025, with a median return on equity (ROE) of 16.3%, just marginally lower than the previous record-setting returns of 2023.

Importantly, AM Best notes that while natural catastrophe losses have been increasing in recent years, 2025 ended up generating lower losses than expected.

“Reinsurers have adapted to the new status quo of higher CAT losses, and the relatively benign year allowed for very high returns that are unlikely to be repeated. However, the terms and conditions put in place after 2023 renewals are proving durable, and reinsurers are expected to maintain underwriting discipline and remain profitable in the near term,” the agency explained.

Recall that broker Guy Carpenter reported a 12% decrease in its Global Property Catastrophe Rate-On-Line Index at the January 1st renewals for global property catastrophe reinsurers, which then fell further to a 16% decline after the mid-year renewals.

“This comes on the heels of a 6.6% decrease in 2025, after several years of consistent rate increases, including nearly 30% in 2023. The 16% decline in mid-year renewal pricing, driven by the profitability reinsurers have enjoyed on the property business, is the steepest in decades and greater than any from the previous soft market of the 2010s,” AM Best explained.

Nevertheless, the agency acknowledges that rates are up almost 40% from 2017, when the market began hardening last.

As well as this, reinsurers have also implemented thorough de-risking measures, which includes tightened terms and conditions and a sharp increase in attachment points, which have proven durable despite the softening market.

“While there have been changes to broaden policy wording and narrow exclusions in response to competitive pressure, these changes typically have a lesser impact than more substantive structural changes to reinsurance programs,” AM Best added.

The agency also highlighted the stabilising role of alternative capital in today’s reinsurance market.

“Sound risk management, strategic use of technology, and a maturing partnership with alternative capital have subdued the cyclical nature of the reinsurance market by narrowing the extremes. To meet or go above the cost of capital, reinsurers must remain flexible with regard to market conditions and balance opportunistic moves (taking advantage of market conditions and retreating when pricing is not right) over the short term with strategic long-term goals (maintaining relationships, building expertise, and being relevant and dependable over the long run),” AM Best said.

Importantly, the lower-cost of alternative capital accessible through insurance-linked securities (ILS) partnerships and structures such as catastrophe bonds and sidecars can be a key lever for reinsurer performance throughout changing market cycles.

The majority of reinsurance firms now have an alternative, or third-party capital, partnership strategy. Whether this is simply ceding risk to capital market investors through ILS and cat bonds, establishing aligned risk sharing structures such as sidecars, or fronting / managing specific portfolios of risk for investors including through ILS funds, this partnership has clearly matured.

Furthermore, recent data from AM Best and Guy Carpenter shows that third-party capital in reinsurance, deployed through alternative capital vehicles, catastrophe bonds and ILS, is projected to grow roughly 6% over the course of this year, to end 2026 around a record $130 billion level.

Helen Andersen, industry analyst, AM Best, commented: “Reinsurers’ changes to program structures, such as tightened terms and conditions and a sharp increase in attachment points, have proven durable despite the softening market. The measures have allowed reinsurers to weather the increased frequency and severity of secondary perils.”