Global reinsurers have generated returns above the cost of capital for the first time in four years thanks to repricing and actions to reduce portfolio risk, AM Best says.

The median weighted average cost of capital rose to 8.12% last year, while reinsurers’ return on equity soared to 16.41% – the highest level in 12 years by a margin of about 3.7 percentage points.

The “exceptional” return on equity is unlikely to be repeated, although reinsurers are expected to maintain underwriting discipline in the near term, according to an AM Best report.

Rate rises are slowing but de-risking measures such as tightening terms and conditions and increasing attachment points are unlikely to be relaxed, the report says. 

“The hardened market has led to more sustainable pricing momentum, enhancing reinsurers’ ability to meet their cost of capital over the medium term,” AM Best industry research and analytics senior director Sridhar Manyem said. 

The current hard market arose from prolonged underperformance and economic and social inflation, and despite a relative abundance of capital amid a low interest rate environment.

Investors’ interest in reinsurance through traditional equity, third-party capital and insurance-linked securities grew as they diversified portfolios because of low interest rates. 

“Reinsurers’ failure to meet their cost of capital consistently in recent years has tested investors’ risk appetite,” AM Best industry analyst Helen Andersen said.

The report is part of AM Best’s look at the global reinsurance industry before the annual Rendez-Vous de Septembre in Monte Carlo.