Kathmandu. Rating agency AM Best noted that despite the increase in disaster damage last year, U.S. asset÷ casualty insurers generated higher investment returns and were able to exceed their capital costs in 2024.
Life, pension and health insurers have all overcome different challenges in their respective areas and have been able to overcome the cost of capital. Despite experiencing two major hurricanes, severe storms and cold weather events in 2024, the property and disaster insurance industry recorded an underwriting profit of about $22.9 billion. This is a significant improvement from the $21.3 billion underwriting deficit in 2023.
The cost of capital provides a measure of how much returns investors can expect to generate for investment. It considers the cost of debt and the cost of capital, with the relative weight of the individual company’s reliance on each method of raising capital, as well as risk factors based on the company’s risk profile.
Property and disaster insurers have been able to reinvest bonds at higher interest rates, and this segment is projected to increase investment income by 15 percent in 2024.
Health insurers have consistently exceeded their capital costs over the past 15 years. According to a special report by BEST, the average return on capital use in this segment has steadily declined over the past four years, but still surpasses the average weighted cost of capital by about 2.5 percentage points. The decline in health insurers’ returns has been driven by rising medical and drug costs in combination with higher claims.
Unlike the health and property and disaster segments, the average capital cost for life and pension insurers did not fall in 2024, despite a similar reduction in the cost of equity. Am West’s report also noted that, life insurers are more dependent on debt financing, so the reduction in the cost of capital funding has had little impact. In general, life insurers are more asset-intensive, so their capital costs are more related to capital market volatility.
