After years of stagnation, the insurance industry is expanding quickly
James Mackreides advises astute investors to invest right away.
Probably the most important but least exciting industry in the world is insurance. Every aspect of the global economy is impacted by the insurance sector, from the food we eat to the communication satellites that serve as the backbone of communications in the twenty-first century. Without it, things would be very different.
Most people understand the fundamentals. For example, anyone who drives or has driven in the UK will have some knowledge of how this market operates because auto insurance is required by law. This also holds true for anyone who has a mortgage on a home they purchased. To make a loan on a property, banks typically require home insurance. These two outstanding instances demonstrate how insurance supports the global economy. For a nominal upfront payment known as an insurance premium, the policyholder transfers the risk of a sizable loss to an insurance provider in both situations.
The computation of insurance premiums takes a lot of effort. The premium amount is the outcome of hundreds or thousands of data points, examining everything from local crime rates to historical weather patterns. In addition, it accounts for broker commissions, reinsurance commissions, operating expenses for the insurance company, and possible investment returns (more on that later).
Only when the insurer accurately prices the risks it is underwriting does the entire insurance concept function. Every year, Admiral (LSE: ADM) and other insurers write millions of different policies, all the while knowing full well that a certain percentage of them will result in a significant loss or claim, like a major multi-vehicle auto accident. However, the risk of a significant loss is dispersed throughout the portfolio due to the fact that millions of different customers are contributing to the same pool. If the business has done its math correctly, it should be able to pay claims as they come up while still turning a profit.
The process by which insurers transfer risk.
The vast oil rigs in the North Sea, the cargo ships that transport goods from China, the rockets that launch satellites into space, and the cranes that assist in the construction of infrastructure all operate according to the same fundamentals of insurance. In each of these situations, risk can be transferred to a third party, releasing funds for the owner of the oil rig, cargo ship, rocket, or crane. In the event of a disaster, it would be nearly impossible for these businesses to maintain sufficient cash on hand to cover all potential liabilities.
This was discovered by BP in the years following the Deepwater Horizon oil spill. To cut expenses, the company decided to self-insure its Gulf of Mexico drilling operations. Drilling the Macondo oil well, which was anticipated to contain roughly 50 million barrels of oil, initially cost about £100 million. The business would save money if it chose to self-insure rather than contract out the risk by purchasing insurance policies, and it had already done so. Being a major oil and gas corporation, BP was well-versed in its operations. However, insurance is needed for unforeseen circumstances rather than anticipated ones, and what transpired next was unexpected. Eleven rig workers were killed when Deepwater Horizon exploded, starting the biggest oil-related environmental catastrophe in history. It has been estimated that the company will ultimately pay about £65 billion for the catastrophe, including all settlements and fines. BP might have been able to transfer some of this risk with the aid of appropriate insurance policies.
Even the world's biggest insurers would have had a hard time covering the entire £65 billion. Retrocession insurance and reinsurance are useful in this situation. In the insurance industry, both kinds of insurance aid in distributing risk. An insurer might, for instance, underwrite £100 million annually and use a reinsurer or panel of reinsurers to reinsure £80 million of that risk. In the end, the risk is distributed among several businesses since the reinsurers may choose to retain a portion of this risk and transfer the remainder to a third party.
The combined ratio is a crucial indicator in the insurance sector that provides important information about a business's performance. A combined ratio is made up of multiple components. Costs include things like the amount of money the business pays out on claims each year, the cost of handling those claims, and the cost of acquiring new clients. These are weighed against the premium revenue. The ratio of premiums to costs would be less than 100% if the business is making more money from premiums than it is from claims. However, the combined ratio would be higher than 100% if the company is paying out more claims than it is receiving in premiums.
A company is not making money from underwriting insurance if its combined ratio is greater than 100 percent. Not a terminal indicator, this one. In actuality, a large number of insurance providers are able to and do routinely report combined ratios above 100%. It is particularly prevalent during times of high volatility and uncertainty. However, if a company routinely reports a combined ratio above 100 percent, it may be a sign of poor underwriting care and attention.
Underwriting losses may be partially covered by a company's investment portfolio if the total ratio is greater than 100%. A sizable investment portfolio will be maintained by each insurance group to support underwriting operations and supply funds for unanticipated losses. The size of the investment portfolio in relation to possible underwriting losses is displayed in the solvency report that insurers are typically required to submit on a quarterly basis. Government debt and corporate bonds are examples of low-risk or risk-free assets that the majority of insurance companies typically invest in. These have little chance of suffering a sizable capital loss and produce a consistent and predictable income stream each year. Additionally, when combined ratios surpass 100 percent, the income helps cover the gaps. It is currently anticipated that an investment portfolio will yield a return of between 4 and 5 percent annually. This implies that the business can have a combined ratio of 105%, losing money on the underwriting portion of the operation but profiting from its investments, and still turn a profit overall.
Major change in the insurance industry.
In the global insurance market, there are four primary sectors. There is health insurance, property and casualty (PandC) insurance, reinsurance, and life insurance (which merits its own feature). Most customers will be familiar with the P&C market. P&C offers insurance for homes, cars, businesses, and other everyday risks in addition to specialty risks like energy, political, marine, and aviation, which frequently call for specialized underwriting knowledge. About 40 percent of the industry's projected £7.7 trillion in gross written premiums (GWP) in 2025 will come from life insurance, 10 percent from reinsurance, 20 percent from health insurance (of which two-thirds will originate in the US), and the remaining portion from P&C.
It should come as no surprise that the US has the biggest insurance market in the world. With 43.7% of global premiums, the US was by far the largest insurance market in the world, according to Swiss Re's 2022 total premium volume data. Second place went to China with a 10 percent share, followed by the UK (5 percent), Japan (5 percent), and France (3 percent). In 2022, the top 20 markets together accounted for 91% of global premiums.
Due to a combination of factors, the insurance industry has experienced one of the biggest changes in profitability in recent history during the last five years. When global insured losses from catastrophic events reached £144 billion in 2017, the largest amount ever recorded in a single year, the change really started. Hurricanes Harvey, Irma, and Maria, which hit the US and the Caribbean in quick succession, caused the largest losses. The losses came after the industry had experienced a period of relative stability, which it had started to take for granted. Many businesses ultimately suffered significant underwriting losses on the disasters as a result of improperly pricing their risks.
Most P&C and reinsurance contracts are referred to as "short-tail" because they are renegotiated annually, allowing insurers to re-price risk every 12 months. Immediately after the pandemic struck in 2020, businesses began to re-price risk. The market had good but not exceptional years in 2020 and 2021 because the world was cooped up at home. However, as the world reopened in 2022, losses began to increase. The years immediately following the COVID lockdowns dealt insurers a triple whammy. Businesses had to contend with an increase in claims as well as the rising cost of each claim when the world reopened due to a spike in accidents and inflation. Income from investments didn't cover the difference because interest rates were at an all-time low at the time.
In response to re-price risk, businesses moved swiftly. In 2021, 2022, and 2023, P&C premium growth in the US was 9point 4%, 9point 8%, and 10point 5%, respectively. In order to counteract rising claims costs brought on by economic inflation, social inflation (the rise in P&C insurance claims costs above what can be attributed to economic factors), and catastrophe losses, insurers have raised prices significantly during this "hard market" phase. This has continued into 2024 and 2025, with premium growth of 20% or more in the most vulnerable regions. It took some time for rising rates to affect businesses' bottom lines, but by 2024, the effects were becoming noticeable. The industry combined ratio in the US P&C market increased from 99.7 percent in 2021 to 102.07 percent in 2022 before slightly declining to 101.08 percent in 2023. The combined ratio significantly improved to 96.4% in 2024. With an average of over 100 percent in 2020, 2021, and 2022, Swiss Re estimated that the P&C combined ratio improved to 98 percent in 2024 from 102 percent in 2023.
The reinsurance sector also swiftly adapted to the evolving landscape. Large losses from disasters typically fall on reinsurers, and since 2020, losses from these events have increased. Annual insured losses from disasters hardly ever topped £10 billion before the pandemic. Losses from natural disasters exceeded £154 billion last year, and the average yearly loss from 2017 to 2024 exceeded £146 billion, according to the Gallagher Res 2025 Natural Catastrophe and Climate Report. £12 billion is the ten-year average.
In response to this new normal, reinsurance rates have changed. The Guy Carpenter Index of global property catastrophe reinsurance pricing has increased annually until the January 2025 renewal season, and it is still up 60% since its last low in 2017, despite some softening heading into 2025 (which was swiftly reversed following the California wildfires). An in-depth analysis of a subset of 16 reinsurers by Gallagher Res indicates that these rate increases have contributed to the average combined ratio declining from 87.3 percent in 2023 to 86.8 percent in 2024. The industry is now more resilient to growing losses as a result of higher rates. In its annual report on reinsurance, Gallagher Re stated that "assuming a normal level of natural catastrophe losses, we expect an underlying return on equity (ROE) of around 15 percent and a headline ROE of approximately 18 percent-19 percent" for the reinsurance industry. ROE numbers should rise in the P&C market as well. Swiss Re projects the ROE of the global P&C industry for key markets to rise significantly from roughly 56% in 2022 - 2023, to around 10% in 2024, 2025, and 2026.
Increased interest rates have also benefited insurers' bottom lines. Swiss Re forecasts that companies are now making much higher returns on their investment portfolios, up from roughly 1 percent prior to and during the pandemic to 3point 6 percent in 2024 and 3point 9 percent in 2025 for the P&C industry. It has taken some time for the higher rates to become apparent because insurers typically stagger the duration of the bonds in their portfolios, but now the firms are truly beginning to reap the rewards of higher rates.
Greatest deals in the insurance industry.
Chubb (NYSE: CB), a US giant, is one of the top-performing insurers that is reaping the benefits of all the trends mentioned above. Since 2022, the company's core operating profit has surpassed previous records, with a primary focus on P&C insurance in North America. Strong pricing and expansion in commercial and consumer lines worldwide have been the main drivers of net premium growth. Overall, the group's global net written premiums rose by 10% in 2023 and 9.6% in 2024. The company's industry-leading P&C combined ratio, however, is its primary differentiator. In contrast to the US P&C industry average of 99.7 percent, it reported a five-year average of 89.2 percent in 2024, 86.6 percent in 2023, 87.6 percent in 2022, 89.1 percent in 2021, and 96.1 percent in 2020. Together with higher investment income, that allowed the company to report a 2024 ROE of 13.9 percent.
One of the biggest publicly traded pure-play insurance firms in the world is Chubb. Reinsurance at the holding company level is the primary focus of the biggest, Berkshire Hathaway Inc. (NYSE: BRK-B). P&C policies that are geared toward consumers are provided by its subsidiaries, chiefly GEICO. State Farm and Progressive, the only major publicly traded company, are GEICO's primary rivals.
Car and truck insurance specialist Progressive (NYSE: PGR) reported a 19% increase in fourth-quarter earnings at the end of the previous year. When the combined ratio for the year, which included a 3 point 6 point contribution from net catastrophe losses, came in at 88 point 8 percent, net income for the year doubled. Net personal line premiums increased by 23% overall. By the end of 2025's first quarter, Progressive had 35.1 million active personal insurance policies, an 18% increase from the previous year.
During its first-quarter results call, Travelers (NYSE: TRV), a peer of Chubbs, highlighted the trends influencing the industry. The company said that three factors contributed to the growth, which more than doubled its earnings expectations: a "terrific" 79.9 percent underlying combined ratio in personal lines; a 20.9 percent year-over-year improvement in its overall combined ratio; and price increases in all lines except workers compensation.
With a primary focus on the Lloyds of London insurance market, Beazley (LSE: BEZ) and Hiscox (LSE: HSX) have exposure to P&C, speciality, and reinsurance, which gives them an advantage. They have specifically established a niche for themselves in the specialty insurance market, which is much less competitive than the mainstream global P&C market. Both companies have recovered from combined ratios of over 100 percent in 2020 to 79 percent for Beazley in 2024 and 89 point 2 percent for Hiscox on an undiscounted basis thanks to cautious and skilled underwriting and rate hikes. ROE was 27 percent and 19 points 8 percent, respectively, last year. Both announced fresh buybacks and dividend increases to commemorate their impressive performance from the previous year. Hiscox announced plans to repurchase £175 million worth of shares, while Beazley initiated a £500 million share buyback in response to its 2024 results.
Swiss Re (Zurich: SREN), the second-largest reinsurer in the world (Berkshire is the largest based on market capitalization), has used rate firming over the past five years to move past past mistakes. In addition to addressing US liability reserving issues, management has presented a strategy to overtake Munich Re (Frankfurt: MUV2), the leading reinsurance company in the world. Though it has historically been the preferred reinsurance stock for investors, Munich is well-positioned to benefit from additional strengthening in reinsurance pricing and typically trades at a slight premium to the rest of the industry. Swiss has comparable growth potential to Peer Hannover Re (Frankfurt: HNR1), which has a middle-of-the-pack valuation.
Although their insurance businesses are their most well-known ventures, Allianz (Frankfurt: ALVE) and Axa (Paris: CS) provide a variety of financial services products. Both have embraced aggressive M&A tactics, increasing their market share in industries like life insurance and asset management. But their combined ratios still show a lack of specialization. In 2024, Axa and Allianz both reported a P&C combined ratio of 91 and 93 percent, respectively. Nonetheless, diversification does offer some protection over the course of the insurance cycle.
After carving out a niche for itself in the UK insurance market, Aviva (LSE: AV) recently agreed to purchase Direct Line in order to increase its market share in the motor insurance sector. In terms of its general insurance businesses in Canada and the UK, the group reported an undiscounted combined ratio of 98.5% in Canada and 94.9% in the UK last year. General insurance premiums increased by 14% overall, and the group reported a 96.3% undiscounted combined ratio. The organization's operating profit increased by 20% to £1.77 billion thanks to contributions from its retirement savings and life insurance divisions.
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