'You don't own enough insurance companies'

 

Reinsurance prices fell 16% in H1 2026 as capital increased to $705bn. Insurers' own prices are already down 12%. While the underwriting profits are narrowing, these companies benefit from record-high US interest rates.

The only defensive sector that's still growing profits 

In today's economy, almost every stock has become either an AI trade or an inflation trade. Tech stocks, industrials, and even utilities have been pulled into the AI capex cycle. 

Where AI isn't involved, like in consumer goods, higher energy, food and raw-material costs have eaten into their margins. 

That is why a diversified portfolio still needs businesses that are not tied to the AI cycle and can either withstand inflation or benefit from it.

Traditionally, that job belonged to telecoms, utilities, consumer staples and healthcare.

Telecoms have stable, recurring revenue but their markets are saturated. They don't have any pricing power on their subscribers because inflation makes it hard to raise prices on a commodity, and they have to take increasing amounts of debt to upgrade their equipment.

Utilities are more of the same. Their returns are regulated, their upside is capped, and their balance sheets are now filled with debt required to build the grids and power infrastructure needed for tomorrow's AI datacenters. 

Consumer staples still sell products people need, but inflation has made those products far more expensive to produce. The cost of cocoa, coffee, grains and other primary agricultural inputs has surged, squeezing margins and leaving no room for earnings growth.

Healthcare used to be the defensive sector that could still compound. But pharma ultimately lives on its pipeline, and that pipeline is getting harder to refill. 

Too few new molecules are making it through development fast enough to replace blockbuster drugs approaching patent expiry, leaving more companies exposed to patent cliffs (patents of drugs entering license-free usage, meaning an influx of biosimilars) without an obvious next engine of growth.

The traditional defensive basket is gone. Telecoms have no pricing power and are in debt, utilities are also saddled with debt for AI datacenters, consumer staples are being eaten by inflation, and healthcare doesn't have any new drugs entering the market to keep it thriving.

Except for one.

Excess & surplus lines insurers are the last bastion of an uncorrelated defensive portfolio. They have the resilient demand that defensive investors want, while still producing the earnings growth that the rest of the basket has lost.

And one of their biggest costs has just fallen sharply. The protection insurers buy for themselves, reinsurance, became 16% cheaper in the first half of 2026.

(source: Marsh Re, H1 2026)

On its own, that sounds like a gift: buy the same protection for less, keep more of every premium you collect.

Except insurers are being forced to charge their own customers less too. Marsh reported a 12% decline in global commercial property insurance rates in Q2 2026.

Last November, in Impactfull Weekly #14, we highlighted specialty insurers because they were benefiting from cheaper reinsurance while the prices they charged customers were still holding up. 

They were also earning record investment income by investing premiums before claims were paid. That combination produced some extraordinary profits.

Say goodbye to that easy home run.

Reinsurance is getting cheaper, but so is insurance itself. The billion-dollar question now becomes: which insurers can keep the savings for themselves before competition gives them back to customers?

In this edition of Impactfull Weekly, we explain why protection is getting cheaper, and who can defy slowing profits.

Part 1: Why is reinsurance getting cheaper?

Insurance for insurance companies

Imagine you're an insurer covering thousands of homes. A steady flow of leaking pipes and damaged roofs is part of the business. A hurricane damaging thousands of those homes together is a much bigger problem.

Therefore you pay another company to take part of that risk. This is called reinsurance: insurance for insurance companies.

Some reinsurance contracts share premiums and claims.

Others work like a large deductible: the insurer pays losses up to an agreed amount, after which the reinsurer pays covered losses up to a limit. The original insurer still owes its customers what their policies promise.

Insurance companies have another source of protection: investors.

Through catastrophe bonds (or cat bonds), investors put money into a separate pool and earn income for making it available. If a disaster meets the conditions written into the bond, some or all of that money can pay losses. Investors accept that they may not get their principal back.

Think of a disaster fund that investors are paid to provide capital for.

An insurer can access this market directly. It doesn't need to pass through a chain of reinsurers first. According to Aon, insurers accounted for 65% of catastrophe-bond issuance in the twelve months to June 2026.

For the buyer, this creates choice. It can compare traditional reinsurance with investor-funded protection and decide which combination offers the best deal.

More money, less problems?

As we saw in the first chart above, dedicated reinsurance capital reached $663bn at the end of 2025 and forecasts $705bn by the end of 2026. That forecast includes $575bn held by traditional reinsurers and $130bn supplied by outside investors.

Capital is the financial backing available to absorb losses from disasters. More of it gives the industry greater capacity to offer protection.

Much of the increase comes from companies already operating in the market. Strong insurance and investment earnings have allowed reinsurers to retain more money. So new investors add yet another source of competition.

The cat-bond market illustrates the change. Aon puts outstanding bonds at $63.4bn in June 2026, up 17% year on year. Sixteen organisations used the market for the first time during the last twelve months.

Prices are not falling simply because insurers want less cover. Aon reported that global reinsurance demand increased by more than 10%, even as buyers secured double-digit property-catastrophe price reductions at the mid-year renewals.

There's a storm brewing

NOAA, the US weather agency, assigns a 75% probability to a below-normal Atlantic hurricane season in its 2026 outlook. It points to a strengthening El Niño, a Pacific warming pattern that can make conditions less favourable for Atlantic hurricanes.

(source: Copernicus)

Fewer major claims would leave even more money available to provide protection. So if losses remain manageable, insurers and reinsurers could carry more capital into the next round of contract renewals. 

That money will need somewhere to earn a return, encouraging further competition. A quieter season can therefore improve this year's earnings while putting pressure on next year's prices.

It doesn't guarantee low insurance losses though. One storm hitting a heavily insured area can still be expensive.

Follow the savings

So far, the immediate beneficiary is clear: specialty insurers are paying less to reinsure the hard-to-insure risks they take on, directly lowering their costs.

But its competitors can often buy cheaper protection too.

One insurer might keep the savings. Another might cut customer prices to attract more business. If customers can easily switch between equivalent policies, the first insurer may have to match the discount.

The extra money entering reinsurance can therefore travel through the industry and end up in the customer's pocket.

Who can keep the discount instead of passing it straight to customers?

Part 2: Who keeps the change?

A matter of $4

Let's say cheaper reinsurance saves an insurer $4. If its customer price stays unchanged, that $4 becomes extra profit. If competition forces a $4 discount, the entire benefit goes to the customer.

In our example, the insurer starts with $10 of profit. Keeping the savings takes it to $14. Giving customers $2 leaves it with $12.

What matters is how many dollars survive competition pressure, because percentage changes in customer premiums and reinsurance costs apply to different amounts.

Not all specialists are the same

Cheaper reinsurance helps most when an insurer can hold the price of the policy it sells. 

Think of a bakery: cheaper flour increases its profit, until the bakery next door cuts the price of bread.

The same pressure applies to insurance. If customers can buy equivalent protection elsewhere for less, the savings soon becomes theirs.

But some policies are harder to compare. Especially in the segment of excess & surplus insurance (E&S) where the risks these companies take on are explicitly hard to underwrite.

Consider a crane operator. The insurer needs to understand what the crane lifts, where it operates and who maintains it. A cheaper policy that excludes damage to neighbouring buildings could leave the operator exposed to the very accident it needs insured.

The insurer's expertise then becomes part of the product they're selling. 

Understanding the risk, setting the price and writing the cover is called underwriting. Done well, it gives customers a reason to choose an insurer beyond the lowest quote.

US E&S insurers generally have more freedom to tailor prices and coverage, allowing them to design the policy around the business, largely due to their expertise in judging extreme risks and putting a hefty price tag to cover them.

For us, the sweet spot lies in insurers whose costs are falling but whose customers still have a reason to pay.

How much of the savings survives?

A smaller reinsurance bill can mean a better deal. It can also mean less protection. 

Like a homeowner cutting their premium by raising the excess, an insurer can spend less today while accepting a bigger bill when something goes wrong.

An insurer can also spend the savings on better protection. For example, if you're renewing your home insurance and discover that the same budget now buys extra cover against an expanded basket of risks.

For an insurer, that could mean protection against a larger disaster or cover secured for several years. The benefit may therefore be a business better prepared for losses, even if this year's profit barely changes.

But even a good deal on protection can be swallowed by the discount customers demand.

As stated previously, global commercial property insurance prices fell 12% in Q2 2026. 

Specialist products faced that pressure too: global cyber prices fell 4% in a timeline where AI is posing an ever larger threat to cybersecurity.

On the other hand, US casualty prices rose 7%. 

(source: Marsh Re GIMI Report Q2 2026)

But charging more only helps if the increase keeps pace with the cost of claims.

This is where the broad specialist insurance story becomes a company-by-company argument. We need to follow three things together: the cost of protection, the price charged to customers and the claims the insurer expects to pay.

Higher profit despite smaller margins

Cheaper reinsurance does not guarantee a wider profit margin. Customer prices can fall faster than costs, while repairs, legal settlements and other claims become more expensive.

The combined ratio shows how much of each premium dollar goes on claims and insurance expenses. When it rises, the insurer keeps less of that dollar.

That sounds like a reason to leave the sector. But a smaller slice of a bigger business can still mean more profit.

For example, Palomar reported a second-quarter combined ratio of 83.3%, compared with 78.8% last year. Yet Palomar's underwriting income rose from $38.3m to $48.0m. Its larger business more than offset the smaller margin.

Cheaper protection still helps, but the case for investing in specialty P&C (including Excess & Surplus insurance) increasingly depends on underwriting discipline and the price at which you buy these names.

But what if rates go the wrong way?

(source: Bloomberg)

Higher interest rates mean bigger bills for companies refinancing debt. For insurers reinvesting customers' premiums, they can mean bigger interest cheques.

Insurers collect premiums before paying claims and invest the money in between. As older bonds mature, higher yields let them earn more without selling another policy.

That is the antifragile element: pressure on other businesses can support insurers' earnings. Selected E&S insurers combine that benefit with the freedom to adjust prices and cover as risks change.

The benefit takes time and claims still matter. But cheaper reinsurance gives disciplined specialists another lever for profit growth, one that has nothing to do with AI or the Fed.

Companies to watch

Trisura Group (TSE:TSU): 

Trisura writes specialty insurance in Canada. In the United States, it also issues policies for insurance programmes run by partners, then passes much of the insurance risk to reinsurers and earns a fee for providing that service.

More available reinsurance can help those programmes expand. But cheaper protection does not automatically increase Trisura's fee, and Trisura remains responsible to policyholders if a reinsurer fails to pay. 

Second-quarter combined ratio 84.9%, operating return on equity 16.7%, book value per share up 20% to C$21.19, net cash and an A- rating. The model's weak point is the reinsurance it relies on: a single US programme cost it C$81.5m in 2022 when collateral ran short.

Skyward Specialty (NASDAQ: SKWD): 

Skyward writes niche commercial lines across eight divisions and, since January, through Apollo at Lloyd's. Its book sits in the lines where surplus lines premium is still growing double digits, and more than 60% of its liabilities settle inside two years, which matters when US liability claims inflate at 12 to 15%.

Second-quarter operating return on equity 19%, Skyward segment combined ratio 86.9%, book value per share up 15% this year. Apollo brought London marine and energy exposure at the right moment, and 5.4 points of Middle East losses with it. The name least exposed to the casualty problem.

Palomar Holdings (NASDAQ: PLMR): 

Palomar writes earthquake, inland marine, crop and specialty property, almost entirely in the United States, and buys more reinsurance relative to premium than any name here. 

Premium grew 27% in the second quarter, adjusted return on equity was 26%, and it has beaten estimates for fifteen consecutive quarters. The adjusted combined ratio rose to 76.7% from 73.1% as the mix shifted toward casualty and crop, and earthquake pricing is under pressure from the same capital glut that helps everyone else. At 11.7x EV/EBITA, a 27% grower is fairly priced.

 

Our take

Specialty insurance is one of the only sectors that still has sustainable growth ahead among the defensive sectors.

Not because every insurer suddenly became a great investment. Reinsurance sure is getting cheaper, but insurers are also forced to charge customers less. The margin cushion that made the sector so attractive last year is narrowing.

That makes underwriting judgement much more important than it was before.

This is why E&S insurers are thriving in this environment.

They write risks that require specialist expertise, spread those risks across enough different lines that one bad event cannot destroy a year of earnings, and are willing to walk away from business when competitors price it too cheaply.

Cheaper reinsurance still helps. So does the income earned by investing premiums before claims are paid. But neither can rescue an insurer that loses discipline on the policies it writes.

Its customers still need the product, earnings can still grow without an AI boom or the next rate cut, and the best operators have more than one way to make money.

https://www.marketscreener.com/news/you-don-t-own-enough-insurance-companies-ce785bdedf8af62c