Additional capital returns are looking more likely in 2025: J.P. Morgan

Prices are expected to start reducing in the medium term, which likely points towards reaching the end of a positive earnings upgrade cycle with the market entering a face where capital returns will possibly emerge, according to analysts.

J.P. Morgan has recently looked into whether Lloyd’s insurers perform better when markets soften or not, an analysis that has come amid emerging debate on the pricing cycle for both specialty markets and also on reinsurance pricing.

They have both been in positive territory for a number of years now, but experts have noted that, according to data from Q1’24 earnings, this good momentum is beginning to slow for specialty lines for example.

Yet experts highlight that no obvious correlation has been found between share price performance and pricing data.

“While we do not expect to see softening in the near term, we believe that it is a reasonable conclusion to draw that prices will begin to reduce in the medium term. Looking back at data, there is no clear conclusion on the relationship between pricing trends and share price performance for the Lloyd’s insurers,” J.P. Morgan stated.

Adding: “Theoretically, when prices stop improving, it likely points towards reaching the end of the positive earnings upgrade cycle. However, different companies have different business mixes in which pricing trends could be different and individual years can have widely different loss experience too which can also be a driver of performance.

“Capital returns look more likely in the next phase of the cycle. One conclusion is clear from the data; there was a pivot last cycle towards returning capital when the market began to soften.”

Looking back at previous cycles’ data, pricing softened between 2012-17 before hardening began in 2018, both in reinsurance and in most specialty lines according to the report.

As a result in 2012-17, opportunities to deploy capital into growth opportunities at the right price were fewer and the Lloyd’s insurers began to return capital to shareholders.

These cycles have also shown that payout ratios were materially higher in 2012-16 (90% on average) than the current assumptions, which stands at 60% on average for 2024-25.

“We are now entering a phase where we believe additional capital returns are likely to emerge, given healthy starting capital positions and strong ROEs even in normal year,” J.P. Morgan concluded.

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