Over 10 years deploying capital in the insurance capital markets I’ve found that most coverage rarely goes beyond surface-level headlines, outcomes, and broad narratives. 

This newsletter takes a different approach - a perspective from inside the market - the pricing cycles, the capital flows, what’s moving markets, and what’s behind the headlines.

One of the smartest underwriters I know recently told me that the risks keeping him up at night were those presented as third quartile. The logic is simple:

Never order the second-cheapest wine on the list, I guess…

What makes this observation interesting? Where we are in the cycle.

In a hard market (when buying insurance is relatively expensive) there's less need to be concerned about risks presenting in the third quartile. Everything is expensive, so even a risk that's worse than it's presented to be gets a price that covers the risk.

In a soft market (when buying insurance is relatively cheap) the cushion disappears. The risks presented as bad are still priced as bad. The risks that are presented as ordinary, and aren't, still get an ordinary price - but now that price no longer covers what they actually are.

Let's dive a little deeper.

Fastest in property catastrophe reinsurance, where rates are down about 16% this year. The message out of Monte Carlo last month was that January's renewals will take another 10-15% off.

Autonomous Research says that would mark "the full reversal of the hard market, at least from a pricing perspective".¹ Industry capital is around $800bn, up 40% from the 2022 low, and Gallagher Re reckons it would take "well over $100bn" of excess losses to change the picture.¹

Lloyd's is a few steps behind, but directionally the same. Rates fell 6.7% in the first half of this year, about twice last year's pace, while premium grew 15.8%. While the headline combined ratio improved, the underlying one (which strips out a quiet catastrophe year and releases from old reserves) went from 82.1% to 84.0%.²

As an investor, understanding where we are in the cycle is critical. Softening rates don't change the risks in a book - they change what you get paid for them.

Lloyd's of London is unique among insurance markets in having a central performance management function. The Corporation of Lloyd's approves every syndicate's business plan each year: what it writes, how much, and at what rate adequacy. When rates soften, it can refuse a plan that grows into falling prices, cut a syndicate's capacity or, in the extreme, close it.

After the soft market of the mid-2010s ended in a £2bn loss in 2017,³ Lloyd's told every syndicate to find the worst-performing 10% of its own book and do one of two things with it: fix it, or stop writing it.⁴

This remediation shines a helpful light on what happens when insurers are forced to deal with business that softening rates have left underpriced…

Fix it. Plenty of the targeted business never left. It was re-underwritten and renewed at a higher price. Lloyd's reported a positive rate change on all eight of the classes it had singled out at the January 2019 renewals,⁴ and rates rose fastest in exactly those classes.⁵ Across the market, the attritional loss ratio (claims from everyday business against premium) fell from about 59% in 2017 to 49% in 2021.⁶ A naturally hardening market accounted for some of that, but the targeted classes were repriced hardest.

Stop writing it. The rest, around £4bn in 2019 alone, left the market.⁷ Much of it went back to the US at a new price.⁸ Kinsale, one of the specialists on the receiving end, saw it as a chance to grow and widen its margins by increasing the rate - its premium roughly doubled between 2019 and 2021.⁵ ⁹ (Not all of that came from London, and US prices were rising across the board, but you get the idea.)

In short, the worst-performing business was re-underwritten, priced higher, and transformed into good business.

More capital is arriving that can't set a price. Sidecar capacity is up about 50% since the end of 2024.¹ Cat bond investors are accepting 2.4 times expected loss this year against 3.7 times in 2024, and AM Best has started telling them to be more selective.¹⁰

Richard Brindle, who runs the Fidelis Partnership, described the market on the Voice of Insurance podcast this month as a "Darwinian division into key leads and follows".¹¹

Lead underwriters see the full submission and set the price. Followers take a share on the lead's terms. This can be a capital-efficient way to get underwriting beta when the lead is right, and expensive when undifferentiated capital is competing for access (see Hard Market Issue 10).

If this sounds familiar, it's because the same theme is running through private credit - the parallel is closer than "too much money chasing yield".

Private credit losses aren't showing up in the obviously distressed names - they're in the middle of the book.

Spreads on new direct loans have tightened by about 170 bps since early 2023, and covenant-lite deals have gone from 4% of direct lending to 21%.¹² PIK interest at the largest non-traded BDCs was up 42% year on year in the first quarter, and Moody's reckons about two thirds of last year's defaults were restructurings rather than missed payments.¹³

A loan presented as performing that isn't is the credit version of a third-quartile insurance risk. It's also why nobody can agree on the default rate: Fitch says 6%, a narrower industry index says 2.5% - the gap seems to be mostly about whether an amended loan counts as a default.¹³

The similarities go further - much of the money that's flooded into private credit over the past decade came in through structures that rely on someone else's underwriting: BDCs, and insurers buying privately rated paper.¹⁴

What gives - pricing or terms? Reinsurers say they'll give ground on price and hold the line on terms.¹ Terms are harder to see than the headline rate, so I'll be looking out for frequency cover coming back, changes to aggregate covers, and attachment points that aren't keeping pace with exposure.¹ ¹⁰ All signs of a softening market that's giving away margin without announcing lower rates.

The standing invitation holds. If you've been sitting on a question - about a product, a structure, an idea - send it over.

Until then.

Charlie Evans, CAIA
Chief Investment Officer, Zephyros Investments

¹ Reinsurance News, "10-15% rate declines signalled for 2027 as reinsurance hard market nears full pricing reversal", 1 October 2026, citing Autonomous Research, Aon and Gallagher Re. https://www.reinsurancene.ws/10-15-rate-declines-signalled-for-2027-as-reinsurance-hard-market-nears-full-pricing-reversal/

² Insurance Business, "Lloyd's rates fell 6.7% in H1 - nearly twice the pace of last year. Brokers should be watching", 3 September 2026, citing Lloyd's Half Year Report 2026 and its Q2 2026 market message. https://www.insurancebusinessmag.com/asia/news/breaking-news/lloyds-rates-fell-6-7-in-h1--nearly-twice-the-pace-of-last-year--brokers-should-be-watching-588465.aspx

³ S&P Global Market Intelligence, "Lloyd's of London syndicate closure threats", 5 July 2018 - 2017 net loss of £2bn and combined ratio of 114%. https://www.spglobal.com/marketintelligence/en/documents/lloyds-of-london-syndicate-closure-threats-research.pdf

⁴ Lloyd's 2018 Annual Results analyst presentation - Decile 10 defined as each syndicate's bottom 10% of gross written premium; positive rate on all eight review classes at the January 2019 renewals. https://assets.lloyds.com/media/dddca19c-36c6-4a29-80ba-324aa3fdfee2/pdf-annual-report-2018-Lloyds-2018-Annual-Results-Analyst-Presentation-FINAL.PDF

⁵ Insurance Times, "Underpriced Lloyd's business: where is it now?", 2019 (undated; references Marsh's Q2 2019 index) - rates rising fastest in the Decile 10 classes; Kinsale's Michael Kehoe on the opportunity to grow and expand margins. https://www.insurancetimes.co.uk/analysis/underpriced-lloyds-business-where-is-it-now/1431214.article

⁶ Lloyd's Full Year 2021 Results presentation (attritional loss ratio 2019-2021: 57.3%, 51.9%, 48.9%) and 2018 Annual Results presentation (2017: 58.9%). https://assets.lloyds.com/media/75cbe195-1174-49f9-a472-3a70208773f4/Lloyd's Full Year 2021 Results FINAL.pdf

⁷ Lloyd's 2019 results, via Hampden - £4bn of underperforming business jettisoned by syndicates in 2019. https://www.hampden.co.uk/article/lloyds-2019-results-further-detail

⁸ Insurance Journal, "Business Is Gushing, Underwriters Trying to Keep Up", 16 September 2019 - R-T Specialty's Tim Turner on "$6 billion worth of business that's blowing back into the U.S. market". https://www.insurancejournal.com/magazines/mag-features/2019/09/16/539839.htm

⁹ Kinsale Capital Group, full-year results for 2020 and 2021 - gross written premium $389.7m (2019), $552.8m (2020), $764.4m (2021); combined ratios 84.7%, 86.7%, 77.1%; growth driven by higher submission activity and higher premium rates on bound accounts. https://ir.kinsalecapitalgroup.com/news/news-details/2021/Kinsale-Capital-Group-Inc.-Reports-2020-Fourth-Quarter-and-Year-End-Results-02-20-2021/default.aspx · https://ir.kinsalecapitalgroup.com/news/news-details/2022/Kinsale-Capital-Group-Inc.-Reports-2021-Fourth-Quarter-and-Year-End-Results-02-20-2022/default.aspx

¹⁰ Artemis, "As cat bond loss multiples tighten, AM Best urges investors towards greater selectivity", 25 September 2026 - 2026 issuance at 2.4x expected loss against 3.71x in 2024; attachment points under renewed pressure. https://www.artemis.bm/news/as-cat-bond-loss-multiples-tighten-am-best-urges-investors-towards-greater-selectivity/

¹¹ The Voice of Insurance, Ep319, "Richard Brindle & Richard Coulson - The Fidelis Partnership: Darwinian Division", 6 October 2026. https://thevoiceofinsurance.podbean.com/e/ep319-richard-brindle-richard-coulson-the-fidelis-partnership-darwinian-division/

¹² ABF Journal, "The unit economics of deal origination: how spread compression is reshaping middle market lending platforms", 5 June 2026 - median new-issue direct loan spread 716bps (March 2023) to 544bps (end 2025), per McKinsey citing Kroll StepStone; covenant-lite 21% of direct lending deals in 2025, up from 4% in 2023. https://www.abfjournal.com/the-unit-economics-of-deal-origination-how-spread-compression-is-reshaping-middle-market-lending-platforms/

¹³ Investing.com, "Private Credit in 2026: Record Defaults, Softer Returns and New Regulatory Focus", 26 August 2026 - Fitch's 6.0% US private credit default rate (April 2026) against the Proskauer Private Credit Default Index at 2.51% (Q2 2026); Moody's estimate that distressed restructurings made up about 65% of 2025 defaults; PIK income up about 42% year on year at the nine largest non-traded BDCs in Q1 2026. https://www.investing.com/analysis/private-credit-in-2026-record-defaults-softer-returns-and-new-regulatory-focus-200686600

¹⁴ Insurance Business, "NAIC targets $1.2 trillion in insurer private credit with tighter solvency rules", 25 September 2026 - US insurers held about $1.2tn of private credit at end-2025, with $544bn in privately rated bonds, BDCs and private credit funds flagged for particular attention. https://www.insurancebusinessmag.com/us/news/breaking-news/naic-targets-1-2-trillion-in-insurer-private-credit-with-tighter-solvency-rules-591242.aspx