AM Best: US P&C underwriting performance to continue rebound in 2025

By Isha Marathe

Feb 20 - (The Insurer) - Net investment income across the U.S. P&C industry is projected to reach $100.8 billion in 2025 as higher interest rates fuel stronger investment yields, helping insurers create a buffer against the volatility of weather-related losses, according to AM Best's Review & Preview Best’s Market Segment Report.

The U.S. P&C underwriting performance improved significantly in 2024 compared with the previous year, but remained loss making. U.S. P&C insurers reported an aggregate underwriting loss of $2.6 billion in 2024, compared with $24.6 billion in 2023.

The improvement was despite weather-related insured catastrophe losses again significantly impacting underwriting performance in 2024, with economic losses amounting to over $200 billion, around half of which were covered by public or private insurance, AM Best said. Hurricanes Helene and Milton were responsible for a large portion of those losses.

The year-end combined ratio for the homeowners/farmowners line is expected to be five points lower than the ratio through year-end 2023, with the private passenger auto business expected to improve by six points, AM Best said.

"On a net basis, both the homeowners multiperil and private passenger auto businesses generated more favorable loss ratios through year-end, reflecting the aggressive push for rate adequacy among primary personal lines insurers since early 2022,” said Greg Williams, managing director at AM Best.

AM Best said it expects the rebound in underwriting performance to continue in 2025, although the pace of premium growth is forecast to slow. The P&C sector is expected to grow new premiums written by 7.3% following a 10% increase in 2024.

CLIMATE RISK

As the potential for frequency and severity of weather-related losses increases, the cost of homeowners insurance is likely to remain elevated, AM Best said.

For instance, the January wildfires in California led 2025 off to a destructive start, AM Best said, with the high value of real estate in areas such as the Pacific Palisades likely to contribute to sizable insurance losses and substantial economic losses.

"It is still too early to accurately estimate the magnitude of the losses, although early estimates range from $25bn to $45bn. Insurers are focused primarily on servicing the claims of policyholders whose homes or properties were directly damaged by the fires," AM Best said.

The severity of weather-related disasters was exacerbated for P/C insurers due to their dependence on reinsurance, which has been more complex to manage in recent years, prompting some reinsurers to change their risk appetites for catastrophe-exposed personal and commercial property risks, AM Best noted.

"Homeowners and commercial property insurers can be expected to re-examine their appetites for homeowners coverage given the growing risk of wildfire losses, which have become even more unpredictable with respect to location, intensity, and seasonality."

AM Best is revising its loss estimate by 8.5 points owing to the January wildfires for 2025.

The California wildfires have also brought focus on potential regulatory changes to rate hikes, a new presidential administration, and its impact on the P&C market.

In 2024, P&C insurers saw net investment income stabilise in 2023, due largely to three factors: Federal Reserve policy actions, interest rate trends, and equity market performance.

The industry’s net investment income is estimated to grow approximately 18% in 2024 to $85.4 billion after holding steady in 2022 at $71.5 billion and 2023 at $72.4 billion, AM Best said.

The growth in 2024 reflects new money being reinvested at higher yields.

"The Fed has since signaled a more cautious stance and left its benchmark rate unchanged in January 2025," AM Best said.

"This could lead to more moderate returns on fixed-income investments compared with 2024. Fed forecasts for inflation through 2026 have since been nudged higher. Additionally, the projected fed funds rate through 2027, as well as the long-run neutral fed funds rate, has been revised upwards."

In the rest of 2025, there is uncertainty surrounding Fed policy given the upside risks associated with tax cuts, tariffs, and immigration, AM Best said.

COMMERCIAL AND AUTO

Personal auto and homeowners lines ended 2024 with an estimated combined ratio of 101%, an improvement from the prior-year's net combined ratio of a little more than 107%. Still, AM Best expects the line to post a small underwriting loss in 2025.

The commercial automobile line generated a combined ratio of 108.5% and the commercial multi-peril lines, 104.5%, in 2024.

One of the main causes of rising auto rates for insureds was higher repair costs in affected areas that pushed reinsurance pricing upward, AM Best said.

Additionally, commercial lines saw continued pricing momentum in 2024, as net premiums written rose by 6.1%, with the main source of losses for the industry coming from a continued rise in social and economic inflation.

"In general, frequency has moderated as policyholders opt for higher deductibles, while severity has moderated slightly as supply chain bottlenecks have eased," AM Best said.

Additionally, litigation financing and macroeconomic pressures continued to increase commercial lines claims costs in 2024, AM Best said.

"These headwinds could weaken prior year loss reserve adequacy over the near term, especially for casualty lines of coverage," said Jacqalene Lentz, senior director, AM Best.

AM Best said the P&C industry’s net loss and LAE reserves as of year-end 2024 will be deficient by $18.8 billion, consisting of a $14.5 billion deficiency on core reserves and a $4.3 billion reserve deficiency on asbestos and environmental (A&E) reserves.