S&P: US P&C capital facing challenges from cat losses and elevated market volatility

By Chris Munro

April 14 - (The Insurer) - The U.S. P&C market’s continued capital resiliency supported by strong underwriting margins and healthy net investment returns could encounter increasing challenges in 2025 from rising catastrophe losses and heightened market volatility, S&P Global Ratings believes.

Last year saw the capital headroom supporting S&P’s stable view on the North American P&C market reach unprecedented levels.

That was despite the market suffering one of the costliest hurricanes and severe convective storms in U.S. history, and the sector taking a more than $113.0 billion hit from natural catastrophe insured losses.

The U.S. P&C market sidestepped that challenge though and ended 2024 with statutory surplus of $1.10 trillion, up from $1.04 trillion at the prior-year point.

According to S&P, “capital strength continues to be a defining characteristic of P&C insurers in the U.S.”

But S&P warned the sector could encounter increasing challenges this year owing to escalating cat losses and heightened market volatility.

The ratings agency said there has been a “notable uptick” in severe weather events, notably the Southern California wildfires and intense severe convective storms, which has placed considerable strain on insurers' catastrophe budgets so far this year.

“Our analysis indicates that many primary insurers have depleted more than half of their 2025 catastrophe budgets due to the losses incurred in the first quarter,” S&P said.

Across the U.S. P&C industry, S&P believes insured weather losses totalled more than $55 billion in 2025’s first quarter, well above the $13 billion booked in the prior-year period, as per Aon’s Q1 2024 catastrophe report.

The surge in catastrophe losses is driven by the California wildfires which are expected to cost insurers up to $50 billion.

“While the (Q1 2025) losses were significant, we believe many of the rated insurers with robust capital and effective reinsurance protection have the capital headroom to sustain additional weather losses for the remainder of the year,” the agency noted.

The first-quarter 2025 catastrophe losses are “unlikely” to erode capital, S&P said.

But the agency said primary insurers could face margin pressure should the severe weather pattern persists into the active convective storm season, which runs from April to August, peak hurricane season (June to November) and the main wildfire period (July to October).

It is not just elevated catastrophe losses taking their toll on U.S. P&C insurers though.

As S&P highlighted, mark-to-market volatility has been intensified by uncertainties over global trade and that has further undermined insurers' capital headroom.

“The unpredictability of global trade flows affected market sentiment, leading to sharp movement in the equity market,” said S&P.

“This resulted in the S&P 500 Index dropping 15% year-to-date ending April 7, 2025, followed by a remarkable rebound of 9.5% in just one day on April 9, underscoring the increased volatility.

“The combination of underwriting challenges and investment pressures prompts us to pay close attention to insurers' capital headroom for the remainder of the year,” the agency added.

As S&P stated, “there is a high degree of unpredictability around policy implementation by the U.S. administration and responses - specifically with regard to tariffs - and the potential effect on economies, supply chains, and credit conditions around the world."

Given current market dynamics, S&P undertook a two-factor capital stress test to assess insurers' vulnerabilities and capital capacity amid volatile conditions.

The stress test assessed U.S. P&C insurers’ capital resilience in the wake of weather-related losses that exceed their annual catastrophe budget for 2025, along with a significant decline in the equity market within the same year.

S&P’s stress test considered a decline of 35% in equity valuations and that over half of U.S. primary rated P&C insurers’ $40.4 billion in annual catastrophe budget had been depleted in Q1 2025.

Factoring in what S&P described as a “substantial rise in catastrophe losses” later this year, the agency found that, following its stress test, most U.S. rated primary P&C insurers showed a drop of about 22.0% in total available capital (TAC).

“Equity asset and natural catastrophe risks, averaging 35.6% and 11.2% of total risk-based capital, respectively, could expose one-fourth of rated primary insurers to capital-at-risk in 2025,” S&P said.

“Our findings also indicate insurers with equity exposure to TAC ratio exceeding 60% are sensitive to capital movement than those susceptible to elevated natural catastrophe losses,” the agency added.