S&P: US P&C carriers in ‘position of strength’ despite Q1 cats and diminishing reserve adequacy

By Michael Loney

June 5 - (The Insurer) - S&P Global Ratings' Neil Stein has said the credit fundamentals of the U.S. property casualty sector remain strong, which will allow it to handle any pressure from further losses this year after wildfires depleted a chunk of catastrophe budgets in the first quarter.

Speaking at S&P’s annual insurance conference in New York on Wednesday, Stein, who is managing director and property casualty sector lead at the rating agency, said “the sector entered this year from a position of strength”, after delivering record operating profits and a 96.5% combined ratio for 2024.

“The sector last posted an underwriting profit in 2020 and that was slim at 99.7% so when you think about this year, it was actually the best since 2013,” he said.

S&P in November last year revised its outlook on the U.S. P&C sector to stable from negative, citing an improvement in personal auto and homeowners business.

Stein said that issues the agency is watching include the increasing frequency and severity of natural catastrophes, underwriting discipline and risk selection, reserve adequacy and the accelerated use of AI.

Discussing the first quarter's California wildfires, Stein said “we think this is an earnings event, not a capital event”.

“We do think that about a quarter or third of their 2025 catastrophe budgets have been depleted, just for the wildfires alone, and maybe more than a half when we think about all events in the first quarter,” he said.

Stein continued: “This early strain may lead to pressure later in the year, especially if the remainder of the year proves to be above average. But the credit fundamentals remain intact, and even through the first quarter the industry produced a combined ratio that was relatively break-even. That was driven by strength in the private auto business.”

Stein also highlighted a diminishing trend on reserve adequacy in the past few years.

“For full year 2024 and for the second consecutive year, even though the numbers are a little bit smaller, commercial lines showed reserve strengthening,” he said. “While one year doesn't make a trend, it's something that we're going to continue to monitor, because it really does take a multiyear period to develop.”

Reserve strengthening in lines such as general liability, excess liability and commercial auto have offset reserve releases in workers’ compensation and short-tail lines.

In contrast, reserves continued to be released for personal lines business.

Stein noted that nuclear verdicts are contributing to adverse loss trends in liability lines.

“We do believe from an industry-wide perspective there are prudent loss picks and demonstrated reserve discipline, but we do remain just cautious overall, largely because of the environment,” he said.

P&C CARRIERS AFFECTED ‘UNEVENLY’ BY TARIFFS

Discussing the impact of tariffs, Stein said S&P has not taken any rating actions on U.S. insurers as a result. He said the imminent risk is credit market volatility.

“P&C companies will be impacted, but they will be impacted unevenly,” he said. “One example is for personal lines companies the higher tariffs are going to have an impact on car parts, building materials and those things are likely going to increase the cost of claims for insurers, and eventually that's going to feed through to price.”

He added: “The supply chain could be disrupted, not unlike things that we saw during COVID.”

Stein said that S&P did a stress test for P&C companies in the U.S. related to tariffs.

“We found that a small portion of our companies could experience capital pressure in 2025 but in aggregate it remained resilient. So we didn't take any action,” he said.