US Property & Casualty outlook: sunny skies, but pack an umbrella

The US P&C industry recorded a 99% combined ratio in the first quarter of 2025, an impressive result given the California wildfires. It's also a signal of strong underlying profitability. However, rising capacity and competition will begin to erode underlying results, and elevated catastrophe activity continued through the second quarter. Rate gains are easing across many commercial and personal lines where insurers assess pricing to be adequate and are targeting expanded market share in spite of elevated uncertainties. We see headwinds to premium growth building, which may be compounded if exposure growth slows. We still see growth slowing toward longer-term averages and forecast a 5.5% premium gain in 2025 and 4% in 2026. We see return on equity (ROE) at 10% in both years.

Key takeaways

• The 2025 outlook remains favorable on historically strong but slowing underlying underwriting results.
• We expect decelerating growth but profits to remain stable. That said, there is potential for loss-cost shocks.
• We forecast industry ROE of 10% in 2025 and 2026 as investment returns offset weaker underwriting profitability.
• We expect premium growth to slow to a still-strong 5.5% in 2025, and to 4% in 2026.

We forecast ROE at 10% this year and next,¹ a slight decline from 11% in 2024 after elevated catastrophe activity in the first half of the year. The underwriting tailwinds that drove 2024 improvements – strong premium growth, easing inflation and low claims severity growth – are mostly past. We see premium growth easing this year amidst rising competition, especially in commercial property and personal lines. Potential tariffs could push up claims costs. Investment return gains have slowed as the gap between portfolio and market yields narrows.

We forecast direct premiums written (DPW) growth of 5.5% in 2025 and 4% growth in 2026. In 1Q25 premium growth dipped below 7% for the first time since 1Q21. Historically strong growth in the past four years was first driven by commercial line premiums recording double-digit gains in 2021-22, and then by personal lines in 2023-24. Today, growth rates are converging to the mid-single digits (see Figure 1).

Figure 1: Quarterly direct premiums written, y-o-y

We anticipate upward risks to our growth forecast: tariffs and reduced net migration could put upward pressure on goods prices and wage inflation, requiring, potentially, premium rate adjustments to compensate. While this may be partly offset by slower GDP/exposure growth, premiums are heavily influenced by the underwriting cycle. Despite elevated uncertainties, our core growth message is unchanged: industry growth remains solid but is decelerating from a historically elevated four-year period.

Table 1: US P&C insurance sector outlook  

We continue to forecast slight deterioration in the industry's combined ratio to 98.5% in 2025 and 99% by 2026. Despite strong underlying results, the 1Q25 California wildfires and elevated severe convective storm activity in 2Q25 will weigh on this year's overall result. At the same time, higher capacity and competitive pressures are reducing rate gains. Personal auto continues to be a driver of industry improvement: the 1Q25 loss ratio was 5 ppt lower than a year ago. However, this line of business faces higher uncertainty in the second half of the year as the outcome of tariff decisions and their impact on the vehicle production supply chain (especially cars produced in Mexico and Canada under the USMCA) remain unclear. There are already signs of acceleration in claims components such as used car prices and repairs. Despite the uncertainties, personal auto insurers resumed rate cuts following a pause after the early April tariff announcement.

Table 2: Premium growth and loss ratios by line of business, 1Q25

Historically strong underlying (non-catastrophe) underwriting results offset by persistent elevated catastrophe activity. Underwriting results remain healthy. The 2024 combined ratio of 97% was the US P&C industry's best underwriting result in a decade. Excluding catastrophe losses, the 88% combined ratio was the best in at least 20 years (see Figure 2). The strong performance has continued into 2025. Excluding catastrophe-affected property lines, the industry loss ratio in 1Q25 was 2 percentage points (ppts) lower than a year ago. However, rapid rate deceleration across several lines in 1H25 contributes to our expectation that underwriting performance will begin to deteriorate. Good times create conditions for their own demise as companies compete for greater market share.

Figure 2: US P&C net combined ratio, 2004-24

The seven-year hard market in commercial lines continues to wane but with differentiation, as property pricing decelerates while casualty accelerates. Elevated capacity and rising competition are putting downward pressure on rates across most lines. According to Marsh, in 1Q25 US aggregate commercial insurance prices declined for the first time since 1Q18.² However, market conditions vary significantly by line. The overall dip was driven by property pricing down 9%, and rates in cyber and financial/professional lines continued to decline as well. In contrast, casualty prices (excluding workers' comp) were up 12%, with social inflation continuing to pressure liability claims costs. Higher capacity in the admitted market and weaker property pricing might start to weigh on total growth in the excess & surplus lines market too. An early view on 2Q25 data indicates that growth in non-admitted premiums – roughly 1/3 property, 2/3 liability – dipped below 10% for the first time in five years.³

Figure 3: Commercial rate change by line of business

Investment income: we forecast US P&C portfolio yields to rise to 4.0% in 2025 and 4.2% in 2026, up from 3.9% last year as recurring investment income continues to rise, albeit at a slower pace. The tailwind has diminished as the gap between new money yields and portfolio yields shrinks (see chart 5, appendix), but we expect yields on maturing securities to remain above the portfolio average through 2025. Net investment income earned of USD 19 billion in 1Q25 was 12% higher than the same period a year ago after adjusting for affiliated transactions. We expect a positive differential to continue despite anticipated Federal Reserve rate cuts, because cash and short-term investments account for only around 10% of the industry's investment portfolio.⁴ Insurers have taken advantage of higher yields in recent years to extend the average time to maturity of their fixed income portfolios (see Figure 4).

Figure 4: US P&C insurer fixed income portfolio composition, years to maturity