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This report does not constitute a rating action.

The capital headroom supporting the stable view on the North American property casualty (P/C) sector reached unprecedented levels in 2024, despite enduring one of the costliest hurricanes and severe convective storms in U.S. history. The P/C sector encountered more than $113.0 billion in natural catastrophe insured losses (according to Aon Catastrophe report). Yet the U.S. statutory surplus increased to $1.10 trillion by the end of 2024 from $1.04 trillion the previous year. Additionally, the P/C sector's combined ratio improved to 96.6% at the end of 2024 from 101.8% at the end of 2023. Statutory pretax income doubled to $190.8 billion in 2024 from $96.2 billion the prior year. The record level of operating performance is attributed to a hard market across nearly all business lines, which resulted in strong underwriting margins, while healthy net investment returns continue to play a crucial role in bolstering surplus capital.

Chart 1

Insurers' Capital Resilience Confronts Major Risks

Capital strength continues to be a defining characteristic of P/C insurers in the U.S. The sector, however, could encounter increasing challenges in 2025 due to escalating catastrophe losses and heightened market volatility given recent trends. A notable uptick in severe weather events--especially wildfires and intense convective storms--has placed considerable strain on insurers' catastrophe budgets so far this year, highlighted by the Los Angeles County wildfires in January and the unprecedented number of severe storms in March. A clearer picture on total weather-related insured losses will emerge as more companies announce their earnings in the coming weeks. On an industry level, we anticipate insured weather losses to exceed $55 billion in the first quarter of 2025, surpassing the $13 billion (according to Q1 2024 Aon catastrophe report) from the previous year's first quarter when considering the California wildfire insured losses of up to $50 billion.

At the same time, mark-to-market volatility has been intensified by uncertainties over global trade, further undermining insurers' capital headroom. The unpredictability of global trade flows affected market sentiment, leading to sharp movement in the equity market. 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.

To determine how the U.S. rated P/C insurers perform under moderate stress conditions, we conducted a two-factor stress test to evaluate their capital strength. We selected these rated groups of primary insurers based on their meaningful natural catastrophe and/or equity exposures. Our analysis employs a moderate stress test approach, focusing on realistic scenarios that highlight potential challenges, rather than the extreme conditions posed by a severe stress test. While severe stress tests are valuable for understanding tail-risk scenarios, moderate stress tests better reflect plausible--yet difficult--conditions, making the findings more relevant for identifying vulnerabilities. It’s important to note that the test findings do not indicate a change in our ratings. Furthermore, our rating decisions are grounded on a comprehensive assessment of the insurers’ capacity to restore their balance sheet capital and achieve earnings recovery in the next two years.

A Debrief On Catastrophe Losses

Initial observations suggest insured losses related to weather events in the first quarter of 2025 could be higher than in many previous first quarters in recent years. The National Weather Service has confirmed at least 215 tornadoes in March 2025, impacting a significant portion of the Midwestern and Eastern states, making the highest number of outbreaks recorded during March. Although the tally for the first-quarter weather losses has yet to emerge, we expect weather-related losses will again be loss drivers for many property-focused insurers.

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. While the 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. Additionally, during the past eight quarters, we estimate cumulative rate increase of about 26.6% for commercial property (according to Council of Insurance Agents & Broker quarterly pricing survey) and of approximately 22.1% for personal property (based on Market Scout quarterly pricing survey) should benefit insurers, as they continue to earn written premium. Furthermore, while many primary insurers are retaining more risks, they are also acquiring reinsurance protection higher in the tower to safeguard capital from tail events.

First-quarter results would unlikely erode capital; however, we believe primary insurers could face margin pressure if the severe weather pattern persists into the active convective storm season (April – August), peak hurricane season (June – November), and wildfire season (July – October). Notable events, including Hurricanes Helene and Milton (insured losses of about $20 billion each) and Tubb Fire (approximately $17 billion), have already provided insight into the potential scale of significant losses that could occur. According to Colorado State University's initial 2025 forecast, hurricane researchers are predicting an above-average Atlantic hurricane season with 17 named storms (compared to an average of 14.4 for 1991-2020), surpassing all previous records.

Chart 2

A Litmus Test On Capital Headroom

Aside from assessing capital resilience of insurers in the wake of weather-related losses that exceed their annual catastrophe budget for 2025, the two-factor stress test also considers a significant decline in the equity market within the same year. This two-factor scenario enables us to evaluate the sensitivity of insurers that are leveraged on either side of their balance sheets—holding risky assets alongside liabilities susceptible to natural catastrophes. We selected these two factors due to their acute and noticeable volatility, which can have a substantial impact on financial results.

Parameters and assumptions applied are as follows:

• Doubling the catastrophe load for 2025;
• A 35% decline in equity including equity-like investments, such as private equity and hedge funds;
• Halt share repurchases and maintain stock dividend assumption;
• Positive operating cash flows and supportive of asset growth, resulting in no reduction in asset charges and liquidity;
• A 50-bps decrease in the 10-year government bond yield, benefitting accumulated other comprehensive income due to higher valuations of fixed securities;
• Effective tax rate of 21%; and
• The stress test is applicable to one year (2025) and does not intend to result in rating actions.

Note that we also added two scenarios (25% and 15% decline in equity) to illustrate other plausible outcomes.

Capital Sensitivity: Equity Volatility Versus Natural Catastrophes

The test results indicate that one-fourth of the U.S. rated primary insurers could experience capital pressure in 2025. We also expect a decline in TAC from $902.5 billion to $707.9 billion, based on the stress parameters and assumptions applied. Unsurprisingly, our findings reveal that the affected companies generally have equity exposure to TAC ratio exceeding 60%. Additionally, their capital buffer is generally less robust than of those not impacted by the assessment.

Although our findings show potential vulnerabilities that could diminish the overall capital buffer, we believe the aggregate capital remains resilient. Although capital redundancy at the 99.95% confidence level declined to -6.6% (post-test) from 18.9% (pre-test), we believe the rated insurers’ stable operating margin, disciplined exposure management, and conservative asset allocation approach would allow them to recover over our forecasted horizon from this modest reduction in the capital headroom.

Average (weighted)	Capital redundancy (99.95%) 2025	Equity/total invested assets	Total bond and loans/total invested assets	Equity investments/ TAC	Natural catastrophe gross aggregate/TAC	Natural catastrophe net aggregate/TAC
U.S. primary insurers	18.9%	30.5%	61.7%	67.7%	21.8%	15.0%

Scenario
1	Equity decline 15%
2	Equity decline 25%
3	Equity decline 35%
4	Additional catastrophe load of 100%

Chart 3

Related Research

• Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
• Global Reinsurers Stand Strong Amid Investment Volatility And Natural Disasters, April 10, 2025
• Robust Capital Supports North America Insurers Amid Market Volatility, April 9, 2025

Primary Contact:	Patricia A Kwan, New York 1-212-438-6256; patricia.kwan@spglobal.com
Secondary Contacts:	Neil R Stein, New York 1-212-438-5906; neil.stein@spglobal.com
	Saurabh B Khasnis, Englewood 1-303-721-4554; saurabh.khasnis@spglobal.com
	Megan O'Dowd, New York 1-2124381202; megan.odowd@spglobal.com
Research Contributor:	Ronak Chaplot, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai ;