Credit ratings agency AM Best said the U.S. property and casualty (P&C) insurance industry recorded its strongest performance in a decade in 2025, driven by disciplined underwriting, strong pricing and investment returns, despite continued pressure on claims costs and liability risks.
“Despite headwinds, interest rate action and investment gains drove U.S. property and casualty insurance industry performance,” AM Best noted in its annual Review and Preview Best market segment report. AM Best noted that despite significant losses in the first quarter due to California wildfires and other weather-related events, momentum in pricing and investment income across major lines allowed net underwriting income in the property and casualty insurance business to more than double year over year to an estimated $39 billion.
The combined ratio is expected to improve from 97.1 in 2024 to 95.0 in 2025. However, AM Best warned that stabilizing or softening interest rate trends across most major lines could impact underwriting results in 2026, while severe catastrophes could produce worse results.
The personal route market remains strong, with private passenger vehicles and homeowner routes maintaining good trends. Within commercial lines, workers’ compensation and commercial property supported underwriting profitability, helping to offset weaker results in commercial auto, general liability (including umbrella and excess) and medical professional liability.
The severity of losses resulting from social inflation and third-party litigation funding continues to pose challenges for casualty insurers. AM Best further highlighted that a re-estimate of final reserves for the property and casualty industry at the end of 2024 improved the overall reserve position to a $9 billion shortfall, nearly $10 billion better than the original forecast. While the line of responsibility development factor appears to be stabilizing, workers’ compensation development remains on an upward trajectory, slightly eroding its reserve status.
Despite catastrophic losses at the start of the year, including wildfires in the greater Los Angeles area and severe convective storms in the Midwest, South and Plains, continued rate growth momentum in personal and commercial lines and strong performance in workers’ compensation supported the industry’s resilience.
AM Best estimates that net catastrophe losses will increase the combined ratio by 6.9 percentage points in 2025, down from 8.4 percentage points in 2024. Core underwriting remains solid, with a normalized accident annual combined ratio of 89.5, consistent with 89.3 in 2024. The excess and surplus lines market continues to grow as carriers increasingly divest themselves of high-risk risks, particularly in property, auto liability and complex casualty lines.
Net written premiums will grow 6.1% in 2025, slowing from 8.7% in 2024 as rate increases taper off for most lines. Renewal prices declined year over year in certain categories, including workers’ compensation, cyber, directors and officers liability and commercial property. AM Best expects net premium growth to decline 4.0% in 2026 and the combined ratio to rise slightly to 96.9, reflecting higher repair and material costs affecting claims.
In 2025, the personal insurance business will further improve, with the combined ratio falling to 94.0. Private passenger car and homeowner lines benefit from enhanced risk management and operational efficiencies.
However, AM Best warned that margins could tighten in 2026 as interest rates continue to slow and pressure on heavy losses persists. In the commercial segment, the combined ratio is expected to be 95.8 in 2025, with workers’ compensation and commercial real estate supporting profitability, while commercial auto, general liability and medical professional liability remain challenging. AM Best expects the combined ratio to rise slightly to 96.3 in 2026 due to lower net premium growth, although the unit will remain profitable.
Investment income is a major contributor to earnings and is expected to grow 13% by 2025. AM Best noted that the insurer’s portfolio, which is heavily weighted towards high-quality bonds, benefited from reinvesting maturing low-yielding securities at higher rates, while positive performance in equity markets further underpinned results. Strong operating cash flow from underwriting improvements enabled surplus growth and positioned the industry well into 2026.
Reserve adequacy has also strengthened over the year. The reestimate of reserves at the end of 2024 increases the overall position by nearly $10 billion, and AM Best expects reserves to increase by $8.3 billion at the end of 2025. Core reserves are expected to increase by $6.7 billion and asbestos and environmental reserves by $1.6 billion, with the largest improvement in other/product liability, partially offset by weakness in workers’ compensation and other items.
Overall, AM Best expects a reserve shortfall of $800 million in 2025, or about 0.1% of book reserves, with undiscounted reserves showing a surplus. The industry has achieved 19 consecutive years of favorable one-year reserve development, bolstering balance sheet strength.
AM Best’s outlook for personal and commercial business remains stable. For personal lines, underwriting improvements, appropriate rate action, stronger capitalization and higher investment returns are expected to sustain performance, although loss severity, severe weather and competitive activity remain pressures.
Commercial lines benefit from disciplined underwriting, strong capital and increased investment income, while casualty lines face ongoing challenges from social inflation, litigation and nuclear verdicts. Investment returns are expected to remain a key support for long-tail casualty insurance, reinforcing the importance of prudent pricing and prudent risk selection.
“AM Best expects net premium growth to decline in 2026 and that the property and casualty insurance industry’s margins will narrow in 2026,” added Jacqalene Lentz, senior director at AM Best. “Macroeconomic headwinds, including higher claims costs due to higher prices for materials needed to repair physical damage to homes, commercial real estate and automobiles, may result in a slight increase in industry loss rates.”
“With net premium growth expected to slow due to lower rate levels across multiple commercial lines, the segment’s combined ratio is expected to improve by a few percentage points in 2026 but still reflect underwriting profitability,” said Anthony Molinaro, associate director at AM Best.
“Personal insurance margins are likely to be squeezed in 2026. The segment should produce solid results, but with slightly higher underwriting ratios and slightly lower operating returns.”
Overall, AM Best concludes that the U.S. property and casualty insurance industry enters 2026 on stronger fundamentals, anchored by improvements in underwriting, reserve adequacy and investment performance, while remaining focused on catastrophe and liability-driven risks.
