This week marks the end of the Q1 2025 earnings season, with the exception of a few stragglers reporting next week. For insurance, the hot button item this season was the impact of the California wildfires, with losses largely concentrated in the reinsurance/hybrid segment and the personal lines insurer Mercury General.
The ups and downs of earnings have been overshadowed by a busy news cycle rife with macroeconomic concerns including a slowing economy, the President’s calls to remove Fed chair Jerome Powell, and of course the omnipresent impact of new tariffs on the US economy. We have taken the position that tariffs will not in and of themselves be a catastrophe for the industry, but we also believe that they could cause the market to turn by exacerbating other issues facing P&C.
This note will cover five key metrics to show how each segment performed, relative to one another, in Q1 2025 and in previous first quarters going back to 2020.
For “top-line growth” we have used net premiums earned, as not all companies report gross or net written premiums on a GAAP basis. We also cover how combined ratios and prior period development have changed over time, as well as growth in book value (indexed to Q1 2020), and net investment income.
Generally, we have found results in Q1 2025 to be worse year-over-year than Q1 2024.
Top line growth fell for some segments and stagnated for others, with only minor increases for some segments. Net investment income growth fell as a rule, reflecting how the investing environment has deteriorated amid worsening economic conditions.
Each segment’s combined ratio was profitably below 100%, with the exception of reinsurers, who generally had a poor quarter due to losses from the aforementioned California wildfires. The effect of prior period development on segment combined ratios was marginally smaller this quarter, though Q1 tends to have lower reserve releases than other quarters.
With the exception of regionals, every segment’s return on equity fell in Q1, reflecting the mounting issues facing much of the industry both from within and from macro headwinds without.
We discuss these points in detail below.
Top line growth was a mixed bag
Growth rates for Q1 2025 are generally very similar to the ones we saw in the Q4 edition of this piece, though the figures here are somewhat more depressed owing to slowed economic growth this quarter. Reinsurance and specialty growth rates fell substantially compared to 2024, while most other segments remained relatively stagnant.
The chart below shows top-line growth of each segment, defined in this case as net premiums earned, on a year-over-year basis for the first quarter of each year since 2020.
Most of the industry was profitable this quarter, save for reinsurers
Combined ratios were roughly homogenous around 94-97%, with the notable exception of reinsurance. Every reinsurance company had a higher combined ratio in Q1 2025 compared to 2024 due to California wildfire exposures, save for Axis, which has divested itself from catastrophe reinsurance over the past few years.
Personal lines combined ratios continued to fall from peaks over 110% in Q1 2023. Though specialty and multi-line increased, most of the industry remained profitable, albeit with a tighter margin than most segments have enjoyed in previous years.
The chart below shows how combined ratios have changed for each segment in previous Q1s.
Almost every segment’s ROE went down this quarter
The median return on equity for every segment was substantially lower in Q1 2025 than in Q1 2024, save for a slight uptick in regionals (driven by a sharp increase from Donegal). This indicates worsening profitability in nearly every part of the P&C industry, although no segment has reached the troughs seen in Q1 2020.
Notably, reinsurers swung from having the highest ROE to the second lowest over the course of the last twelve months. All of the “big four” Bermudian reinsurers/hybrids have reeled from high catastrophe losses this quarter, along with the longstanding troubles faced by many in the segment as they have attempted to pivot to a “hybrid model”.
Specialty retained a relatively high ROE in Q1, the fruits of the relatively capital light, high profit business models of many in the segment.
The chart below shows the median Q1 return on equity for each segment from 2019 onwards.
Reserve releases have slowed for all but the largest commercial carriers
First quarter earnings typically see less drastic reserving changes when compared to the large-scale reserve reviews some companies conduct at year end. Prior period development was mostly the same in Q1 2025 as in Q1 2024, albeit with some noise as multi-line insurers released more and regionals released less.
We have repeatedly stated our caution against the continued reserve releases coming from workers compensation and particularly the “hard market” accident year bucket of 2020-2022. As market conditions continue to worsen, we expect reserve releases to diminish further.
The chart below shows prior period development in terms of how it impacts combined ratio for first quarters from 2020 onwards.
Investment income growth falls
Akin to combined ratios as discussed above, net investment income growth has become relatively homogenous compared to Q1 2024. This is because net investment income has fallen across the board, attributable to stock market declines beginning in mid-February and lower short-term treasury yields near the end of the quarter.
The most dramatic decline comes from reinsurance/hybrids, where the elevated investment income growth enjoyed by that segment in 2022 and 2023 has fallen back to more normal levels.
The chart below shows Q1 YoY investment income growth from 2020 onwards. Note that the “multi-line” segment in this case excludes AIG, as the deconsolidation of Corebridge severely skews data for the segment as a whole.
In summary, this quarter’s earnings results show the industry grappling with economic turbulence, much like any other sector of the market. While insurance has remained able to weather this storm more than other sectors have, macro and catastrophe headwinds are already visibly rearing their heads.