Optimism surrounds the US property and casualty market but challenging headwinds remain, according to a Guy Carpenter report.

The reinsurance broker says last year was a record-breaker for the industry, with the highest surpluses.

“Rate reductions continued to moderate and there was optimism following the 2016 election given the potential for tax cuts and deregulation,” Guy Carpenter President of North America Tim Gardner said. “Yet red flags remained, and a closer look at the individual metrics contributing to the growth in surplus revealed interesting trends.”

Last year emerging risks, catastrophe frequency and severity, and shifting capital needs contributed to a 0.4% industry underwriting loss – the first calendar-year underwriting loss since 2012. Reduced margins and adverse development “reflected a competitive environment supported by excess capital levels”, and direct written premium growth slowed.

The average large property and casualty carrier saw its accident-year loss ratio increase by 2% from 2015, the report says.