US insurer rating downgrades rise by 60% amid worsening conditions – AM Best

A recent report from AM Best indicates that rating downgrades for US-based insurers rose by 60% in 2023 compared to two years prior, largely driven by worsening market conditions and increasing loss costs.

The report highlights how catastrophe risk and secondary perils continue to reshape geographic risk for insurers.

According to AM Best, insurers operating in six or fewer states accounted for 60% of the rating downgrades in 2023. In particular, companies domiciled in California, Florida, and Texas represented 27% of downgrades over the past three years. Personal lines carriers were a significant factor in this trend, according to AM Best’s findings.

The report reflects the challenging environment US property/casualty insurers have faced in recent years. While rating changes depend on the specific conditions of individual companies, AM Best noted that these movements also reflect broader market dynamics.

David Lopes, senior industry analyst at AM Best, said that some of the factors driving these rating actions are cyclical, while others signal a more permanent shift in operating conditions.

“Worsening economic and social inflation, as well as rising operating and loss costs are also among the factors at play,” Lopes said.

The negative outlook for personal lines insurers, which AM Best has maintained since September 2022, is a key factor in these downgrades. Although rising interest rates have boosted investment income across all insurance segments, personal lines carriers have faced increased pressure.

At the same time, higher interest rates have led to premium growth in the life/annuity segment due to more attractive crediting rates.

According to the report, most Long-Term Issuer Credit Rating (Long-Term ICR) downgrades were caused by declines in capitalization and worsening operating performance. In contrast, upgrades were primarily the result of improvements in balance sheets and operating performance, insurers being included in different rating units, or support from parent companies.

Personal lines carriers accounted for 43% of Long-Term ICR downgrades over the past three years, according to the report. In the commercial lines segment, upgrades have outnumbered downgrades over the same period, with the segment experiencing the most upgrades.

However, 2023 saw a drop in upgrades and a rise in downgrades, with commercial lines carriers representing nearly 25% of total downgrades over the last three years.

The report also noted a shift in geographical exposures among property insurers. Some companies have reduced or even ceased writing business in states with high natural disaster risk, such as Florida, California, and Texas.

The increased frequency of secondary perils—such as wildfires, tornadoes, and severe thunderstorms—across regions like the West, South, Southeast, and Great Lakes has also impacted insurers’ ratings.

Organizational structure and business mix are playing a role in these shifts, as property/casualty mutual organizations derive 62% of their premiums from personal lines, compared to 39% for stock companies.

Although mutual organizations have generally seen more upgrades than downgrades over the past three years due to stronger balance sheets and higher Best’s Capital Adequacy Ratio (BCAR) scores, 2023 saw more downgrades than upgrades for these organizations.

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