Personal lines drives increase in US downgrades over last three years: AM Best

Recent years have seen a higher number of negative ratings actions on businesses operating in US insurance markets, with downgrades of AM Best-rated US firms increasing by 60% in 2023.

According to AM Best, this deterioration reflects the conditions that US property & casualty (P&C) insurers have been facing in recent years, including worsening economic and social inflation, combined with rising operating and loss costs.

In fact, the downgrades reflect deteriorating operating results, notably within the personal lines segment, which has had a Negative outlook from the agency since September 2022, and has seen a growing number of downgrades in the last two years.

The agency stated that personal lines carriers have accounted for 43% of Issuer Credit Rating (ICR) downgrades over the last three years.

“The number of personal lines’ rating downgrades rose in 2023, as property insurers have navigated the perfect storm of elevated catastrophe losses, secondary perils, reinsurance pricing increases leading to greater business retention, inflation and regulatory hurdles,” AM Best said.

Importantly, AM Best notes that while rating upgrades and downgrades are dependent on the individual circumstances of each rated company, the wider trajectory of rating movements can reflect marketplace dynamics.

David Lopes, senior industry analyst, AM Best, commented: “Some of the factors driving these rating actions are cyclical in nature, while others reflect 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.”

Moving towards the commercial lines segment, AM Best noted that upgrades continued to outnumber downgrades.

Even with volatility, the segment reportedly accounted for the largest share of upgrades seen over the last three years, although the number fell in 2023, while the number of downgrades rose.

However, as the agency explains, commercial lines carriers also accounted for nearly 25% of the downgrades seen over the last three years, with commercial casualty companies accounting for half the downgrades in commercial segment in 2023.

Lastly, AM Best highlights how there has been an increased recalibration in geographical exposures among property insurers, with some companies reducing activity, or even stopping writing business completely in certain states that are prone to natural disasters, such as Florida, California, and Texas.

Companies domiciled in these three states have accounted for more than a quarter (27%) of downgrades over the last three years. driven primarily by personal lines carriers.

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