First rating downgrade for U.S. property, casualty industry in five years

OLDWICK: Ongoing negative effects from the 2017-2018 catastrophes on the U.S. property/casualty (P/C) industry led to rating downgrades during the first half of 2019 outpacing rating upgrades for the first time in five years, according to a new AM Best report.

The Best’s Special Report, titled, “Downgrades Outpace Upgrades for the First Time in Five Years,” notes that loss-affected companies saw declines in risk-adjusted capitalization, volatility in operating performance and reassessments of the appropriateness of their enterprise risk management. Positive rating actions were driven by tighter underwriting standards that led to favorable results over several years and improved risk-adjusted capitalization.

Additional factors that led to rating upgrades included recognition of a company’s enhanced importance within its organization, increased parental support and merger and acquisition (M&A) activity.

Downgrades of Long-Term Issuer Credit Ratings (Long-Term ICR), as a percentage of all rating actions on U.S. P/C carriers, increased to 7.1% of total actions, up from 6.3% in the first half of 2018.

Conversely, Long-Term ICR upgrades were 6.2% of total actions, compared with 7.1% in the same prior-year period. AM Best took action in the first half of 2019 on the Long-Term ICRs of 680 rating units, which describes either an individual insurer or a consolidation of companies and is the financial basis on which AM Best performs its credit rating evaluations.

The overwhelming majority of the rating actions were affirmations (81.7%), reflecting the overall stability of the U.S. P/C industry.

The following are some other highlights from the report:

Included in the total number of rating changes in the first half of 2019 were the assignment of 10 P/C ratings, or 3.0% of total rating changes. Nine of the initial assigned ratings were in the commercial lines segment and involved new or recently formed companies;

The number of ratings placed under review in first-half 2019 dropped to nine from 21 in the previous year, although the number of companies placed under review in first-half 2018 was elevated due to the implementation of the updated Best’s Credit Rating Methodology;

The commercial lines segment recorded 11 upgrades and 13 downgrades in first-half 2019, while in the personal lines segment, upgrades totaled 10 compared with 9 downgrades; and

In first-half 2019, 81.3% of the U.S. P/C industry’s credit ratings carried a stable outlook, a modest increase from the first half of 2018.

AM Best has a stable market segment outlook on the personal and commercial lines segments of the U.S. P/C industry, although the industry continues to face challenges, including elevated catastrophic weather activity; rising frequency, severity and competitive issues in the automobile segment; system implementations and, in the reinsurance segment, the push for diversification and scale as M&A continues.

AM Best also maintains a stable outlook on the reinsurance segment.

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