Best’s Special Report: Best’s Impairment Rate and Rating Transition Study — 1977 to 2017

AM Bests latest special report on the long-term impairment rates of AM Best-rated U.S.-domiciled insurance companies states that two U.S. insurance companies became impaired in 2017, compared with 11 impairments in 2016.

The Bests Special Report, titled, Bests Impairment Rate and Rating Transition Study 1977 to 2017, marks the 15th study conducted, and is aimed at estimating default risk of U.S. insurers. The analysis covers 40 one-year periods from Dec. 31, 1977, to Dec. 31, 2017, and includes only U.S. companies that had at least one Financial Strength Rating (FSR) or one corresponding Long-Term Issuer Credit Rating (Long-Term ICR) during the period. Adjustments to the data or inclusion criteria may make comparison of the results of one study with its predecessors difficult. However, to provide as much consistency as possible, the studys updates and revisions will be based on a common starting point of Dec. 31, 1977, for FSRs, and Dec. 31, 2001, for Long-Term ICRs.

Subsets of impairment-related data discussed in the report include:

  • Gross impairments, which encompass the broadest definition of impairments and include companies that AM Best has ceased rating by the time of impairment. Gross impairments also further reduces cohorts of insurance carriers by withdrawn ratings, thus further boosting impairment rates;
  • Net impairments, which represent gross impairments, except insurers that became impaired after rating withdrawals are not counted and cohorts of insurers are not reduced for withdrawn ratings; and
  • Liquidations, which represent insurers counted in the net impairments that were eventually liquidated.

Over the 40 one-year periods in this study, 5,206 companies had an FSR and 770 eventually became financially impaired, including two property/casualty insurers in 2017. However, just 547 had an FSR at the time of impairment. Additionally, of those 547, 66% or 363 companies went into liquidation. With regard to Long-Term ICRs, of the 3,324 companies that had a Long-Term ICR during the Dec. 31, 2001, to Dec. 31, 2017, period, 163 became financially impaired, although just 127 of those insurers had a Long-Term ICR at the time of impairment. Furthermore, of those 127 companies, 59% or 75 companies went into liquidation. AM Best believes that while impairment rates are not directly comparable to corporate default rates, liquidation rates may be closer to issuer default rates calculated by the largest Nationally Recognized Statistical Rating Organizations.

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To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=280909.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

Copyright 2018 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

Emmanuel Modu
Managing Director,
Insurance-Linked Securities
+1
908 439 2200, ext. 5356
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Christopher Sharkey
Manager, Public Relations
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ext. 5159
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Jim Peavy
Director, Public Relations
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