Best’s Special Report: U.S. Property/Casualty Rating Downgrades Rise Markedly in 2018


Credit rating downgrades in the U.S. property/casualty (P/C) insurance segment more than doubled year over year in 2018, reversing a trend of annual declines since 2014, due to factors that included catastrophic weather losses, challenging pricing in competitive lines of business and capital market volatility, according to a new AM Best report.

However, according to the Bests Special Report, titled, U.S. Property/Casualty Rating Downgrades Rise Markedly in 2018, positive Long-Term Issuer Credit Rating (Long-Term ICR) actions also increased in 2018, reflecting individual company trends of positive operating performance over several years, steady growth in risk-adjusted capitalization and acquisition/affiliation with higher-rated companies and groups. Despite a significant amount of catastrophe activity in 2018 following the historic 2017 events, most companies effectively managed this exposure through favorable risk management efforts and robust reinsurance programs.

The number of Long-Term ICR upgrades, as a percentage of all rating actions on U.S. P/C carriers, remained flat year over year at 8.5% in 2018, although the number of rating units with rating upgrades increased. The number of Long-Term ICR downgrades increased to 5.7% compared with 2.8% in 2017 of total actions on rating units. AM Best took action in 2018 on the Long-Term ICRs of 757 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 2018 U.S. P/C rating actions were affirmations (78%).

The following are some other highlights from the report:

  • Included in the total rating changes in 2018 were the assignment of 21 ratings, which represent 2.7% of rating changes, compared with 18, or 2.5% of rating actions in the prior period;
  • The number of ratings placed under review in 2018 essentially held steady at 41 compared with 42 in 2017, although the number of companies placed under review in 2017 was elevated due to the implementation of the updated Bests Credit Rating Methodology;
  • The commercial lines segment recorded 33 upgrades compared with 19 downgrades in 2018, while in the personal lines segment, upgrades totaled 30 compared with 22 downgrades; and
  • In 2018, 79.8% of the U.S. P/C industrys credit ratings carried a stable outlook, a modest increase from 2017.

Overall, AM Best views the U.S. P/C industrys ratings as stable despite the increased number of rating downgrades, and that the industry as a whole maintains sufficient overall risk-adjusted capitalization relative to its existing ratings. However, individual companies continue to face significant challenges, including operating pressure from the reduced benefit from prior-year reserve releases, the effect of weather-related events on property carriers concentrated in a single state and an increase in competitive market conditions caused by sophisticated pricing algorithms and expanding distribution channels.

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Lewis DeLosa
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