Faced in large part with deteriorating market conditions and rising loss costs, rating downgrades of AM Best-rated U.S.-based insurers increased by 60 percent in 2023 compared with two years earlier, according to a newly issued report.

A new Best’s Special Report notes that in addition to catastrophe risk, secondary perils continue to reshape geographic risk, with companies writing business in six states or less accounting for 60% of rating downgrades in 2023. Companies domiciled in California, Florida, and Texas have accounted for more than a quarter (27%) of downgrades over the past three years, driven largely by personal lines carriers, according to the report.

This deterioration reflects the conditions that U.S. property/casualty insurers in particular have faced in recent years. The report also 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.

“Some of the factors driving these rating actions are cyclical in nature, while others reflect a more permanent shift in operating conditions,” said David Lopes, senior industry analyst, AM Best. “Worsening economic and social inflation, as well as rising operating and loss costs are also among the factors at play.”

The rating downgrades reflect deteriorating operating results particularly in the personal lines segment, which AM Best has had a negative outlook on since September 2022. Rising interest rates have increased investment income for all insurance segments; higher rates also helped bolster premium growth for life/annuity insurers due to attractive crediting rates.

Overall, Long-Term Issuer Credit Rating (Long-Term ICR) downgrades were driven primarily by declines in capitalization and deteriorating operating performance. Upgrades were due primarily to balance sheet and operating performance improvements, insurers being added to different rating units, or related to lift from parent organizations.

The report also notes that personal lines carriers have accounted for 43% of Long-Term ICR downgrades over the past three years. In the commercial lines segment, upgrades continued to outnumber downgrades. Despite volatility, the segment accounted for the largest share of upgrades over the last three years, although the number fell in 2023, while the number of downgrades rose. However, commercial lines carriers also accounted for nearly a quarter of downgrades the past three years.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=346498.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2024 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240910997116/en/