A recent report from AM Best indicates that rating downgrades to U.S.-based insurers are up 60% in 2023 compared to the previous two years, largely due to deteriorating market conditions and increased loss costs.

The report highlights how catastrophe and secondary risks continue to reshape geographic risk for insurers.

According to AM Best, insurers operating in six or fewer states accounted for 60% of rating downgrades in 2023. In particular, companies based in California, Florida and Texas accounted for 27% of rating downgrades over the past three years. Personal insurance companies were a significant factor in this trend, according to AM Best’s findings.

The report reflects the challenging environment that U.S. property/casualty insurers have faced in recent years. While rating changes depend on the specific circumstances of each individual company, A.M. Best noted that these moves also reflect broader market dynamics.

Some of the factors driving these rating actions are cyclical, while others point to a more permanent shift in operating conditions, said David Lopez, senior industry analyst at AM Best.

“The worsening economic and social inflation, as well as the high operating costs and losses, are also among the influencing factors,” Lopez said.

The negative outlook for personal lines insurers, which AM Best has maintained since September 2022, is a key factor in the downgrade. Although rising interest rates have boosted investment income across all insurance sectors, personal lines insurers have faced increasing pressure.

Meanwhile, higher interest rates have led to growth in premiums in the life/annuity insurance sector due to more attractive credit rates.

According to the report, most of the downgrades to long-term credit ratings were due to lower capital and deteriorating operating performance. In contrast, upgrades were primarily the result of improved balance sheets and operating performance, the inclusion of insurers in different rating units, or support from parent companies.

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According to the report, personal lines companies accounted for 43% of long-term credit rating downgrades over the past three years. In the commercial lines sector, the number of upgrades exceeded the number of rating downgrades during the same period, with the sector witnessing the largest number of upgrades.

However, 2023 has seen a drop in upgrades and a rise in downgrades, with commercial airlines accounting for nearly 25% of total rating downgrades over the past three years.

The report also noted a shift in geographic exposures among property insurers. Some companies have reduced or even stopped writing in states with high risks of natural disasters, such as Florida, California and Texas.

The increase in the frequency of secondary perils — such as wildfires, hurricanes and severe thunderstorms — in regions such as the West, South, Southeast and Great Lakes has also impacted insurers’ ratings.

Organizational structure and business mix play a role in these shifts, with mutual property and casualty insurers deriving 62% of their premiums from personal lines, compared with 39% for equity companies.

Although mutual organizations have generally seen more upgrades than downgrades over the past three years due to stronger balance sheets and higher Best’s BCAR scores, 2023 has seen more downgrades than upgrades for these organizations.

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