For the first time in five years, credit rating downgrades for the U.S. property/casualty (P/C) industry outnumbered upgrades on a marginal basis in 2019, according to a new AM Best special report.
The Best’s Special Report, titled, “Rating Downgrades Outnumber Upgrades in 2019,” states that the number of downgrades rose by over 25% from the prior year, owing to a number of factors, including weather-related losses, challenging pricing in competitive lines of business and a rise in loss cost severity in several lines of business.
Despite a decline in upgrades and increased downgrade activity, numerous companies still showed improved risk-adjusted capitalization and positive operating performance, which supported higher rating levels.
Catastrophe activity declined markedly in 2019, which benefited the underwriting profitability of numerous lines of business, as well as risk-adjusted capitalization. Strengthened capitalization and upgrades also resulted from merger and acquisition activities, along with explicit parental support through either additional equity contributions or internal quota share agreements with parents.
Affirmations and upgrades accounted for 85% of all rating actions, reflecting the industry’s persistently strong capitalization, growing pricing sophistication, and positive operating results. However, some individual companies continue to face significant headwinds, including operating pressure from the reduced benefit of prior year reserve releases; weather-related events on property carriers concentrated in a single state; and increased severity affecting numerous lines of business.
The following are some other highlights from the report:
— The number of ratings placed under review in 2019 declined well below 2017 and 2018 levels. Under review actions in 2017 were affected by implementation of the updated Best’s Credit Rating Methodology (BCRM), while actions in 2018 were due primarily to heightened catastrophic weather activity;
— In the commercial lines segment, negative outlooks (22) continued to outnumber positive outlooks (21). Overall, 86.6% of the segment’s outlooks are stable, a slight increase when compared to the prior period. Although the segment certainly continues to face headwinds; and
— Of the total rating changes, 31 (4.0% of all rating changes) were assignments compared to 21 (2.8%) the prior year. The majority of assigned ratings were for commercial lines companies and covered entities writing various coverages, including workers’ compensation, commercial casualty, private passenger standard automobile and commercial automobile.
In 2019, upgrades decreased significantly from the prior year, although rating changes rose slightly – ratings on 137 rating units changed compared to 128 in 2018. As in prior years, affirmations, at 78.4%, were the most common rating action, slightly below the five-year average. The high percentage of affirmations reflects the overall stability of the U.S. P/C industry.
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 New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.