It is now common knowledge that calendar year 2023 was a difficult one for property insurers, whether those focused on personal lines (homeowners and auto physical damage) or commercial lines (fire and/or commercial multi-peril) coverages. The inflation overhang from a spike in costs across the economy starting in 2021, combined with an extension of large weather-related losses across a broader swath of the U.S. and a hardening of reinsurance rates/lack of reinsurance capacity, led to outsized underwriting and operating losses for a growing number of insurers exposed to property risks. Especially hard hit were single-state and regional insurers with less geographical and line-of-business diversification.
In early March, A.M. Best released a report on 2023 property & casualty (P&C) insurer rating actions,[1] in which it discussed a spike in downgrades versus the prior year (>80% year-over-year), citing a “difficult period for the personal lines segment.” Gallagher Re had previously released a paper (in February) outlining the results from its study of rating actions by A.M. Best over an eight month period through August 2023[2]. They too noted a sharp uptick in downgrades or adverse outlooks tied to “an increase in costly secondary perils; inflation; and volatility in investment markets.”
ALIRT Research, recognizing early in 2023 that negative rating actions were accelerating, began to collect its own data on this trend. Below we show our results.
Our goal was not to capture every action by A.M. Best over the past 15 months, but rather to focus on those negative ratings actions that impacted mid-sized to smaller insurance groups (again, largely regional) with a focus on property risks. We also restricted our study to changes in Financial Strength Ratings (FSR) and not Long-Term Issuer Credit Ratings (Long-Term ICR), given that it is the FSR which serves as a potential trigger in many E&O policies.
The ultimate purpose of this study is to compare the ALIRT Score trends (updated through the full year 2023 financial reporting cycle), with the aforementioned rating actions to demonstrate where our analytics anticipated these actions and also to provide clients with a sense of which carriers are likely to face remedial actions in the near term. We remind our readers that insurers with ALIRT Scores in the low 30’s or below are traditionally forced to adopt strategic measures in an attempt to return to financial health. These can include culling books of unprofitable business, exiting certain product lines or geographies, changes in management, capital infusions, more aggressive claims handling, restorative reinsurance transactions, and/or a sale of part or a whole organization, among others.
The historical “normal” score range for over 100,000 ALIRT Analyses produced by our model over the past 20 years is 39-61. This represents an 11 point standard deviation off a mean of 50. The overall range is 0-100, though we infrequently see scores in the 80’s (or higher) or that fall into the 10’s.
By closely tracking the quarter-to-quarter changes in ALIRT Scores and writing on those that are showing undue financial stress, we are able to help distributors anticipate where future rating actions may occur (especially below the critical A- level). With this insight, they can then take proactive steps to dial back or eliminate exposure to weaker counterparty exposures.
Study Results
In Appendix A we show the A.M. Best negative ratings actions for 43 insurance carriers. In a few cases we list subsidiaries from the same group (e.g. the two insurers from Conifer Holdings Inc.), but otherwise list just the lead/largest insurer within a group. In almost all cases where there is more than one insurer within a rated group, the A.M. Best action will apply to all of that group’s individual insurer entities.
The Appendix includes the YE2023 asset and surplus sizes for each insurer, along with the rating action (date and brief description), and the last five years of ALIRT Scores (2019-2023). Below we show a breakdown of this cohort by score; i.e. <30, 30’s, >=40. Towards the bottom we include three companies that have not yet issued their YE2023 financial while the last insurer listed, Cameron Mutual, was liquidated in 11/2023.
[1] US Property/Casualty Downgrades Outpace Upgrades in 2023 (A.M. Best, March 11, 2024)
[2] Spike In Downgrades Shows Challenges for US Insurers (Gallagher Re, March 2024)
