2023 Challenges Drive Rating Downgrades in US P&C Insurance

In 2023, US property-casualty (P&C) insurers encountered escalating challenges, resulting in a notable increase in rating downgrades, according to A.M. Best. In a Best's Special Report, "US Property/Casualty Downgrades Outpace Upgrades in 2023," A.M. Best reported that downgrades rose to 7.4 percent by the end of the year from 4.2 percent in 2022. Weakening balance sheets and deteriorating profitability were the predominant factors behind these downgrades. Additionally, reinsurance costs, economic and social inflation, and rising loss costs intensified pressures on insurers across segments.

The commercial lines segment exhibited resilience amid these challenges. While 21 ratings were upgraded and 15 downgraded in 2023, the segment has generally reported profitable underwriting results over the past 5 years. However, social inflation and litigation financing posed challenges, prompting casualty insurers to implement rate increases and tighten terms. Lingering concerns about reserves in the casualty segment also remained.

In contrast to the commercial lines' performance, the overall rating distribution for P&C insurers remained relatively stable in 2023 compared to 2022. However, there was a slight decline in the proportion of "Good" to "Exceptional" ratings, dropping from 97 percent to 95.9 percent. Meanwhile, the percentage of ratings with "Fair" or lower issuer credit ratings increased from 3.0 percent to 4.1 percent.

A.M. Best's data highlighted shifts in the reasons behind rating changes. Over a third of upgrades were due to companies being integrated into higher-rated rating units or receiving greater support from parent organizations. Conversely, more than a third of downgrades were due to adjustments to more than one building block, all of which included balance sheet strength.

Looking ahead to 2024, P&C insurers face a range of challenges. Despite early signs of economic inflation decline, it continues to impact loss costs. Uncertainty around climate risks, secondary perils, social inflation, and rising reinsurance costs persist. A.M. Best anticipates these market trends will continue to exert pressure on US insurers. Insurers that can swiftly adapt to these evolving challenges are likely to maintain or improve their ratings.

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