Challenges ahead for US re/insurers amid spike in downgrades – Gallagher Re

More than 100 entities experienced lower ratings and negative outlooks in the past year

Challenges ahead for US re/insurers amid spike in downgrades – Gallagher Re


By Kenneth Araullo

Gallagher Re has released an in-depth analysis detailing significant trends in AM Best rating changes for US property and casualty insurers, along with the financial benchmarks associated with these changes.

The report, crafted by Gallagher Re’s strategic and financial analytics team, examines the rise in rating downgrades and explores reinsurance as a strategic solution for carriers facing financial strain and negative rating adjustments.

According to the analysis, the number of rating downgrades for US property/casualty insurers saw a notable increase in the first eight months of 2023, continuing a trend that began in 2021. This period witnessed a higher incidence of negative rating actions, including outlook modifications, as AM Best intensified its evaluation of insurers’ performance metrics.

The scrutiny comes in response to a series of challenges, such as escalating secondary peril costs, inflationary pressures, and investment market fluctuations. From the beginning of 2022 to August 2023, AM Best took negative rating actions against 109 companies, which included 60 downgrades and 64 negative outlook revisions, with 15 companies experiencing both.

The analysis revealed that 77 of these companies primarily operate in personal lines, while 32 are focused on commercial lines. Common factors among those facing downgrades were a surplus decline exceeding 20% and an average combined ratio rising above 117%.

Additionally, the majority reported operating ratios over 100%, indicating that investment income was insufficient to compensate for underwriting losses. Furthermore, 45% of these companies reported adverse claims development exceeding 10%, contributing to their negative ratings.

The report also covers rating actions in the latter four months of 2023, noting an additional 13 downgrades and 26 worsened outlooks. However, there was a silver lining, as 39 companies saw improvements in their outlooks, attributed to proactive management actions rather than market condition improvements.

Despite these positive adjustments, AM Best’s outlook for personal lines remains “negative” heading into 2024, reflecting the ongoing challenges in the market.

In its report, Gallagher Re emphasizes that reinsurance could serve as a viable strategy for insurers aiming to mitigate the risk of negative rating actions. By leveraging reinsurance solutions, companies can bolster their financial stability and navigate the complexities of the current insurance landscape.

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