Credit rating activity for the U.S. property/casualty industry in the first half of 2017 was favorable, with upgrades outpacing downgrades. Nearly one-third of the 2017 upgrades were driven by increased parental support, ongoing mergers and acquisitions (M&A) and the generally enhanced importance of companies within specific organizations.
Other positive rating actions were due to tightened underwriting standards that have led to sustained favorable results in recent years, increases in risk-adjusted capital and improvements in enterprise risk management, according to an A.M. Best special report.
According to Best’s Special Report, “Favorable Ratings Activity Continues for U.S. Property/Casualty Industry,” long-term issuer credit rating (ICR) upgrades significantly outpaced downgrades in the first half of 2017 (25 versus 8), with most of the changes occurring in the personal lines segment. This continues a prior-year trend of upgrades outnumbering downgrades, although in 2016, the split was closer (27 versus 21).
According to the ratings agency, macroeconomic factors have generally been positive over the past year, with lower levels of unemployment, coupled with higher housing starts and new car sales.
However, after three years of posting underwriting profits, the P/C industry recorded an underwriting loss of nearly $6.6 billion in 2016, driven by an increase in frequency and severity, particularly in the automobile business.
Affirmations remained the most common rating action at 86 percent, reflecting the overall stability of the U.S. P/C industry, according to the analysts.
Although nearly 80 percent of the commercial and personal lines segments’ ratings have a stable outlook, the percentage of negative outlooks continues to outpace the percentage of positive outlooks in each segment. In the commercial lines segment, 10 percent of its rating units had a negative outlook versus 7 percent on the positive side, and in the personal lines segment, the split was 13 percent to 8 percent. (The report also summarizes rating activity among the top 10 largest rating unit/companies in the two major segments.)
A.M. Best said it maintains a negative outlook on the commercial lines segment, owing to a competitive pricing environment; rising losses, particularly in the commercial automobile sector; and the prolonged low interest rate environment, which will strain operating profitability.
The personal lines segment has a stable outlook from A.M. Best; however, the rating analysts say there are challenges as demonstrated through the first three months of 2017, when the P/C industry posted an underwriting loss of more than $840 million, the first, first-quarter underwriting loss since 2012. The deterioration in profitability was driven by the ongoing pressure on the automobile business, as well as above average catastrophe losses, according to A.M. Best.
Source: A.M. Best: Favorable Ratings Activity Continues for U.S. Property/Casualty Industry
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