With ratings alone as evidence, the financial strength of the U.S. property/casualty industry continues its upward momentum, and the life/health sector is finally showing signs of improvement. In two separate reports, ratings firm
According to its report on the property/casualty sector, financial results improved again in 2010, and slightly more rating units were upgraded in 2010 than were downgraded, in contrast to 2009. A.M. Best cites volatility in property lines as a residual challenge for geographically concentrated personal lines carriers, stating this contributed to negative rating actions due to frequent wind, hail and tornado activity. For commercial lines carriers, strategic affiliations and carriers being acquired by higher-rated entities resulted in upgrades outpacing downgrades in 2010.
Specifically, upgrades of property/casualty insurers totaled 55 in 2010, down from 59 in 2009. Downgrades totaled 53, compared with 68 in 2009.
−There were 40 upgrades and 24 downgrades in the commercial lines segment.
−Approximately 50% of the upgrades were in the commercial casualty and workers’ compensation lines of business.
−Upgraded commercial casualty insurers generally reflected improved risk-adjusted capitalization based on solid operating performance and regional market strength, or a prominent position within their core niche of business.
−In the personal lines segment, 14 rating actions were upgrades, while 28 were downgrades.
−There were 11 downgrades in the personal property and nine downgrades in the private passenger auto/homeowners lines of business. The downgrades were primarily due to the impact of weather-related losses and adverse loss-reserve development on geographically concentrated carriers, particularly in Kentucky, Missouri and Oklahoma.
−There was one rating upgrade of a U.S. reinsurer in 2010, while one U.S. reinsurer was downgraded.
In the life/health sector, gradual improvements triggered trends leaning toward “equilibrium,” notes A.M. Best. “After an alarming two-year period ended in 2009, where the life/health industry experienced almost five times as many downgrades as upgrades,” notes the firm, “2010 saw more balance in overall rating changes with 28 upgrades and 28 downgrades. This reflects A.M. Best Co.’s view that life/health companies, coming off the lows seen during the financial crisis, are continuing to strengthen their balance sheets and liquidity profiles.”
As a result, A.M. Best revised the outlook for the life/annuity segment to stable in July 2010. In spite of the improvements in profitability and capitalization, the sector is affected by other factors, cautions A.M. Best, which confirmed its decision to maintain its negative rating outlook on the health segment as part of this report.
−A.M. Best observed several trends in 2010, including a slow but steady improvement in overall economic conditions, enhanced capital positions at life/health operating and holding companies, lower unrealized and realized investment losses and refined risk management practices.
−Notably, industry players were: focusing more on liquidity; increasing scenario/stress testing; performing product segment and corporate structure reviews; redefining risk appetites; and emphasizing statutory capital levels.
−The financial crisis and associated deterioration in economic fundamentals were the primary factors leading to the continued negative rating actions taken in the life/annuity segment in 2009.
−As conditions improved, investment portfolios stabilized, equity markets hit post-crisis highs and negative rating actions subsided.
−A.M. Best expects health insurers’ margins to decline in 2011, due to costs associated with systems and procedural changes related to the implementation of the Patient Protection and Affordable Care Act; medical loss-ratio and rate-reasonableness requirements; and more normalized utilization trends as the economy improves.
