AM Best: Number of P/C Gross Impairments Falls in 2022; No Net Impairments

Despite the reversal seen in the U.S. equity market and rising inflation and interest rates, property/casualty insurers performed well in 2022, according to the latest report on the long-term impairment rates of U.S.-domiciled insurance companies.

The report released earlier this month, Best’s Impairment Rate and Rating Transition Study — 1977 to 2022, added just two P/C insurance companies to the list of gross impairments in 2022 – FedNat Insurance Co. and Americas Insurance Co. In the previous year, 10 carriers were identified as gross impairments by AM Best. Gross impairments refer to insurers that became impaired and had a Best’s Credit Rating at some point during the study period but not necessarily at the time of impairment. With gross impairments, an insurer can become impaired years after the insurer has ceased being rated by AM Best.

“Despite a moderate decline in surplus driven by significant unrealized losses in asset holdings, P/C companies maintain strong risk-adjusted capitalization,” the report stated.

FedNat Insurance Co., domiciled in Florida and last rated by AM Best in 2004, became impaired due to hurricane-related losses, high claims litigation and suspected roof replacement fraud. Americas Insurance Co., a Louisiana-domiciled company, last rated by AM Best in 2011, became impaired following losses from hurricanes Ida, Laura, Delta and Zeta.

Rising loss costs, catastrophe frequency and social inflation were the main concerns for P/C insurers, even as pricing momentum and investment income remained favorable.

The study, aimed at estimating the risk of impairment of U.S. insurers, covers 45 one-year periods from Dec. 31, 1977, to Dec. 31, 2022, and includes U.S. insurers that had at least one Financial Strength Rating (FSR) or one corresponding Long-Term Issuer Credit Rating (ICR) during the study period. The other category of impairment noted in the report is net impairments, which refers to insurers that became impaired and had an FSR at the time of impairment.

There were no insurers added to the list of net impairments in 2022, meaning no companies were rated by AM Best at the time of impairment, consistent with 2021’s zero net impairments.

The increase in frequency and severity of catastrophe events, especially secondary perils, according to the report, has placed a significant amount of pressure on insurers in recent years. Since the start of 2021, 18 companies became impaired due to natural catastrophes; 14 were domiciled in Florida or Louisiana. None were rated by AM Best at the time of impairment, with 11 companies never rated by AM Best.

AM Best points out that some findings in the study tend to be intuitive. For example, a given rating in one year, such as “a-,” tends to be a good predictor of a similar rating in the following year. In addition, a financially weak company is more likely than a financially strong company to become impaired. And for companies with higher initial ratings, the time to impairment tends to be longer.

It took an average of 17 years for FICs [financially impaired companies] that were initially rated “A++/A+” to become financially impaired as a gross impairment, but only an average of 11.4 years for FICs rated “B/B-.” It took an average 9.9 years for the FICs initially rated “D” to become financially impaired, Best said.

Of the 5,323 companies that had an AM Best rating during the 1977-2022 period, 752 became financially impaired and were considered gross impairments. Just 486 had an AM Best rating at the time of impairment, i.e., net impairments.