S&P Revises US P&C Insurance Sector Outlook to Negative

S&P Global Ratings has revised its view on the US property and casualty (P&C) insurance sector to negative from stable, reflecting the rating agency's expectation of wider credit trends over the next 12 months.

"The change, in our view, reflects the negative impact on capital of rising interest rates and consequent decline in the market value of fixed-income portfolios captured within accumulated other comprehensive income (AOCI)," an S&P statement said. "It also reflects the negative impact on reported GAAP earnings of the decline in the value of equity investments, natural catastrophe losses including Hurricane Ian, and higher claims costs, particularly in personal lines."

S&P described rating activity in the US P&C sector as "muted" so far this year, with only one rating downgrade and no upgrades. Since the beginning of the year, however, the distribution of company rating outlooks in the sector—an indicator of possible future rating actions—has become more negative, the rating agency said.

S&P noted that the aggregate capital cushion enjoyed by rated P&C insurers deteriorated materially in the first half of this year, largely as the result of the decline in the market value of bond holdings.

"Given the further rise in interest rates through the third quarter, we anticipate another significant decline in bond portfolio valuations and shareholders' equity," S&P said. "We also note that interest rates have continued to increase, so we expect further capital deterioration in the fourth quarter."

S&P noted that personal lines insurers have experienced a sharp deterioration in their underwriting results due to the impact of inflation and supply chain disruptions on the cost of car parts, building materials, and labor.

"An elevated level of convective storm losses and, more recently, losses from Hurricane Ian, have also depressed underwriting performance," S&P said. "Fortunately, commercial lines pricing and underwriting results remained strong, partially mitigating the deterioration in personal lines for multiline insurers."