A.M. Best Special Report: P/C Financial Impairments Hit Near-Term Peak in 2011 [Health & Beauty Close – Up]

A.M. Best Co. said the property/casualty (P/C) industry experienced precipitously rising financial impairment trends in 2011, with impaired companies still emerging well into 2012.

In a release, the insurance ratings company said the 34 2011 P/C impairments represented a significant jump from the 28 reported for the year by A.M. Best on January 23. This report also updates A.M. Best's historical P/C FIC database for 1969 through 2011.

The 2011 experience was a leap above 2010's 21 impairments and well exceeded the P/C historical average impairment count of 25.8. It also was in stark contrast to the life/health (L/H) industry's two 2011 financial impairments, the lowest impairment count and rate for the L/H industry in 50 years. So far, three property/casualty companies have been reported for 2012.

The P/C industry's 2011 financial impairment frequency (FIF)-a more accurate indicator of impairment trends than a mere count-was almost 30 percent above the industry's historical average. This approached the highs of the early 2000s, when the economy also was weak and the stock market dove with the bursting of the dot.com bubble and the effects of the terrorist attacks of September 11, 2001.

Most of 2011's impairments reflect the weak U.S. economy and troubled real estate industry. The impairments also are an indication of the industry's overall deteriorating operating performance. Many of the impaired insurers had been weakening over the past three or four years and were victims of several factors, including soft market conditions, high underwriting losses and poor management decisions. The majority of 2011 impairments appear to have been pushed over the edge by the prolonged effects of the struggling economy. Only three 2011 FICs were the direct result of shock catastrophe losses.

Softening the effects of the weak economy and the high catastrophe losses in 2010 and 2011 on the P/C impairment rate have been the strength of the industry's capitalization and its redundant reserves, and to some extent, its greater attention to risk management. As insurers continue to absorb losses and capital and reserves are drawn down, however, their operating results have suffered and they have become more vulnerable to shock events in the operating environment.

Rating trends are a key indicator of the financial health and stability of the insurance industry because there generally is an accelerating trend in the degradation of ratings before impairments increase. As of the publication date of this report, A.M. Best has maintained a negative rating outlook on the commercial lines segment. Coincidentally, 25 of the 34 FICs, or 73 percent, in 2011 were commercial lines insurers. The outlook implies that while the vast majority of rating actions will be affirmations, negative rating actions will outnumber positive rating actions during 2012.

The majority of the negative rating actions have been the result of weather-related losses, adverse prior-year loss-reserve development and/or inadequate rates, which some companies could not effectively absorb without materially reducing their risk-adjusted capital positions, A.M. Best said.

More information:

www.ambest.com

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