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MAY 04, 2021 09:18 AM (EDT)

Best’s Special Report: Best’s Impairment Rate and Rating Transition Study — 1977 to 2020


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 Emmanuel Modu
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FOR IMMEDIATE RELEASE

OLDWICK - MAY 04, 2021 09:18 AM (EDT)
AM Best’s latest special report on the long-term impairment rates of AM Best-rated U.S.-domiciled insurance companies states that two insurance companies were added to the list of impaired insurers in 2020, down from a total of seven carriers in the previous year.

The Best’s Special Report, titled, “Best’s Impairment Rate and Rating Transition Study — 1977 to 2020,” marks AM Best’s 18th study and is aimed at estimating the risk of impairment of U.S. insurers. The analysis covers 43 one-year periods from Dec. 31, 1977, to Dec. 31, 2020, including the COVID-19 outbreak across the United States. It 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.

Both impairments in 2020 were property/casualty companies, while four life/health and three property/casualty companies made up the 2019 impairments. In contrast with the reduced insurer impairments in 2020, the corporate issuer defaults in 2020 were about a twofold increase from 2019, revealed in the corporate default study from a major Nationally Recognized Statistical Rating Organization (NRSRO). The surprisingly low number of insurer impairments in 2020 given the economic impact of the COVID-19 pandemic has underscored the resilience of the U.S. insurance industry. Most insurance companies maintain solid balance sheets, owing largely to their strong risk-adjusted capitalization and liquidity.

Categories of impairment discussed in the report include:


  • Gross impairments, which encompass the broadest definition of impairment and include companies that AM Best has ceased rating by the time of impairment. Gross impairments reduce cohorts of insurance carriers by withdrawn ratings, thus further boosting impairment rates;

  • Net impairments, which represent gross impairments, except that insurers that became impaired after rating withdrawal are not counted, and cohorts of insurers are not reduced for withdrawn ratings; and

  • Liquidations, which represent insurers counted in the net impairments that were eventually liquidated.

The report also addresses the issues related to comparing the AM Best impairment study with corporate default studies of other major NRSROs. These corporate default studies primarily reflect the defaults associated with senior unsecured debt obligations or their proxies. The report emphasizes that any comparisons between AM Best’s impairment studies and the corporate default studies of those NRSROs should be based on AM Best’s holding company ICRs or their proxies, which are effectively equivalent to AM Best’s senior unsecured debt ratings.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=308264 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.