S&P Global Ratings revised its view on the U.S. property/casualty sector to negative from stable, the rating agency said yesterday, with a new report identifying lower capitalization as the driver of the move.

“We expect to make negative revisions to the ratings or outlooks of those insurers whose capitalization has fallen materially below our expectations and whose projected earnings and capital management options, in our view, will be insufficient to rebuild capitalization to a level consistent with our current ratings over the next 24-36 months,” said John Iten, primary credit analyst with S&P Global Ratings, in a media statement.

The report, “U.S. Property/Casualty Insurance Sector View Dims On Weakening Capitalization,” notes that while 92 percent of S&P’s financial strength ratings for P/C carriers had stable outlooks in January 2022, the percentage had already slipped to 80 percent by October 21, when 17 percent had negative outlooks.

Rising interest rates are pushing down the market value insurers’ fixed income portfolios—and GAAP shareholders equity along with it. In addition, declines in the value of equity holdings, elevated natural catastrophe losses, and deteriorating personal auto underwriting results are all pressuring the net earnings of some insurers, the report said.

The report also noted the potential impact of a changing property-catastrophe reinsurance market on the P/C insurance sector. “We anticipate that the combination of a relatively high proportion of Hurricane Ian losses being ceded to reinsurers, some property-catastrophe reinsurers withdrawing market capacity, and higher inflation will increase the cost of renewing reinsurance programs next year and may lead some primary insurers to increase their net catastrophe retentions, which could raise their capital requirements,” the report said.

As insurers report their third quarter results, S&P Global analysts will be updating their assessment of capital and earnings, as measured by S&P Global Ratings’ proprietary insurance capital model. As part of this process, earnings forecast for the projection period (2023-2025) and expectations for capital management activities will be revised.

Source: Standard & Poor’s Global Ratings