Deteriorating market conditions and rising loss costs led to a 60 percent increase in rating downgrades of AM Best-rated U.S.-based insurers in 2023 compared with two years earlier, according to a newly issued report.

The latest Best’s Special Report indicates that in addition to catastrophe risk, secondary perils continue to reshape geographic risk, with companies writing business in six states or less accounting for 60 percent of rating downgrades in 2023.

California, Florida and Texas-domiciled companies accounted for more than a quarter (27 percent) of downgrades over the past three years, driven largely by personal lines carriers, according to the report.

The report also notes that while rating upgrades and downgrades are dependent on the individual circumstances of each rated company, the wider trajectory of rating movements can reflect marketplace dynamics.

“Some of the factors driving these rating actions are cyclical in nature, while others reflect a more permanent shift in operating conditions,” said David Lopes, senior industry analyst, AM Best. “Worsening economic and social inflation as well as rising operating and loss costs are also among the factors at play.”

Rating downgrades reflect deteriorating operating results mainly in the personal lines segment, which AM Best has had a negative outlook on since September 2022.

Rising interest rates have increased investment income for all insurance segments; higher rates also helped bolster premium growth for life/annuity insurers due to attractive crediting rates, the report noted.

Overall, Long-Term Issuer Credit Rating (Long-Term ICR) downgrades were driven primarily by declines in capitalization and deteriorating operating performance.

Balance sheet and operating performance improvements primarily influenced upgrades, as did insurers being added to different rating units or related to lift from parent organizations.

The report also notes that personal lines carriers accounted for 43 percent of Long-Term ICR downgrades over the past three years.

In the commercial lines segment, the report found that upgrades continued to outnumber downgrades.

Despite volatility, the segment accounted for the largest share of upgrades over the last three years, although the number fell in 2023. Commercial lines carriers also accounted for nearly a quarter of downgrades the past three years, the report found.