US P&C industry’s aggregate leverage ratio climbs to 23% due to capital declines

Written by Adam Cadle

25/01/2023

The US P&C industry’s aggregate leverage ratio climbed from 19.5% to 23% in Q3 2022 from year-end 2021, AM Best research has shown, due to rising interest rates, increased unrealised loses and declines in capital.

Almost every company saw an increase in their debt to capital ratios in 2022 from year-end 2021 despite most reducing their long-term debt obligations. For the 42 publicly traded P&C companies followed for this study, most kept their appetites for long-term debt in check in 2022, and instead are focused on strengthening and making enterprise risk management (ERM), strong corporate governance, and stress testing capabilities integral to their operations.

“The rising interest rate environment is not only impacting the investing and operating environments for U.S. insurers, but it is also leading to a more cautious approach to capital-raising via debt issuance,” said Helen Andersen, financial analyst, AM Best.

“Macro-economic challenges such as inflation and capital markets volatility will likely hamper profitability compared with prior years. However, the shorter duration of bond portfolios may benefit P/C insurers in the rising rate environment because insurers can reinvest proceeds of maturing bonds at the current higher rates.”

According to the report, capital at many companies have notably declined on a GAAP basis. At year-end 2021, nearly one-quarter of invested assets in the P/C industry were allocated to equities, which dropped nearly three percentage points by the third quarter of 2022, driven partially by the stock market downturn, resulting in unrealised losses. Additionally, losses through the third quarter of 2022 have turned the interest coverage ratio negative in aggregate.

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