By Navneeta Nandan

Sept 10 - (The Insurer) – Improved individual company performance has been the major driver in S&P Global Ratings’ recent spate of financial strength rating upgrades to AA-minus from A-plus at P&C carriers The Hartford, Arch Capital Group, Fairfax Financial and AIG, according to analysts at the ratings agency.

Talking to The Insurer, S&P analysts Taoufik Gharib and Saurabh Khasnis highlighted that improved earnings resilience and risk management at the companies played their part in the ratings upgrades to the AA-minus level.

The analysts also noted that S&P’s new capitalization model, which was revised in November 2023, was a contributing factor in the upgrades, but they reiterated that this impact was fairly limited.

“They're not driven solely by our new capital model, but it contributed to the strengthening of the competitiveness of their capital position,” Gharib, director and lead analyst, North American insurance ratings, told The Insurer.

Robert Greensted, director of S&P, said in a press briefing for S&P’s global reinsurance sector outlook on September 2 that the overall industry average is high A range, which reflects that the sector is well-rated and has a stable outlook.

The rating actions throughout the year have been mostly positive, he said.

“In terms of the positive rating actions, these have largely been driven by improved underwriting performance that we believe is sustainable over the short to medium term. We also believe that some have improved their earnings diversification away from the reinsurance sector,” he said.

“Others, we have taken positive rating actions because of improved capitalization or improved leverage ratios.”

For the negative actions, Greensted said that they were “quite specific”, such as being driven by adverse development in U.S. casualty or aviation lines. Besides, the higher than forecasted losses due to the Californian wildfires have also played a role in some negative rating actions.

FAIRFAX CAPITALIZATION MORE OF A STRENGTH

S&P upgraded Fairfax from A-plus to AA-minus in June.

Gharib said that historically, Fairfax’s capital was not a strength because it had higher financial leverage than its peers and had an investment strategy that was “more aggressive than the average insurance group”, which held back its ratings.

It held a lot of cash in short-term investments, which they started to invest in U.S. treasuries in 2022 and generate further investment income.

In 2021, Fairfax’s annual interest and dividends were around $641 million. That jumped to $2.5 billion in 2024. “And that's the run rate that we forecast in 2025 through 2027,” Gharib added.

This alone had significantly contributed to the operating earnings. The company has now also reduced its financial leverage to range below 30%.

Additionally, the company also has a strong franchise that includes Allied World, Odyssey Re, Crum & Forster and Northbridge, alongside its major acquisition in the Middle East of Gulf Insurance, which is the fourth largest insurance company in the Middle East and North Africa region, the analyst added.

The group is in the top five E&S players in the U.S. and is the fourth largest commercial writer in Canada. Gharib added that it is in the top 15 or 20 global reinsurers in the world.

Given that Fairfax is a major player in E&S, it has also benefited from the hardening of the property and property cat market.

“So now their capital is redundant at the highest confidence level under our criteria, which is 99.99%, and we forecast that going forward. So, hence, we upgraded them to AA-minus with stable outlook.”

ARCH’S INSURANCE EARNINGS IMPROVED

Gharib said that Arch’s upgrade was driven by its competitive position.

Until the last two years, most of Arch’s underwriting earnings came from its mortgage segment.

The insurance segment wasn’t contributing significantly to its underwriting earnings, while the reinsurance segment, despite being profitable in underwriting results, wasn’t contributing significantly from a premium perspective, with maybe just couple billion dollars of premium, he said.

Over the past two years, Arch grew its reinsurance segment to the extent that it is now in the top 10 global reinsurers. It also enhanced the underwriting results of its insurance segment, while increasing its top line.

Now, Gharib said, the company has grown in size and has a bottom-line diversity.

Financial leverage was never a major concern for Arch, the analyst said. It was maintaining a 12% to 15% financial leverage.

Hence, the balance in its underwriting earnings is what drove Arch’s upgrade, Gharib concluded.

THE HARTFORD’S MARKET POSITION STRENGTHENED

S&P had put Hartford on a positive outlook last year, which led to the upgrade to AA-minus last month.

Over the years, the company has not only sustained good operating performance, but also grown its market share, strengthened its market position, commercial lines business, particularly its small commercial segment.

Khasnis, director and lead analyst, North America P&C ratings at S&P, added that apart from being the number one player in small accounts, Hartford’s management has put in more effort into making its pricing more sophisticated, while risk selection, increased focus on profitability and market trends have also supported their initiatives.

All of these have resulted in a more improved underwriting performance.

A decade ago, Hartford’s combined ratio ranged between mid to high 90s. Since then, it has consistently improved, Khasnis added. Now, the ratings agency estimates that it will report a combined ratio in the low 90s.

Additionally, Hartford’s strong profitability has also improved its capitalization.

“Even under our old capital model, they maintained significant buffers at the required capital level. And even under the new capital model, they have significant buffers at the required capital level.

“And we think that buffer that they have or the excess capital that they have will provide them with significant resilience in order to offset some of the large losses if they have to face any,” Khasnis said.

The upgrade of Hartford’s ratings is a combination of improved underwriting performance, sustained market positioning and competitive advantage in the market, along with improved capitalization, the analyst added.

AIG REPOSITIONED IN RECENT YEARS

AIG was upgraded from A-plus to AA-minus back in May this year.

The group in recent years has repositioned itself on the P&C side, sold its catastrophe business and reinsurance business to RenRe, and divested and spun off its life insurance business.

Khasnis said that AIG’s P&C performance has improved year-after-year through the past five years.

The S&P analysts said that a company is upgraded from A-plus to AA-minus when S&P is really confident that the company will have a stable profile going forward.

EVEREST AND FIDELIS OUTLOOKS REVISED DOWN THIS YEAR

However, not all (re)insurers have enjoyed positive momentum in their S&P ratings this year.

For example, S&P in January had put Everest Group’s A-plus rating on a negative outlook, citing reserve adequacy issues. The group took a substantial reserve charge related to its casualty portfolio, similar to the charge it took last year on its reinsurance portfolio.

“Considering the lack of track record that they have in terms of managing the reserves, we had taken the rating action in terms of putting them on a negative outlook,” Khasnis added.

The ratings agency had also in April revised the outlook of A-minus rated Bermuda-based Fidelis Insurance Holdings from positive to stable because of its adverse reserve development due to the Russia-Ukraine losses in the aviation book and the California wildfire.