AM Best has revised down its outlook for the US homeowner insurance segment from stable to negative in part as a result of "elevated reinsurance costs“.

The ratings agency also cited above-average catastrophic activity, inflation and secondary perils.

AM Best said in a report dated September 18 — Market Segment Outlook: US Homeowners — that net underwriting results are deteriorating, while rising costs and supply-chain disruptions are putting pressure on earnings and making it difficult to maintain “rate adequacy“.

The New Jersey ratings agency noted the third consecutive year of underwriting losses in the US homeowner insurance segment.

In the report, AM Best said that 2023 has already been a year of major catastrophes, including Hurricane Idalia, wildfires in Hawaii, California atmospheric rivers and convective storms and flooding in the US.

It added that the firm reinsurance market has resulted in changes in pricing, terms and conditions and attachment points, and that large players have discontinued the writing of new business in states prone to catastrophes.

The report stated: “In response to the rate adequacy trends, some market leaders have curtailed new business in cat-exposed areas, citing escalating construction costs, heightened cat risks and elevated reinsurance costs.

“Three of California’s top five homeowners insurers (State Farm, Allstate and Farmers) have closed or limited access to new policyholders. Some carriers have placed a moratorium on new Florida homeowners business over the past 18 months. During that period, several companies not rated by AM Best have been declared insolvent.

“Reinsurance costs have risen owing to several years of poor performance, driven by natural catastrophes, growing secondary perils and elevated claims costs attributable to the rising cost of construction materials. As reinsurers increase rates, limit capacity and tighten terms and conditions, the challenge for primary insurers in cat-prone states will continue to grow.

“Reports indicate that midyear reinsurance placements were less chaotic than the January 2023 renewals but remain challenging from a pricing perspective.

“Although pricing was particularly strong in cat-exposed areas, reinsurers have generally started to realign their risk profiles with a greater focus on generating underwriting profits, which have been elusive for a number of years. AM Best believes that higher rates will persist over the near term.”

The ratings agency said that most homeowner insurers remain well capitalised because of good balance-sheet management and rate increases where possible, but it added that some companies may be eating into their capital cushions, especially those that are in catastrophe-prone areas.

They may be being hit especially hard if the hard reinsurance market has driven them to increase retention of risk, as claims will hit their balance sheets more directly.