Fitch Sees Growth, Profitability Continuing for U.S. Commercial Lines

Fitch Ratings said it maintains a stable rating outlook for the U.S. commercial lines sector due to improving profitability over the past two years and strong capital levels allowing insurers to withstand considerable adversity.

Fitch’s fundamental outlook on the commercial lines sector is also stable, reflecting challenges to further improve profitability going forward.

In its latest market update report for the U.S. commercial lines insurance market, Fitch discusses the continuing trend of growth and profitability for the sector. In 2013, commercial lines experienced a third straight year of favorable premium growth, fueled by hardening market conditions that have persisted over the last 10 consecutive quarters.

Net written premiums increased by 3.6 percent for commercial lines in aggregate in 2013, which was moderately less than 2012’s growth rate. The reported accident year loss ratio improved by nearly 6 points over the prior year to 67.7 percent in 2013.

Property related segments reported the strongest changes given modest catastrophe losses in 2013, Fitch said. Workers’ compensation results improved, but this segment continues to generate a significant underwriting loss. Medical professional liability is the one segment with weak pricing and deteriorating underwriting results, according to the rating agency.

Fitch said it expects commercial lines accident year loss ratios to show moderate improvement in the near term with continued, albeit lower, price increases and modest loss cost growth.

The current hardening phase of the commercial lines underwriting cycle differs from previous hard markets, according to Fitch. Specifically, Fitch said “recent price increases represent a response to past underwriting losses, and recognition that underwriting profits are the only viable replacement for falling investment income in the current low yield environment.”

On a calendar year basis, commercial lines underwriting results continued to be favorably affected by recognition of reserve redundancies from prior accident years in 2013. Reserve releases increased in 2013 in spite of expectations for slowing development and several instances of significant unfavorable reserve actions, Fitch said.

Although calendar year development was favorable and improved from year-to-year, Fitch said there is a wider disparity in reserve experience by segment as only commercial auto developed unfavorably in 2013. The segment with the strongest favorable development continues to be medical professional liability.