AM Best maintains negative outlook for commercial US P/C industry

Rating agency AM Best is maintaining its negative outlook on the commercial lines segment of the US property/casualty (P/C) industry, despite relatively reliable aggregate results over the past several years.

AM Best said the negative outlook indicates its expectation of more downgrades than upgrades in the coming year.

Concurrently, the rating agency is also holding over its stable outlook on the personal lines segment of the US P/C industry, according to the firm’s latest briefing.

AM Best said the negative outlook on the commercial lines sector largely reflects the same concerns that have been prevalent in recent years: moderation and declines in commercial lines pricing, the potential for adverse loss reserve development and low investment yields.

The firm believes core accident-year margins for commercial lines will continue to be pressured as rate increases moderate, and in some lines, actually decline.

A material line in this sector, commercial automobile, is expected to continue experiencing rate increases in 2016 amid a positive accident-year trend; however, adverse development in the line has wiped away any benefit recognised from these increases.

“Commercial lines insurers’ balance sheets and the levels of capitalization maintained by many insurers remain strong even after giving consideration to moderately underfunded reserves,” said AM Best.

“As a result, the vast majority of rating actions will be affirmations. However, insurers that lack the underwriting culture to produce sustainable, favourable earnings as the downward part of the cycle continues will be susceptible to downgrades.”

In the personal lines sector, company-specific issues as opposed to overarching market trends will likely drive rating actions, said the firm.

The year-over-year consistency of the automobile line, which composes the majority of premiums in the segment, continues to drive earnings, according to the data.

It also stated pricing sophistication reflective of investments made by market leaders in multivariate pricing models has enabled insurers to analyse large amounts of data, segment their books of business and quickly recognize trends.

Additionally, catastrophic weather events in recent years have been at or lower than expected for the segment, according the report, which it said was due to a lack of large-scale catastrophic events, such as hurricanes or earthquakes.

Property losses have resulted from smaller scale loss events, such as harsh winter weather and tornado/hail and thunderstorms. As a result, property results have contributed positively to the segment’s earnings, said the firm.

AM Best also said that despite the strong capitalisation of the personal lines segment is a positive and results have been consistent with limited volatility, insurers cannot rest.

“Companies that have not actively invested in improving their pricing sophistication, efficiency and risk management are at a competitive disadvantage and will not be relevant in the long term,” it added.