U.S. p&c commercial lines 2016 outlook negative; personal lines outlook stable: A.M. Best

Anticipating more downgrades than upgrades in the coming year, A.M. Best reports that it is maintaining its negative outlook on the commercial lines segment of the United States property/casualty industry.

The negative outlook is despite relatively solid aggregate results over the past several years, notes a statement issued Thursday by A.M. Best.

The outlook for commercial lines largely reflects the same concerns that have been prevalent in recent years, suggests the briefing, Commercial Lines Outlook Remains Negative as Margins Remain Under Pressure; Personal Lines Remains Stable. Those concerns are moderation and declines in commercial lines pricing, the potential for adverse loss reserve development and low investment yields.

Core accident-year margins for commercial lines will continue to be pressured as rate increases moderate, and in some lines, actually decline, A.M. Best believes. “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 recognized from these increases,” the briefing adds.

With continuing strong balance sheets and capitalization for many commercial lines insurers, the vast majority of rating actions will be affirmations. That said, insurers lacking “the underwriting culture to produce sustainable, favourable earnings as the downward part of the cycle continues will be susceptible to downgrades,” the briefing cautions.

Things seem more positive for the personal lines segment of the U.S. p&c industry, A.M. Best notes, with the rating agency holding over its stable outlook.

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

The automobile line, representing the majority of premiums in the segment, continues to drive earnings. “Pricing sophistication reflective of investments made by market leaders in multivariate pricing models has enabled insurers to analyze large amounts of data, segment their books of business and quickly recognize trends,” states the briefing.

And with the ack of large-scale catastrophic events, catastrophic weather events in recent years have been at or lower than expected for the segment. Property results have contributed positively to the segment’s earnings.

Again, however, insurers in the segment cannot rest, A.M. Best advises. “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,” the statement adds.