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With its host of natural disasters, 2017 was expected to be a bad year for commercial insurance companies, and new report from Fitch Ratings has confirmed expectations.

The commercial lines had a combined ratio of 103.8%, leading to an underwriting loss in the market overall since 2012. In addition to 2017's hurricanes and wildfires, several years of cyclical pressure on premium rates also contributed toward gradual deterioration in results over the last three years, the report says.

There was some positive news. Net written premiums were up 2.4% in 2017 and direct volume 2.6% higher for 2017. The report predicts that increases in pricing in some segments should lead to higher premium volume in 2018. Premium growth is expected to benefit from the slightly better economy with an increase in payrolls and business receipts. Growth in business investment and an uptick in construction activity would also promote commercial lines revenue.

The report expects underwriting results to revert back toward a “modest” profit in 2018, assuming fewer natural disasters in 2018.

Related: Severe April storms resulted in $2 billion hit to U.S. economy

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Key takeaways

  • Commercial auto chronic problem. Commercial auto insurance remains a chronic problem for underwriters, the report says, despite several rounds of rate increases and underwriting changes with a combined ratio for 2017 of 111%. Fitch Ratings sees challenges with loss severity trends, rising litigation costs, shortages of experienced drivers and continued reserve weaknesses, which are likely to limit the potential for strong underwriting improvement.
  • Property results sliding. The report notes that commercial property lines experienced a substantial underwriting loss in 2017, primarily due to the number of natural catastrophes. For 2017, the segment's combined ratio climbed to 117% following combined ratios between 90% in the four previous years.
  • Workers' compensation profits up. Fitch Ratings found that workers' compensation was the most profitable major commercial market segment, noting that the segment posted a third consecutive large underwriting gain in 2017. Loss trends remain relatively stable, the report says, but competition may lead to deteriorating results. Nonetheless, Fitch Ratings expects the segment to experience a combined ratio below 100% in 2018.

Related: Insurer to invest in coastal wetlands to mitigate storm damages

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Big picture

Fitch Ratings noted calendar-year favorable reserve development for commercial lines overall increased significantly in 2017 to 4.5% of earned premiums. This compares with 1.3% favorable development in 2016.

Segment pricing trends will continue to vary, the report says, noting that commercial lines market pricing remains competitive. The report notes that underwriting losses in 2017 did not lead to reductions in capital or removal of underwriting capacity that would promote more favorable swings in conditions. Property rates were up in response to recent catastrophe losses but other lines are showing greater price stability or slight improvements that the report says may not be sustainable over the longer term. Commercial auto is the only other major segment showing an increase in rates, but the report cautions that considerable rate and underwriting actions are still needed based on continued poor results.

The full report is available on the Fitch Ratings website.

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Rosalie Donlon

Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].