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

The commercial lines had a combined ratio of 103.8%, leading toan underwriting loss in the market overall since 2012. In additionto 2017's hurricanes and wildfires, several years of cyclicalpressure on premium rates also contributed toward gradualdeterioration in results over the last three years, the reportsays.

There was some positive news. Net written premiums were up 2.4%in 2017 and direct volume 2.6% higher for 2017. The report predictsthat increases in pricing in some segments should lead to higherpremium volume in 2018. Premium growth is expected to benefit fromthe slightly better economy with an increase in payrolls andbusiness receipts. Growth in business investment and an uptick inconstruction activity would also promotecommercial lines revenue.

The report expects underwriting results to revert back toward a“modest” profit in 2018, assuming fewer natural disasters in2018.

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

Key takeaways

• Commercial auto chronic problem. Commercial auto insurance remains a chronicproblem for underwriters, the report says, despite several roundsof rate increases and underwriting changes with a combined ratiofor 2017 of 111%. Fitch Ratings sees challenges with loss severitytrends, rising litigation costs, shortages of experienced driversand continued reserve weaknesses, which are likely to limit thepotential for strong underwriting improvement.
• Property results sliding. The report notesthat commercial property lines experienced a substantialunderwriting loss in 2017, primarily due to the number of naturalcatastrophes. For 2017, the segment's combined ratio climbed to117% following combined ratios between 90% in the four previousyears.
• Workers' compensation profits up. FitchRatings found that workers' compensation was the most profitablemajor commercial market segment, noting that the segment posted athird consecutive large underwriting gain in 2017. Loss trendsremain relatively stable, the report says, but competition may leadto deteriorating results. Nonetheless, Fitch Ratings expects thesegment to experience a combined ratio below 100% in 2018.

Related: Insurer to invest in coastal wetlands to mitigatestorm damages

Big picture

Fitch Ratings noted calendar-year favorable reserve developmentfor commercial lines overall increased significantly in 2017 to4.5% of earned premiums. This compares with 1.3% favorabledevelopment 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 notlead to reductions in capital or removal of underwriting capacitythat would promote more favorable swings in conditions. Propertyrates were up in response to recent catastrophe losses but otherlines are showing greater price stability or slight improvementsthat the report says may not be sustainable over the longer term.Commercial auto is the only other major segment showing an increasein rates, but the report cautions that considerable rate andunderwriting actions are still needed based on continued poorresults.

The full report is available on the Fitch Ratingswebsite.

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