The Commercial Auto segment recorded its first underwriting lossin eight years in 2011 due to a combination of declining premiums,increasing claims severity and a reduction in favorable prior-yearreserve releases, a new report reveals.

In its “Commercial Auto Market Update,” Fitch Ratings says theline posted a combined ratio of 103.6 in 2011. Fitch says that onan accident-year basis and examining only liability for CommercialAuto, the underwriting losses began in 2009.

Net written premiums in 2011 were around $21 billion—21 percentlower than the line's peak level in 2006. “This decline isattributable to years of declining premium-rate trends in acompetitive market environment, as well as reductions in insuredexposures as Commercial Auto was significantly affected by theeconomic recession,” says Fitch.

In addition to fewer premium dollars coming in, Fitch says theCommercial Auto segment is also seeing a decline in favorablereserve development.

While Fitch says Commercial Auto insurers have reported“significantly favorable” reserve development for the past sevenyears, the ratings agency notes that favorable development was lesspronounced in 2011 and is expected to decline further going forward“as a review of recent accident-year reserve experience revealssomewhat less-conservative Commercial Auto reserving.”

Still, despite the headwinds, Fitch says the market fundamentalsin Commercial Auto are improving. “The market has responded to thisweaker underwriting performance as evidenced by premium rateincreases that started in the second half of 2011,” the reportstates.

Fitch expects those rate increases to continue into 2013 butnotes that these increases will need to outpace growing loss costs:“Commercial Auto is affected by similar loss factors as PersonalAuto. Most recently, bodily injury claims inflation has affectedautomobile lines.”

Even so, Fitch says it expects Commercial Auto to return tounderwriting profitability in 2013, if not boasting the low-90scombined ratios achieved in 2004 and 2005.