Fitch Ups Commercial Lines Rating To Stable

Fitch also mentioned it expects the sector to turn a profit this year with the rest of the property-casualty market and it does not expect soft market excesses of the ?90′s to reoccur.

Fitch noted operating results for commercial insurers have been adversely impacted for the last three years by unfavorable reserve development from recent accident years in longer-tail commercial lines and older asbestos exposures.

Fitch's recently updated reserve analysis indicates that the industry still has a material reserve deficiency, but the deficiency has declined somewhat due to recent reported adverse development and indications that reserves for the most recent underwriting period are being set more conservatively.

Fitch said it believes that its current ratings incorporate potential reserve shortfalls that still exist for many insurers. Thus, if reserves do develop unfavorably, but remain within expectations, then ratings will be affirmed.

Negative rating actions, Fitch said, may still occur in cases where reserve charges exceed prior expectations.

While prior-period reserves are expected to continue to develop adversely going forward, Fitch expects to see the earnings impact from development moderate.

Fitch also noted that insurers have recently experienced improvements in underwriting performance and earnings for their current book of business that dampens the effect of past reserving issues on current earnings.

Barring any unusual events, the U.S. property-casualty insurance industry, Fitch said, is on track this year to report its first underwriting profit since 1978.

The commercial lines sector is participating in this improved performance as commercial insurers reported a first-quarter combined ratio of 94.7 and a full-year 2003 combined ratio of 101.2, according to Insurance Services Office Inc.

Currently, pricing conditions in commercial insurance are adequate across a wide spectrum of the market. Although Fitch found premium rate increases in the sector have moderated from those prevalent in 2002 and 2003, and will likely decline in the near term, Fitch said it does not anticipate a return to the grossly inadequate pricing and aggressive underwriting practices of the late 1990s in the intermediate term.

Factors that may contribute to pricing stability in the near term include the removal of many unsuccessful commercial underwriters from the market through insolvencies and market exits over the last several years, and interest rate and investment market conditions that are not conducive to 'cash flow underwriting,' Fitch said.

The rating firm said it will continue to monitor pricing and underwriting trends closely going forward to assess the potential for the market to maintain profits at or near current levels and to forestall the inevitable return to softer pricing conditions.