Analysts at A.M. Best have been sufficiently impressed by commercial lines insurers’ pricing, underwriting and resilience in recent years to boost their outlook on this segment of the U.S. property/casualty industry from negative to stable for 2018. The uptick is the first by A.M. Best for commercial lines in seven years.

In its own language, A.M. Best said the outlook has improved due “an embedded change in the sophistication of the segment’s pricing and underwriting infrastructure and the segment’s resilience amid a variety of macroeconomic and insurance market issues in recent years.”

While the “pricing environment remains challenging and other headwinds persist,” most carriers in the segment have adopted “tools that allow for greater insight into business profitability,” A.M. Best says in a briefing, titled, “Market Segment Outlook: U.S. Commercial Lines.”

A.M. Best, which has had a negative outlook on the commercial lines segment since the start of 2011, said it expects the segment to post an underwriting loss for 2017, but still record net profits, driven primarily by investment results.

This past August, A.M. Best maintained its negative outlook on the commercial lines segment, citing a competitive pricing environment; rising losses, particularly in the commercial automobile sector; and the prolonged low interest rate environment, which it said would strain operating profitability.

In its most recent briefing addressing 2018, A.M. Best notes that catastrophe losses nearly doubled in 2017 compared with 2016; however, through early fourth-quarter 2017, they generally were within companies’ risk tolerances and the retentions of their catastrophe programs, reflecting, according to A.M. Best, the “appropriateness of the segment’s enterprise risk management.” The analysts credit changes in underwriting and pricing fundamentals, particularly by the segment’s leading companies, that have resulted in core underwriting results. These results, coupled with overall strong risk-adjusted capitalization levels, are “allowing companies to absorb shock losses that previously would have strained capacity.”

A.M. Best said that although it believes that reserves for the commercial lines segment are deficient, this deficiency is “very modest relative to the overall reserve balance,” particularly if the effect of statutory discounting is removed. While the amount of favorable reserve development has generally declined over time, A.M. Best said it expects that loss reserve development for 2017 will be favorable overall for the segment.

Despite the outlook revision to stable, A.M. Best notes that challenges persist and could drive longer-term deterioration for the segment. These challenges include: investment yields and reinvestment rates that are still lower than rates on maturing and called securities; ongoing competitive pressures given the level of capital in the segment that may make it difficult to achieve necessary rate increases; decreasing levels of favorable prior-year development; and continued challenging results in the commercial automobile and certain other liability lines of business.

A rapid change in any of these areas could lead to a review of the outlook during the year, but A.M. Best said it is “currently is not anticipating substantial deterioration in the market in 2018.”

*This story appeared previously in our sister publication Insurance Journal.