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Despite 2013 profit, Best keeps 'negative' outlook for property insurers

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Despite 2013 profit, Best keeps 'negative' outlook for property insurers

A.M. Best Co. Inc. said it is maintaining its “negative” outlook for the U.S. commercial property/casualty insurance industry.

In a special report Tuesday titled, “P/C Segment's Net Income Estimated to Be Up Nearly 60% in 2013,” the Oldwick, N.J.-based rating agency cited a “relatively subdued year for catastrophes” for helping the domestic property/casualty industry — both personal lines and commercial lines insurers — achieve an underwriting profit for the first time in four years, and that underwriting results reached their best level since 2007.

For commercial lines alone, pricing shows further signs of increasing, frequency and severity trends remain manageable, insurers continue to be well capitalized and macroeconomic conditions are trending toward “modestly favorable,” Best said.

Still, Best is maintaining its negative outlook for the segment, which has been in effect since 2011, for several reasons.

“While market conditions have improved in recent years, A.M. Best believes the improvement in underwriting results will not be sufficient to surmount the current return dynamics in fixed-income markets.”

In addition, insurers' calendar-year results have not recognized the loss-reserve shortfalls that the rating agency estimates a number of companies accrued during the soft market period.

Best said it believes the majority of commercial lines companies' balance sheets are strong, but reserve shortfalls may be too significant for some companies to maintain their ratings.

The potential for underfunding loss reserves and its effect on insurers' ratings remains a critical issue for A.M. Best, according to the report.

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Surplus growth is expected to remain flat this year, Best said, because it does not project changes in capital gains, “which were a significant contributor to the surplus increase in 2013.”

In addition, interest rates are expected to remain low.

“Insurers will need to adopt a long-term approach to their business that addresses inadequate reserves and compensates for depressed investment returns,” Best said. “These business plans should have improved focus on usage of data and a clearly defined risk tolerance.”