The U.S. workers compensation sector experienced another strong year of underwriting performance in 2017, but declining premiums will eventually lead to weaker underwriting results, according to Fitch Ratings Inc.

The U.S. commercial lines insurance market experienced “considerable” underwriting losses in 2017, largely due to higher property losses from natural catastrophes and continued weak automobile results, but workers comp was “the one bright spot,” with direct written premium volume of $56 billion in 2017, New York-based Fitch said in a report published Wednesday. But direct written premium volume declined by a “modest” 0.3% in 2017, the first year of lower market premiums since 2010, while net written premiums declined by a larger margin of 1.3% mainly due to larger reinsurance cessions by individual insurers, in some cases to offshore affiliates, according to the report.

The workers comp sector had a combined ratio of 92.3% in 2017, an improvement from the 95.6% combined ratio in 2016, according to the report. The sector’s combined ratio improved by more than 10 points over the past five years.

“Pricing pressure will continue going forward, though near-term premium volume will likely benefit from exposure growth as employee payrolls are expanding from higher wages and employment in a period of moderately improving economic growth,” the report stated. “Fitch believes that workers compensation will experience some erosion in results going forward, but is still in a position to generate underwriting profits in 2018 and move towards a break-even combined ratio in 2019. Projecting future results is very difficult given historical segment volatility.”

Following a brief period of rising workers compensation claims in the last recession, frequency trends steadily moved downward for the last several years, largely reflecting the benefits of employee training and workplace safety technology and practices that evolved over time, according to Fitch. The National Council on Compensation Insurance has reported that claims frequency moved downward favorably by 6.0% in accident year 2017 and 6.2% in 2016.

Both indemnity and medical claims severity were relatively stable compared with historical norms for nearly a decade, but ticked up recently, according to the report, with the NCCI reporting that indemnity claims severity increased by 4.0% in 2017 and 2.7% in the previous year.

“Indemnity costs are likely to move up further in the near term with signs of wages increasing,” the report said. “Expanding attorney involvement and litigation activity are leading to higher legal settlement costs in workers compensation and other liability insurance segments that is a growing source of uncertainty in projecting future loss trends.”

“Medical costs can exhibit greater volatility than indemnity costs and workers compensation medical cost trends historically outpace overall medical inflation,” the report continued, citing NCCI data that lost time medical claims severity increased by 4.0% in accident year 2017 and 6.0% in 2016. “Workers compensation underwriters increasingly embraced approaches used by group health providers such as medical networks and case management processes to better contain medical costs,” the report stated. “Drug formularies can help combat ever-rising prescription drug costs and concerns regarding opioid and pain treatment overuse. Still, the potential for a larger increase in medical costs is an ongoing concern for workers compensation insurers.”

Travelers Cos. Inc. was the largest writer of workers comp business in terms of net written premiums of $4.36 billion in 2017, down 1.6% from 2016, with market share at 7.8%; followed by Hartford Financial Services Group Inc. at $3.41 billion in 2017, up 2.3% from 2016, with a 6.1% market share.

Both insurers reported pricing pressure in the workers comp sector over the first half of 2018 during their recent earnings conference calls. Hartford officials are continuing to closely watch the “headwinds on the pricing side” in the workers compensation business as frequency and rates are heading in opposite directions and the favorable loss cost trends are pressuring pricing, President Doug Elliot said during the insurer’s earnings conference call on Friday.

Two companies that grew substantially in the last five years are AmTrust Financial Services Inc. and Berkshire Hathaway Inc., while past market leaders Liberty Mutual Group and American International Group Inc. “continue to slip in market rankings following efforts to reduce risk and restore profitability in workers compensation,” the report stated. “Both companies also recently executed retroactive reinsurance transactions to reduce workers compensation reserve risk.”