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Property/casualty pressures expected to continue

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The outlook for the commercial property/casualty insurance segment remains “negative,” according to a report issued last week by A.M. Best Co. Inc.

“While most rating actions are expected to be affirmations, it is expected that more negative than positive rating actions will be taken over the next year,” said the Oldwick, New Jersey-based rating agency in “Property/Casualty Industry Expected to Produce Third Consecutive Underwriting Profit While Net Income and Surplus Growth Slow.” Best said that it anticipates unfavorable earnings, “most likely driven by a reduction in the benefit of favorable development of prior years' loss reserves to offset deteriorating underwriting margins” to be the most influential driver of negative rating actions.

In addition, the moderation of rate increases in some commercial lines combined with rate reductions in other lines will “exacerbate the current year underwriting trends,” said Best. It added that the continuation of lower reinvestment rates will drive down investment returns.

“While increasingly sophisticated pricing tools and improving macroeconomic trends will offset some of these negative factors, not all companies have positioned themselves to leverage these benefit,” said Best.

“Companies that fail to maintain underwriting discipline as the cycle trends downward will be those most susceptible to negative rating action.” Best noted that competition and the availability of capital will pressure rates downward even while companies try to maintain market share.

“This will suppress premium growth in the short-term and cause loss ratios to rise even if loss levels remain relatively in-line with their current levels. However, of greater concern is the potential for companies to change underwriting practices — broadening eligibility criteria or extending coverages — which would place more upward pressure on losses,” Best said in the report.

Yet the report said that the property/casualty insurance industry as a whole should experience another year of underwriting profit in 2016. That would follow projected underwriting profit for 2015

Best said that the industry's estimated combined ratio for 2015 is expected to deteriorate slightly from that of a year before to 98.0% from 97.4% as rate increases slow down and the level of favorable loss reserve development declines, albeit modestly.

“With net investment income also declining, pre-tax operating profit is projected to fall by 2.1%, to $59.9 billion,” said Best. But it said that net income, while expected to decline in 2015 to $60.1 billion from $63.5 billion will remain above its five-year average. But Best projects that 2016 net income will drop by nearly 28% to $43.3 billion, driven by lower underwriting and investment income as well as an end to realized capital gains.