Even though A.M. Best expects commercial lines operating results to be profitable in 2015, and capital levels to be strong for most insurers, its outlook for the segment remains negative. One key reason: potential loss reserve hiccups.

The negative outlook for U.S. commercial lines, which has been in place since 2011, means that negative rating actions are likely to outpace positive ones in 2015, A.M. Best said in an outlook report published earlier this month.

The report, which also explained a continued stable outlook for U.S. personal lines and a negative one for global reinsurance, provided three main reasons for the thumbs down on commercial lines:

  • Continued concerns about adverse loss reserve development.
  • Continued low investment yields.
  • Moderation in commercial lines pricing.

Discussing reserve developments, a Best briefing published earlier this month said that the adequacy of prior-year reserves remains “the most influential driver” of financial strength ratings for commercial lines insurers in 2015.

“A.M. Best still believes reserves are deficient, although reserve releases are expected to continue in 2015 and contribute materially to reported earnings for the year.” Still, for most commercial lines insurers, capitalization remains strong even after considering underfunded reserves, the rating agency update said.

In terms of insurance pricing, a moderate pace of price increases is currently “on par” with loss-cost trends. But certain lines—namely professional liability and transportation—are poised for “more robust” price hikes, the report said.

Also predicting a continued migration of business into the surplus lines space, Best analysts highlighted this as evidence of disciplined underwriting behavior across the industry generally.

For personal lines, a stable outlook means that 2015 rating actions by A.M. Beat are most likely to affirmations. Highlighting factors like consistency in the personal auto line, with generally favorable, low-volatility performance posted on a year-over-year basis, the report also lists trends like increased sophistication in pricing and continued industrywide branding efforts, Best analysts also predict that consolidation activity might pick up. Among the reasons for increased consolidation—the importance of scale in a highly competitive market and developments in automobile technology, which are both decreasing accident frequencies and potentially shrinking the market for auto insurance.

For global reinsurance, A.M. Best said its negative outlook is for a longer term than the usual 12-18 months. “While A.M. Best does not anticipate a significant number of negative outlooks or downgrades over the near term, the market’s struggles at this point present significant longer term challenges for the industry,” the report said, referring to compression of investment yields and underwriting margins bearing down on overall operating results, as well as underlying factors, such as declining rates, broader terms and conditions, continued pressure from third-party capital providers and an unsustainable flow of net favorable loss reserve development.

Source: A.M. Best