October 1, 2007/For Immediate Release   

Surplus Lines premiums, market share & underwriting results improve in 2006, according to A.M. Best report

After two years of limited growth, surplus lines insurers reported that direct premiums written increased by more than $5.4 billion in 2006 to $38.7 billion overall, increasing the surplus lines industry share of the property & casualty market to 14.37%, according to a recent report by A.M. Best. The improved numbers also resulted in strong underwriting results for the industry.

The A.M. Best Co. Special Report on the Surplus Lines Market, the 14th annual study, was released today in New Orleans at the 2007 Annual Convention of the National Association of Professional Surplus Lines Offices (NAPSLO).

The surplus lines industry posted strong underwriting results in 2006, with a combined ratio of 79.6 for domestic professional writers, aided by light catastrophe losses and disciplined underwriting. As a result, the report said no financial impairments were reported in 2006 among surplus lines companies, which have outperformed the total property/casualty industry in this regard in recent years.

The report showed that overall Property/Casualty insurance rates were in wide retreat, however surplus lines insurers were able to maintain adequate pricing through 2006. Catastrophe-exposed coastal property remained a notable exception to the market’s softening which was a benefit to surplus lines writers. 

Premium Growth & Market Breakdown

The surplus lines market has grown significantly over the past several years, especially domestic professional carriers. The five-year growth direct written premium of approximately 173% for the domestic professional surplus lines group dwarfs that of the total U.S. property/ casualty market of approximately 40% despite considerable slowing in the growth of surplus lines in 2004 and 2005.  A moderate increase followed in 2006.  

The disparity in the growth rate tracks with the rapid growth during hard markets when standard market carriers’ retreat from surplus lines accounts written during the height of the soft market. Overall, strong financial returns in recent years sparked competition that promoted a steady decline in property/casualty insurance rates, with the exception of catastrophe exposed property business. 

An exception to the prevailing market softening is coastal property, specifically those areas hurt by the 2004 and 2005 hurricanes, which continued to experience rate increases in 2006. As a result, heavier competition can be found on noncoastal property business, which has resulted in declining rates and loosened terms and conditions in this business. 

Despite an infusion of significant new capital and robust earnings in the reinsurance sector in 2006, Best reported that there remains a major shortfall in the availability of catastrophe capacity. This has caused pricing to remain attractive through mid-2007 and enticed the capital markets to help bridge the capacity gap.  Best reported that alternative vehicles such as catastrophe bonds, sidecars and industry loss warranties have been used to fill the capacity shortage.

The commercial automobile, general liability and workers’ compensation lines of coverage experienced significant rate reductions. These data point to the continued softening conditions throughout the overall insurance market. The survey also indicates that underwriters have begun loosening standards, pricing aggressively to acquire new business and quoting accounts they would not have considered a year ago. 

The Lloyd’s Market

Lloyd’s remains a market leader for U.S. surplus lines business, with direct written premium of approximately $6 billion in 2006, representing approximately 16% of the surplus lines market.  The primary reasons for the increase in Lloyd’s surplus lines premium volume over the past few years have been prevailing hard marker conditions, marketing activity and enhanced awareness of Lloyd’s security ratings among buyers and producers. 

In July 2007, A.M. Best affirmed the “A” financial strength rating and upgraded the issuer credit rating to “A+” from “A” of Lloyd’s of London, reflecting its strong capitalization, excellent operating performance, reduced exposure to reinsurance credit risk and strong global business profile. Overall, A.M. Best believes Lloyds will continue to benefit from its substantial participation in the U.S. surplus lines market, despite the volatile earnings inherent in surplus lines business.

A.M. Best also believes Lloyd’s central solvency capital is likely to stay strong through 2007 and 2008, following an 11% increase to $4.0 billion at year-end 2006. In addition, as a result of implementation of phase one of the Equitas agreement with National Indemnity Co. (NICo), Lloyd’s exposure to uncertainty relating to Equitas has been reduced substantially.

Solvency

The surplus lines industry reported strong overall underwriting results again in 2006, as companies benefited from a benign catastrophe season and continued underwriting discipline.  The earning of prior-year premium throughout 2006 had a positive effect on underwriting results, leading to another year of profitable operating results. At year-end 2006, underwriting results for the surplus lines composite outperformed the overall property/casualty industry by a considerable margin, considering the 13 percentage point difference in the combined ratio.  The gap widened in 2006, although it was not as great as the 15-point spread as of year-end 2002. 

Annual Study

The Special Report on the Surplus Lines Market, commissioned by the Derek Hughes/NAPSLO Educational Foundation, is the 14th annual study of the surplus lines industry which analyses the various segments of the U.S. excess and surplus lines market and provides A.M. Best’s perspective on the industry’s operating performance, financial condition, solvency trends, stability and emerging issues in the market.

In addition to the financial review of the industry, the surplus lines distribution systems was a focus of the special sections topic of the report, examining licensing and compliance, tax reporting; pending legislation; commissions; relationships, and mergers and acquisitions.

Background

NAPSLO is a national trade organization headquartered in Kansas City, Mo., representing the surplus lines industry and the wholesale insurance marketing system. The NAPSLO Board of Directors established the Derek Hughes/NAPSLO Educational Foundation in 1991 to improve education for members of the insurance industry about the surplus lines industry.

A.M. Best Company, located in Oldwick, N.J., was founded in 1899 and is the nation's leading provider of insurance company ratings and financial information as well as a specialized publisher of insurance periodicals and electronic products.