News Release
September 10, 2008

Surplus Lines premiums, market share & underwriting results improve in 2007, according to A.M. Best report  

While surplus lines insurers outperformed the property/casualty industry in underwriting and operating performance in 2007, the softening market and more aggressive competition portend deterioration in profitability as premium levels declined, according to the annual A.M. Best Co. report on the surplus lines industry

Copies of the A.M. Best Co. Special Report on the Surplus Lines Market,  the 15th annual study,  were released today in San Diego at the 2008 Annual Convention of the National Association of Professional Surplus Lines Offices (NAPSLO).

The report showed that after-tax return on equity, which measures after-tax profitability from underwriting and investment activity, slipped slightly to a still solid 12.4% from 15.05% at year-end 2006. Overall the impact of the softening market was evident in the 3.5% drop in direct premiums written in 2007 for professional surplus lines insurers, dropping from $38.7 billion to $37.3 billion.

The surplus lines industry posted strong underwriting results again in 2007, with a combined ratio remaining below 70 for the second year in a row. As a result, the report noted that for the fourth year in row no financial impairments were reported among surplus lines companies, which have outperformed the total property/casualty industry in this regard in recent years.

Overall the industry reported strong overall underwriting results in 2007, as companies benefited from a second straight benign catastrophe season and the continued exhibition of underwriting discipline.

Premium Growth & Market Breakdown

Underwriting results for the surplus lines composite outperformed the overall P/C industry by a considerable margin, considering the 19 percentage point difference in the combined ratio. This gap has widened in each of the last two years, particularly in 2007, clearly indicating the benefit of the benign catastrophe year, the difference in the mix of business between the two markets and the effectiveness of surplus lines carriers in choosing which accounts to compete for and which ones to risk losing to the competitive market. The drop in the loss and loss-adjustment expense (LAE) ratio for the surplus lines market in each of the last four years shows the cumulative effect of increased pricing during the recent hard market.

While the combined ratio of the surplus lines market has trended similarly to that of the overall P/C industry during the past five years, it has annually outperformed the overall industry by an average of approximately 11 points. The surplus lines market’s superior performance is attributable mainly to its more favorable loss experience. This “market of last resort” has a loss and LAE ratio that outperformed the overall industry by an average of 7 points over the past five years, a result that is not that surprising given the historical impact of hard market cycles, which have heavily impacted results in recent years. A.M. Best believes many of the loss ratio advantages of surplus lines insurers are achieved through their freedom to set pricing and coverage terms; a high level of underwriting discipline and expertise; and increasingly effective risk management techniques. 


Overall the report showed that pretax operating earnings increased by a more normal 19.3% after an extraordinary 112.3% increase in 2006. The composite’s net investment income also increased notably, by 11%, again reaching its highest level in five years, after a substantial, 32.5% increase in 2006.

Solvency

For the fourth consecutive year, the surplus lines industry recorded no financial impairments in 2007, compared with four financial impairments for the admitted property/ casualty industry for the year. The total property/casualty industry’s 2007 impairment count and frequency rate, however, was the lowest recorded in at least 38 years. The exceptionally low impairment experience for both admitted and Nonadmitted companies is not likely to persist through the next few years, given the deteriorating economic and financial environments and increasing competition. 

Annual Study

The Special Report on the Surplus Lines Market,  commissioned by the Derek Hughes/NAPSLO Educational Foundation, is the 15th 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.

Copies of the report are available from NAPSLO at (816) 741-3910