Surplus Lines Industry Losing Its Edge?

The surplus lines industry continues to outperform the overall property/casualty industry but its advantage is not what it used to be.

According to the annual A.M. Best special report, the surplus lines industry generated an operating profit for 2010, but underwriting results worsened “appreciably,” driven primarily by catastrophe-related losses and higher loss totals for the lead “other liability” line of business.

Surplus lines insurers showed a greater profit in 2010 than the overall P/C market but the surplus lines industry’s advantage performance eroded in loss and combined ratios, and in total returns on both revenue and surplus.

“Although the surplus lines industry still outperforms the overall property/casualty industry in most measures, the gap continues to narrow,” the A.M. Best report said.

The 2011 U.S. Surplus Lines Market Review by A.M Best, and sponsored by the Derek Hughes/NAPSLO Educational Foundation, reported that the recession, competition from standard line insurers, and the prolonged soft market continued to affect the surplus lines industry in 2010, contributing to an unprecedented fourth year of declining premiums in 2010.

The group of 73 insurers reviewed for the report generated a $165.4 million net underwriting loss. That followed underwriting gains of $857.1 million and $785.2 million, respectively, in 2009 and 2008, according to A.M. Best.

The 2010 underwriting loss continues the trend of deteriorating underwriting that has been reported since 2007, despite at least $1.1 billion of net income in each of calendar years 2007-2010, the report said.

The surplus lines industry did not grow in 2010. While overall P/C direct premiums written remained static at about $481 billion in 2010, direct premiums written for the surplus lines industry declined in 2010 by 3.8 percent, from $32.9 billion to $31.7 billion, although that decline was slightly lower than the 4.1 percent decline from 2008 to 2009.

“The decline in surplus lines premium for the fourth consecutive year is unprecedented over the past two decades,” A.M. Best said.

A.M. Best bases its analysis on the statutory financial data of 73 U.S.-based domestic professional surplus lines (DPSL) companies, a composite that produced $12.7 billion in direct premiums written in calendar year 2010, representing approximately 58 percent of the total U.S. DPSL market. DPSL companies are those that write at least half of their business on a non-admitted basis. They historically have accounted for two-thirds to three-quarters of the total surplus lines market.

Other Findings

• The loss and loss adjustment expense ratio increased in 2010 to 71.0 from 65.4. Results in errors and omissions helped to push up the net loss ratio. Weather-related losses also had a decided impact on the net loss ratio. The composite’s loss was only slightly better than the 73.6 posted by the total P/C industry after several years when the spread between the two industries was wider.
• The composite calendar-year combined ratio had 7.4 points shaved off it by favorable prior-year loss-reserve development. The P/C industry had only 2.4 points shaved off its total ratio because of favorable prior-year development. A.M. Best said it does not believe the industry will be benefit from this strategy as much going forward because the cushion has been depleted.

New Leader

There is a new No. 1 in the rankings of surplus lines leaders. According to A.M. Best, Lloyd’s has taken over the lead from American International Group (AIG).

Direct premiums written slipped 13 percent from 2009 at AIG to $5.3 billion. Lloyd’s reported $5.8 billion. In terms of market share, Lloyd’s represents 18.3 percent and AIG, 16 percent.

While AIG may have shrunk slightly, it still produced more than four times the direct premiums written of the next highest U.S. group, Zurich Financial Services Group.

“Consistent with historical trends, the larger, more established groups continued to dominate the surplus lines market, with the 25 leading surplus lines groups accounting for approximately 74.0 percent of the total surplus lines direct premiums written, compared with more than 75.0 percent in 2009,” A.M. Best’s market review said.

Given the results thus far in 2011 — driven by an unusual number of catastrophes, the continued sluggish economy, and pricing levels — A.M. Best said it does not anticipate that 2011 final results will be an improvement over those of 2010.

Topics USA Profit Loss Excess Surplus Market AM Best Property Casualty AIG