Good Times in Surplus Lines

Wholesalers Thrive Amid Change

The surplus lines industry is letting the good times roll. Well, not exactly. But times are good and getting better for wholesalers and insurers doing business in the specialty insurance market, experts say.

That’s how Westrope, one of the nation’s largest wholesale firms, sees it.

“Quite honestly, it’s good to be us right now,” says Kevin Westrope, president and CEO of Westrope. “We – and I think most of my competitors who I have talked with – are all experiencing double-digit growth, year-over-year.”

According to Westrope, who also serves as the vice president of the National Association of Professional Surplus Lines Offices (NAPSLO), the annual convention serves as a barometer. At the time of this interview, Westrope and other members of NAPSLO were getting ready for their 2013 NAPSLO annual convention to be held Sept. 29-Oct. 3.

“For the annual convention, which is our biggest networking event of the year, all indications right now show record attendance, probably in excess or near 4,000 participants,” he says. “I think that’s a sign of a good market and great diversification in that market.”

Matt Nichols, president of All Risks Ltd., and current president of NAPLSO, agrees that the record attendance of NAPSLO’s premier event is one way to judge the health of the industry and the health of his association. But he says it’s always a good time for surplus lines.

“2013 maybe a little bit better than 2009 but I think 2009 was tough everywhere,” Nichols says. The tough times wholesalers experienced following the 2008 economic recession wasn’t surplus lines specific, or even insurance industry specific. “That was the entire country and much of the world facing challenges in 2008-2010. It’s always a good time to be in the surplus lines business.”

Bryan Sanders, executive vice president at Markel Wholesale and also a member of NAPSLO, predicts the prevailing attitude will be positive at this year’s convention.

“There is record attendance this year and that’s a sign typically that people are feeling pretty good about the E&S segment and the results so far this year,” Sanders says.

State of the Market

The good times wholesalers are experiencing are a manifestation of increasing rates almost across the board and the growing trend of new business flowing back into the surplus lines market, says David Blades, senior financial analyst at A.M. Best Co.

“We always talk about property catastrophe business based on the storms we’ve had the last couple years, and what that has brought about in terms of rate increases,” Blades says. “But on certain class of liability business, we’ve definitely seen rate increases as well.”

Rate increases in addition to some business returning to the non-admitted market from the standard market is driving the good-time momentum, he says.

“I think those two factors led to a definitive increase in direct premium that we definitely saw in 2012, that was different than the increases that we saw in 2011, where it was just some of the main carriers that pushed a little bit of the rate forward and led to somewhat of a premium increase, but not across the entire surplus lines market.”

After four years of declining premiums for the industry, domestic surplus lines insurers saw just a slight boost in direct premium written (DPW) for 2011 by 3.2 percent, according to the “2012 U.S. Surplus Lines Market Review” by A.M. Best, which is sponsored by the Derek Hughes/NAPSLO Educational Foundation.

However, the “2013 U.S. Surplus Lines Market Review” by A.M. Best will tell a much different story, Blades says, who also co-authors the report.

At press time, the 2013 report had yet to be published. However, Blades says the report will show the surplus lines market with a more noticeable jump premiums in 2012. “That increase will come in at just under 12 percent for the industry as a whole,” he says.

Catastrophe property losses did take their toll on overall surplus lines industry performance in 2012, Blades noted.

“One of the things that we saw from a performance standpoint is that the surplus lines market was affected definitively by property loss in 2012,” Blades says.

One of the more noteworthy results to be revealed in the 2013 A.M. Best report will be how the surplus lines industry in 2012 fared against the overall property/casualty industry, Blades says.

“For the most part, on a consistent basis, the surplus lines market has outperformed the overall total P/C market. What we saw in 2012 – and a lot of this was driven by the impact that catastrophe losses, and, in particular, Superstorm Sandy, had on surplus lines companies – was for the first time in recent memory, the loss and loss adjustment expense and combined ratios of the surplus lines market was actually higher than those of the total P/C markets.”

Catastrophe losses, especially those driven by Superstorm Sandy, had a big impact on the year-end 2012 performance metrics of the surplus lines market, Blades says.

“That’s one of the stories that will be highlighted in both the first two sections of our report,” he says. “You’ll see some of the performance metrics, and particularly on the underwriting side, that the surplus lines market for this one year was actually outperformed by the overall total P/C market. Again, a lot of that was driven by fourth quarter storm losses.”

Although it was beat by the overall P/C market in 2012, the surplus lines market in 2013 is once again back on track.

“The results that we’ve seen through the first half of this year – and again, we’re in September now, so we’re processing some of that data – I think you’ve seen things return to normal in terms of the performance,” Blades says. “We haven’t seen it in the first half (of 2013), some of the same issues that we saw particularly in the fourth quarter of last year (2012). So from a performance standpoint, the surplus lines market is back on track to produce the type of results that the market has produced in previous years.”

2013 and Beyond

According to Blades, there’s been some talk that the rate increases in and of themselves have moderated a bit as the industry heads to the end of 2013. “But I think, for whatever reason, it seems like that sort of phenomenon seems to happen during the second quarter, and for whatever reason, then maybe things pick up a little bit more in the second half.”

Whether rates will continue to climb at a moderate pace remains to be seen. But according to Westrope, the market is by no means softening. It’s not as hard as it was earlier in the year, Westrope says, but his company is up in every division.

“Everything from professional/executive liability, workers’ comp, transportation, primary and excess casualty as well as property … We are beginning to see just a little bit of stress in catastrophe driven accounts … that it isn’t unusual as we approach a year-end,” he says. “Particularly when we’ve come through a year … at least at this point – without any major hurricane damage and storms.”

Overall, Westrope sees the surplus lines market delivering profitable times in the coming year.

“The A.M. Best study that is coming out, I think, will show that we continue to have strong growth in the surplus lines market overall and project continued growth for the future,” Westrope says. “It also indicates that we’ve now gone nine years with no financially impaired companies in the industry, which I think is pretty impressive.”

Blades concurs with that assessment: “You’ll see continued momentum in terms of rate increases, and especially, in terms of more favorable terms and conditions playing out through mid-year and maybe even through the third quarter. I think companies are optimistic about what’s going to happen through the year-end as well.

Topics Excess Surplus Property Market AM Best Property Casualty