Surplus lines insurers in 2012 posted one of their worst years overall as their underwriting performance fell below that of the total property/casualty (P/C) industry for the first time in more than a decade.
Much of the blame for these results can be pinned on Superstorm Sandy, which pummeled New York and New Jersey on Oct. 29, 2012, according to A.M. Best in its latest report.
“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 were actually higher than those of the total P/C markets,” said David Blades, senior financial analyst and co-author of the “U.S. Surplus Lines Market Review,” which covers the current state of U.S. domestic professional and domestic specialty surplus lines companies.
“If you were to look at the results by state, you would see that the surplus lines market had very tough results in the New York and New Jersey areas particularly,” Blades said.
A.M. Best said latest estimates place insured losses from Sandy near $25 billion. While A.M. Best said it is not clear how much of this insured loss the surplus lines market will absorb, these insurers’ fourth-quarter loss ratio surged nearly 12 points, to 64.8 from 52.9, indicating that surplus lines were not spared.
A.M. Best’s groups of domestic professional surplus lines carriers experienced a downturn in profitability in 2012, causing pretax operating income to decline 24.3 percent and net income to drop 10.2 percent.
The surplus lines carriers’ net income, however, was still sizable at $1.57 billion, compared to $1.75 billion in 2011.
In 2012, while catastrophe losses hurt, the surplus lines sector helped itself with premium increases.
Total surplus lines direct premiums written (DPW) jumped 11.8 percent in 2012 from $31.1 billion in 2011 to $34.8 billion in 2012. This compares to the total P/C industry, which experienced a rise in premiums of just 4.3 percent in 2012. (Total P/C DPW was $523.4 billion in 2012 compared to $501.6 billion in 2011.)
“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 told Insurance Journal. “But on certain class of liability business, we’ve definitely seen rate increases as well.”
Rate increases, along with some business returning to the non-admitted market from the standard market, are driving momentum in the surplus lines market, he said.
“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,” Blades said.
Aside from 2012, surplus lines companies have typically outperformed the overall property/casualty industry. The surplus lines industry’s five- and 10-year combined ratios were 100.3 and 92.9, respectively, compared with 103.9 and 100.8 for the P/C industry.
There is an area where surplus lines still outperformed in 2o12. In 2012, for the ninth year in a row, the surplus lines industry reported no financially impaired companies. Meanwhile, the admitted P/C industry disclosed 21 financial impairments in 2012.
While some of the large, standard market insurers historically have dominated commercial lines premium and continue to do so, surplus lines insurers have made inroads, now accounting for approximately 13.4 percent of all commercial lines direct premiums written, up from 11.1 percent a decade earlier and equal to the share recorded five years ago.
A.M. Best believes this trend is likely to continue, as more borderline surplus lines business will be shifted into the surplus lines sector amid improving market conditions and changing risk appetites for standard market insurers.
2013 Results
A.M. Best believes that given the recent overall uptick in rates, as well as the relative lack of natural catastrophe-related losses in the first half of 2013, the surplus lines market is on track to produce an underwriting profit in 2013.
“The results that we’ve seen through the first half of this year — and again, we’re at 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 said. “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.”
However, in last year’s surplus lines report released prior to Sandy, A.M. Best said the surplus lines market appeared to have a good chance at producing better underwriting results in 2012 than it did in 2011 thanks to the decrease in catastrophe losses through mid-June 2012 and rate increases on certain lines of coverage this year. Those two trends were generating “guarded optimism amongst surplus lines insurers,” last year’s report said.
Top Surplus Lines Markets
Lloyd’s again ranks as the top writer of U.S. surplus lines business by direct premiums written. Lloyd’s holds 18 percent of the U.S. surplus lines market writing $6.3 billion in premiums.
“Lloyd’s was, again, number one in 2012, so they kept somewhat of an advantage over AIG,” Blades told Insurance Journal.
In fact, there has not been much change in the top rankings.
“For the most part, especially in the top six rated groups, it’s been pretty much the same,” Blades said. One notable mention in this year’s report is the rise of QBE North America Group, which moved up about four spots from 10th place in 2011 to 6th place in 2012, he said.
That’s largely due to growth through acquisitions. “The North American Group of QBE has really focused on and has really pushed to grow their market share, and that manifested itself in 2012,” Blades said.
“It was really not so much what happened in 2012, but the manifestation of more of the premiums from acquisitions that had been completed in 2011 or beforehand, coming onto their books and pushing their premium up to the point where they moved up four spaces in the top 10 in 2012. I think that would probably be the biggest mover amongst the top 10 group.”
Another notable mention, according to Blades, is Great American P/C Group, which moved back up into the top 25 groups from landing just outside of the top 25 in 2011. They moved up to the 24th spot from 28th.
Catlin is another group that has continued to inch up in the top surplus lines groups, coming in at 25.
“We’ve seen a lot of groups with Bermuda parents, or with overseas parents that are emphasizing or showing interest in allocating resources to the U.S. surplus lines market, and Catlin was one of those that continued inching up,” Blades said.
Topics Carriers USA Profit Loss Excess Surplus Market AM Best Property Casualty
Was this article valuable?
Here are more articles you may enjoy.
Jury Awards $80M to 3 Former Zurich NA Employees for Wrongful Termination 
Progressive Gains as Drivers Shop Around for Auto Insurance—Again 
FBI Says Chinese Hackers Preparing to Attack US Infrastructure 
North Carolina Adjuster and Son Charged With Embezzlement in Roof Jobs 
