Surplus Lines Results Remain Strong, Despite Heightened Competition

August 26, 2008

Surplus lines insurers continued to outperform the property/casualty industry in underwriting and operating performance in 2007, despite the softening market and more aggressive competition. Heightened competition along with the turbulent market, however, caused a slight deterioration in underwriting profitability that led to a decline in the industry’s net income.

The impact of the softening market caused an 8.7 percent drop in net premiums written in 2007 for professional surplus lines insurers. Absent a catastrophe that curtails the incursion of standard market insurers and the new offshore market, the surplus lines industry’s market share is expected to continue decreasing over the near term, according to a new report by A.M. Best, “U.S. Surplus Lines – 2007 Market Review.” The annual special report on the surplus lines market was made possible by a grant provided by the Derek Hughes/NAPSLO Educational Foundation. This is the 15th year the foundation sponsored the report.

“The underwriting and operating performance of surplus lines companies – domestic professional and domestic specialty – continued to outpace that of the total P/C industry in 2007. While direct premiums written (DPW) for surplus lines insurers, overall, decreased due to heightened competition, some of the top companies and groups in terms of DPW that specialize in surplus lines or specialty business still generated excellent underwriting results,” the report noted.

The top three surplus lines groups were unchanged from 2006: American International Group, Lloyd’s and Zurich Financial Service Group. Rounding out the top 10 surplus lines groups are: 4) Nationwide Group; 5) ACE INA Group; 6) W.R. Berkley Group; 7) Markel Corp. Group; 8) Alleghany Insurance Holdings; 9) Berkshire Hathaway Insurance Group; and 10) CNA Insurance Cos.

After-tax return on equity, which measures after-tax profitability from underwriting and investment activity, slipped slightly to a still solid 12.4 percent from 15.05 percent at year-end 2006.

“The accumulation of excess capital in combination with premium erosion, deteriorating underwriting results and intensifying competition caused the decline in profitability,” analysts wrote.

Other Findings
— Merger and acquisition activity has been high among surplus lines companies and distribution through midyear 2008, and is expected to continue over the near term.

— For the fourth consecutive year, in 2007, surplus lines recorded no financial impairments, compared with the four impairments for the admitted P/C industry.

— An interstate compact designed to solve the surplus lines industry’s multistate tax and compliance problems was finalized in 2008, as Congress considered the Nonadmitted and Reinsurance Reform Act (NRRA), also supported by the surplus lines industry.

Source: A.M. Best

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