Best Special Report: Surplus Lines Continue to Overcome Market Pressures

OLDWICK, N.J.--()--For a second consecutive year, underwriters of surplus lines in the United States generated just modest growth in direct premium of 2.8% in 2016, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Surplus Lines Continue to Overcome Market Pressures,” notes direct premium volume was constrained by sluggish growth in industry sectors that affected exposure bases and by increasing competitive pressure, including admitted companies competing for surplus lines business. Surplus lines writers also posted an underwriting loss for a second straight year, but were still able to generate both pre-tax and net profits and maintain solid balance sheet strength.

Direct premium remains a key metric for identifying companies actively competing in the market, as it captures the impact of rate increases and writing new business. The modest growth in direct premium in 2016, which followed a 2.5% growth rate in 2015, was driven by 11% growth in non-admitted premium written by Lloyd’s, which generated the largest percentage of direct premium volume of U.S. surplus lines business. Top line growth excluding Lloyd’s was minimal, especially among the domestic professional surplus lines (DPSL) insurers, which write more than 50% of their business on a non-admitted basis, and historically, have accounted for two-thirds to three-quarters of the total surplus lines market.

In 2015, a less favorable net underwriting performance resulted in a combined ratio of 101% for the DPSL composite, exceeding the P/C industry’s combined ratio by about three percentage points. In 2016, the gap grew to a full seven percentage points as the DPSL composite posted a combined ratio of 107.8, its highest in 10 years (with the exception of 2012, owing to the impact of Superstorm Sandy). However, the composite’s bottom-line results were notably affected by the net results of the sector’s largest single insurer, Lexington Insurance Company, which reported a net combined ratio of 130.8 in 2016. Excluding the impact of Lexington’s results, the DPSL composite would have recorded a combined ratio of just over 91%.

Despite the underwriting loss, the DPSL composite’s overall operating results benefited from relatively steady net investment income of $1.9 billion, leading to a pretax operating profit of $1.2 billion and $2.2 billion in net income. The companies in the DPSL composite also generated approximately $17.3 billion in direct premiums written in calendar-year 2016, accounting for approximately 40.9% of the total surplus lines market. These solid results are due to effective strategic analysis, product diversification, underwriting discipline and an environment conducive to opportunistic mergers and acquisitions.

A.M. Best believes the surplus lines market is financially sound at present and should remain solid for the foreseeable future; however, competitive market pressures appear to be escalating, making it more difficult for companies that lack the necessary scale, diversification or brand recognition to excel.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=265317.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Robert Raber, +1 908-439-2200, ext. 5696
Senior Financial Analyst
robert.raber@ambest.com
or
David Blades, CPCU, +1 908-439-2200, ext. 5422
Senior Industry Analyst
Industry Research & Analytics
david.blades@ambest.com
or
Christopher Sharkey, +1 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1 908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Robert Raber, +1 908-439-2200, ext. 5696
Senior Financial Analyst
robert.raber@ambest.com
or
David Blades, CPCU, +1 908-439-2200, ext. 5422
Senior Industry Analyst
Industry Research & Analytics
david.blades@ambest.com
or
Christopher Sharkey, +1 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1 908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com