US surplus lines premium topped $55bn in 2019 as momentum continues: AM Best

Rate increases and business flow from the admitted market drove E&S premium to a record high last year as US domestic writers grew faster than Lloyd’s, while there are positive signs that the segment’s top line momentum has survived the Covid-19 blip, according to AM Best.

Direct written premium broke (DPW) the $50bn barrier for the first time, coming in at $55.5bn for 2019.

There were also improved underwriting results – at least for AM Best’s surplus lines composite of US-based companies that focus on non-admitted or E&S business – that got closer to break-even for the overall market, said the ratings agency.

But the ratings agency warned that the impact of Covid-19, with shrinking underwriting cash flow, potential increases in claims frequency and severity tied to risks exacerbated by the pandemic, as well as challenging investment market conditions, “will leave some insurers fighting an uphill battle”.

In its annual state of the market report on the sector, the ratings agency said that direct written premium (DWP) growth in the surplus lines market was 11.2 percent in 2019 – in line with the growth rate in 2018, when growth surged from 5.8 percent in 2017.

The strong top line growth means that surplus lines DWP as a percentage of the overall US commercial insurance sector increased to 16.1 percent at the end of 2019 – above the 13 to 15 percent range seen in the years since 2002.

US domestic professional surplus lines companies grew DWP by more than 14 percent in the aggregate last year, up from 7.5 percent in 2018. Lloyd’s top line growth rate slowed significantly from 13.8 percent in 2018 to 6.1 percent in 2019.

AM Best described the growth at Lloyd’s – which has accounted for more than 20 percent of total surplus lines premium since 2014 – as “particularly impressive”, however, given the “strong remedial actions” taken by the performance management directorate to help improve operating performance.

“The impact of any decisions by syndicates to cull their portfolios of poorly performing classes of business has not stemmed the growth and expansion of Lloyd’s market share of US surplus lines business,” said the report.

The agency also noted that Lloyd’s made the strategic decision earlier this year to focus even more on the US surplus lines and reinsurance business.

Top line clears Covid hurdle

In the report, AM Best highlighted the impact of the broadly hardening US commercial insurance market that saw rate increases accelerate in 2019, except in workers compensation.

“As a result, the market offers surplus lines insurers opportunities to design coverage solutions at more adequate prices because incumbent carriers, many of them standard market insurers, were looking for either sizable price increases or to non-renew.

“Many of these risks, even those with recent adverse loss history, could be underwritten profitably but doing so would require the price and policy form flexibility and specialized underwriting of surplus lines insurers. Such opportunities helped the composite grow its top line premium revenue,” said the report.

And the ratings agency said that, despite concerns over underwriting cash flow and increases in claims frequency and severity tied to Covid-19, there are optimistic signs that the surplus lines top line growth momentum will continue through 2020.

The report noted that data collected from surplus lines stamping and service offices through mid-year 2020 indicates an increase of 10.3 percent in surplus lines premium in the first half of the year compared to the prior-year period.

While submission flow moderated in March, the phenomenon proved temporary.

“Surplus lines companies have shared with AM Best analysts that quote opportunities they reported heading into 2020 remain elevated despite the temporary dip.

“Even with troubled coverage lines still bearing higher average rates and more conservative pricing, surplus lines companies have been able to continue growing premium through the second quarter into the second half of the year,” said AM Best.

Combined ratio improves in 2019

AM Best’s composite of domestic professional surplus lines insurers - which includes those that write more than 50 percent of their business on a non-admitted basis - recorded a combined ratio of 99.4 in 2019, which was a 5.1-percentage-point improvement over 2018.

An improvement in the composite’s annual loss ratio reflected the positive impact of recent average pricing increases in most lines, along with lower catastrophe losses in 2019.

“As the market moves forward in the second half of 2020, slowdowns in the P/C industry, and specifically the surplus lines market, due to Covid-19 may be offset somewhat by unique accounts requiring more creative underwriting solutions – particularly nowadays, when companies are re-assessing their risk appetite”

AM Best

The surplus lines market has been more profitable than the overall property casualty industry historically, with a pure direct loss ratio average of 58.2 percent versus 61.1 percent. AM Best noted that excluding AIG the difference in favour of the composite is much starker, with a 52.8 five-year average loss ratio.

For 2020, AM Best expects a range of Covid-19 loss estimates for the second quarter, but noted this could be partially offset by the positive rate environment and lower loss frequency for some lines such as private passenger auto and commercial auto in light of shelter-in-place restrictions.

Claims handling has also slowed for some insurers down due partly to courts operating at limited capacity and other legal system inefficiencies related to Covid-19, AM Best said.

“As the market moves forward in the second half of 2020, slowdowns in the P/C industry, and specifically the surplus lines market, due to Covid-19 may be offset somewhat by unique accounts requiring more creative underwriting solutions – particularly nowadays, when companies are re-assessing their risk appetite,” the report said.

“Nonetheless, the pandemic may very well add further complexity to the market dislocation. Many market observers expect this dislocation to continue to affect the market in 2021.”

AM Best said prudent carriers are talking about being more conservative with reserves and recording additional IBNR in the first and second quarters of 2020 to account for any uncertainties related to Covid-19.

Catching up to AIG

AIG’s strategic reshaping into a leaner operation has allowed other surplus lines writers closer to it in terms of premium volume.

The gap between AIG, with $2.95bn DPW, and Markel in second place with $2.75bn, tightened a little in 2019. This was despite AIG’s acquisition of reinsurer and specialty insurer Validus Holdings in mid-July 2018, which gave it a Lloyd’s arm in Talbot and a specialty/ surplus lines insurer in Western World, which wrote about $514mn in US surplus lines premium in 2019.

The companies making up the top ten surplus lines groups by DPW in 2019 remained the same from 2018, although the ranking changed slightly.

Berkshire Hathaway, WR Berkley, and Nationwide rounded out the top five. Notable growth for Fairfax Financial’s companies writing surplus lines business moved it to sixth place from eighth in 2018, ahead of Chubb and Axa.

“Consolidations during the past few years have helped cement the status of each of these companies in the top 10 writers of surplus lines DPW via additional distribution platforms, geographic or product line diversification, or the addition of highly developed data analytics capabilities,” the report noted.

The Lloyd’s market and AIG have historically accounted for more than 30 percent of the surplus lines market’s DPW. But AIG’s smaller, more focused portfolio in recent years meant that percentage dropped to just under 28 percent in 2019.