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The surplus lines industry broke records in 2014, growing direct premium written (DPW) in 2014 to $40.2 billion — the highest point in history, reports A.M. Best’s “2014 Special Report U.S. Surplus Lines – Segment Review.”

Surplus lines insurers grew DPW by 6.7 percent in 2014, exceeding the industry’s previous peak in direct written premium in 2006.

And the first half of 2015 appears to be on track to mark another record-breaking year for surplus lines.

According to the Surplus Lines Stamping Office of Texas more than $13 billion in premium was collected by surplus lines professionals during the first half of 2015 in the 14 states with U.S. stamping offices. That growth reflects a 9.5 percent uptick over the nearly $12 billion in premium processed during the first half of 2014.

Even more impressive, according to Benjamin J. McKay, executive director of the Surplus Line Association of California, is the growth of the industry during the past four years.

McKay said the industry has seen a 27 percent increase between 2010 and 2014 and his state of California saw about a 40 percent increase in DPW during that time. “The sector has grown dramatically for the past four years and that has driven the influx of new capital and all of the positives and negatives that come along with that,” he said.

The continued growth of surplus lines insurers doesn’t appear to be hurting their stability either.

A.M. Best reports that for the 11th year in a row, the surplus lines industry reported no financially impaired companies. That’s in contrast to the admitted property/casualty industry’s 12 known financial impairments in 2014, the rating agency said.

The combined ratio average for surplus lines specialists held strong at 91.4 for 2014 compared to 97.2 for total P/C industry in 2014, A.M. Best reported.

In general, the market position of surplus lines insurers continues to be described in favorable terms such as profitable, stable, well-capitalized and consistent performers, and A.M. Best’s outlook on the surplus lines insurance market remains stable.

The year 2014 continued the pattern of growth and favorable results, according to Henry Witmer, assistant vice president at A.M. Best Co. “2014 was a continuation of 2013 results after a couple of more difficult years,” Witmer told Å˽ðÁ«´«Ã½Ó³»­ Journal. “In 2012 we had Superstorm Sandy and other issues, but 2014 looks pretty good and in line with 2013 results.”

According to the report, results were driven by a combination of product diversification, underwriting discipline, and advantageous market conditions.

It all adds up to an enviable streak: “As a result, surplus lines companies continue to outperform the overall property/casualty industry and recorded a second straight year of underwriting profitability following three years of underwriting losses,” A.M. Best says.

“The A.M. best study presents some very positive news about the state of the market, A.M. Best’s outlook on the industry and the growth in 2013 and 2014 in terms of direct written premium,” said Brady Kelley, executive director of the National Association of Surplus Lines Offices (NAPSLO). “Surplus lines premium reached its all-time high in 2014 and that’s pretty noteworthy. The market hasn’t been that high since 2006 and all signs indicate that it’s continuing to grow. That’s a positive trend.”

Today’s Surplus Lines Market

In a webinar held on Wednesday to discuss the A.M. Best report and today’s surplus lines market, Jacqueline Schaendorf, president and COO of Å˽ðÁ«´«Ã½Ó³»­ House based in Atlanta, Ga., said that profit in addition to growth has always been the cornerstone of the E&S industry. That’s one reason why competition remains fierce in the market today.

“In the last seven out of 10 years this section of the industry has been profitable,” Schaendorf said. “What that does, especially with growth, is attract new competitors and we are certainly seeing that with private equity. We are seeing more capital coming into the marketplace … into an industry that’s already well capitalized.” That capital continues to put pressure on pricing.

Marya Propis, head of distribution for Lexington Å˽ðÁ«´«Ã½Ó³»­ and AIG U.S. and Canadian property group, agreed.

“We are seeing lot of competition, both in terms of the number of players and in pressure on rates,” Propis said.

Propis said some signs of some adverse loss development are showing in the more traditional E&S commercial property line. That adverse loss development, combined with the low interest rate environment, Lexington hopes to see stability but that’s the more traditional commercial property E&S market.

Another area where commercial property excels in E&S is what Propis called the differentiated E&S segment.

“That’s where we are seeing more interesting dynamics play out in the E&S space,” she said. “That differentiated segment is very dynamic and evolving and changing quickly,” she said. Today’s access to data and analytics has helped drive positive results by improving the risk profiles of many clients, she said.

Lessons-learned from past catastrophes is another reason for profitability in E&S.

“We’ve created a culture of learning; something the E&S industry does really well,” she added. Learning post-loss helps commercial property clients create new best practices going forward.

Technology contributes a great deal to the success of the E&S industry, said Robert Sargent, president of Tennant Risk Services.

“Technology is impacting our business a fair amount, with both efficiency and delivery of products as well as in service,” Sargent said. But it’s also creating opportunity with retail agents, he added, helping to drive new business.

Much of that growth stems from innovation, the hallmark of E&S professionals.

“What’s hard to figure out is what part of that growth is driven by movement (from standard markets to E&S markets) or new types of risks like cyber,” Sargent said. “My perspective is that a lot the growth (in surplus lines) is coming from the innovative side.”

The A.M. Best report revealed that over its 21-year history of the report, the surplus lines market has more than doubled from 3.3 percent of total property/casualty direct premiums written in 1994 to approximately 7.1 percent by the end of 2014. When looking at just commercial lines direct written premium, the growth as a percentage has jumped from 6.1 percent in 1994 to 13.9 percent in 2014.

Top Writers

The top position among surplus lines groups in terms of DPW has in recent years been held by Lloyd’s.

The growth in premium written by Lloyd’s and the increase in the Lloyd’s share of the surplus lines market is a trend that began many years ago, A.M. Best said in its report.

“The United States continues to be Lloyd’s biggest market, with surplus lines and reinsurance activities generating the majority of Lloyd’s U.S. sourced revenues,” the report revealed. “With roughly $8.2 billion in DPW in 2014, Lloyd’s represents approximately 20.3 percent of the surplus lines market.”

Among domestic groups, the largest writer of surplus lines DPW remains AIG, primarily through Lexington Å˽ðÁ«´«Ã½Ó³»­ Co.

“Its direct written premium levels remain near $5.0 billion, a consistent amount over the last five years and reflective of its strengths in the market,” A.M. Best noted.

The combined DPW generated by both Lloyd’s and AIG is close to 32 percent of the total U.S. surplus lines market.

Nationwide Group ($1.8 billion, 4.4 percent of market); W.R. Berkley Group ($1.5 billion, 3.7 percent of market); and Zurich Financial Services NA Group ($1.2 billion, 3.0 percent of market) round out the top five U.S. surplus lines groups in 2014.

Related:

• Top 30 U.S. Excess & Surplus Lines Writers in 2014: SNL
• Louisiana to Withdraw from Multi-State Surplus Lines Clearinghouse
• States Still Grappling with Surplus Lines Tax Sharing
• Surplus Lines Rate Hikes to Slow As Competition Grows

Topics USA Excess Surplus AM Best Market Property Lloyd's Property Casualty