Lexington’s Johnson on U.S. Surplus Lines

The surplus lines industry experienced tough times in 2012. But that hasn’t been the story for 2013, says Jeremy Johnson, president of Lexington Insurance Co., a unit of AIG. In this interview with Insurance Journal‘s Andrea Wells, Johnson says an uptick in the U.S. economy, a positive property/casualty rate environment and strong industry surplus for U.S. insurers is leading to an improving bottom line.

To watch the full video interview with Johnson, visit: http://www.insurance
journal.tv/videos/10614.

Insurance Journal: 2012 was the first year in quite a while that the surplus lines industry didn’t outperform the overall property/casualty market. But it seems like things are turning around in 2013.

Jeremy Johnson: 2012 was a tough year. Superstorm Sandy had a really profound impact on the results. That was particularly impactful on the E&S (excess and surplus) industry, which, for the first time in 10 years, underperformed the P/C composite. When I look at 2013, so far it’s been a relatively benign year from a CAT perspective. Assuming that we don’t have any events between now and the end of the year, it’ll be a good year. We’ll see a return to that historic outperformance. … When you underwrite to volatility, you have to have a lot of capital. If you have a lot of capital supporting the business, you’ve got to underwrite to a really good return in order to cover the cost of that capital.

IJ: Let’s talk about rates and premium growth. Premium grew pretty much across the board in 2012. In your experience, how does this market cycle differ from others in the past?

Johnson: I would say that all market cycles are different. In my career, every market cycle has been precipitated by a different cause and had a different duration and a different resolution, if you like. This market cycle is certainly being driven by low interest rates. When you have the low interest rate environment that we have today, you’ve really got to underwrite to a really aggressive loss ratio in order to support the capital that you have in the business and to provide a return on that capital.

It is interesting. The industry is very well-capitalized. It’s at record highs of over $600 billion of surplus. To a certain extent, supply outweighs demand. The ratio of net written premium to surplus is at an historic low, about 0.77.

You might think that the pricing will be going down with that supply outweighing demand, but it’s not. We’re not seeing foolish pricing.

Again, that’s very much driven by that low interest rate environment and by a real focus on underwriting discipline in order to achieve a risk-adjusted return on capital.

IJ: What are the key drivers of growth in the industry today?

Johnson: We are seeing growth in the E&S segment. It’s really fueled by three factors. First of all, we are still seeing business … In fact, we’re seeing, at an increasing rate, business move from the admitted market into the E&S market.

We’re seeing a gradual uptick in the U.S. economy, and especially in some of those bellwether industries that are good for E&S: construction, transportation, energy. The rate environment is still quite positive. That contributes to a top line growth. It also contributes to an improving bottom line.

IJ: Lexington is known for product innovation. Are there any areas of emerging risk that you have your eye on today?

Johnson: You could say fairly that AIG has really been a virtual fountain of new products and new markets. I think back over the last 30 years, and I think about D&O (directors and officers liability), employment practice liability, environmental liability, kidnap and ransom, and cyber liability. We really led the creation of those products, and, to a large extent, we led the creation of those markets.

If we’re putting ourselves in the position of the customer and trying to anticipate what the customer’s needs are going to be in the future, we have to think about what the economy’s going to look like in the future.

The thought leaders that we speak with and the economists that we speak with would very much guide us to think about the American economy as moving into a knowledge economy.

The industries that are going to drive that knowledge economy are industries such as the aerospace business, genomics, nanotechnology, bioinformatics, robotics. Those are the industries we’re focused on.

IJ: Lastly, what sets your company apart from others in the industry?

Johnson: I would say that it’s specialization. It’s commitment. It’s our people. It’s our focus on innovation. It’s our focus on understanding what our customers need and responding to those needs with the best products that can be provided in the industry. It’s a focus on hiring the best talent, developing the best talent, and providing the best career paths for people.