State of the Market: Surplus Lines Bounces Back

The surplus lines industry showed its subpar showing in 2012 was uncharacteristic as it outperformed the overall property/casualty industry once again in 2013. While 2013 was a good year all-round for the P/C industry, it was an even better year for surplus lines writers.

Surplus lines insurers posted one of their worst years overall in 2012 as their underwriting performance fell below that of the total property/casualty (P/C) industry for the first time in more than a decade. Superstorm Sandy had a lot to do with that.

But 2013 saw those fortunes reversed, according to David Blades, senior financial analyst at A.M. Best Co. and co-author of the annual “U.S. Surplus Lines Market Review.”

“2013 definitely was a tremendous bounce-back to more historical or traditional results for the surplus lines market,” Blades said.

Indeed, 2013 was “pretty much a bumper year for the leading surplus lines groups,” Blades said.

In 2013, surplus lines writers posted a 92.4 combined ratio, while the overall P/C industry’s was a 95.8.

Also, the surplus lines industry doubled its net income in 2013 over 2012.

According to Blades, while the surplus lines market normally achieves solid increases in net income, the 2013 numbers show just how much of an anomaly 2012 was, albeit an anomaly that the surplus lines industry is born to play out in times of volatility.

“Overall there was a definite return to underwriting profitability,” he said.

Double Digits

The “2013 U.S. Surplus Lines Market Review” had yet to be published by A.M. Best at press time, but A.M. Best and Blades gave Insurance Journal a preliminary peak into the rankings showing that 19 of the top 25 U.S. surplus lines groups grew by more than 10 percent in 2013.

Lloyd’s remained the leading U.S. surplus lines group, with AIG coming in second, according to Blades.

Lloyd’s and AIG continue to lead U.S. surplus lines groups. Combining Lloyd’s and AIG is still about 30 percent of the overall direct premium written in the surplus lines market, Blades said.

Overall, the top 25 U.S. surplus lines groups produce about 75 percent of the direct premium written. While many of the top leaders in this group remain the same, Blades said there was some movement in 2013.

Berkshire Hathaway showed almost 39 percent growth in direct premium written in surplus lines business in 2013, jumping up to 14th from 20th. “That was probably the most market jump that we have seen,” Blades said.

Blades said that even within the top 10 U.S. surplus lines groups there was some movement.

W.R. Berkley, which has always been a top 10 surplus lines organization, passed Zurich and moved up from fifth to fourth in the A.M. Best top 10.

The acquisition of Alterra helped Markel move up from the number eight spot to the number six spot in 2013 based on direct premium written, he said.

Overall, Blades said a number of surplus lines groups that were already part of the top 25 moved up a little in the ranking for one reason or another.

“Whether it’s an acquisition of another surplus lines organization or the acquisition of a team,” premiums moved up, he said.

“For the most part because of the growth that you saw in the surplus lines market in 2013, most of that top 10 and that of the top 25 all saw their premiums going up, and a large number of them actually saw double-digits percentage increase in terms of their direct premium written in 2013,” Blades said.

He said that among the top 10, AIG and QBE were the only two groups that actually had declines in direct premium written in 2013.

AIG faced challenges with the loss of some key employees to Berkshire Hathaway, while QBE decided to quit certain lines of business, Blades said.

“[QBE] had, in the previous year, used acquisitions to grow, and to move into a more prominent place within the top 10 of the surplus lines groups. But looking at some of that business, they made some decisions to get off certain lines of underperforming business. They actually saw their premium go down by a little over a 20 percent,” Blades said.

Rate Moderation

The surplus lines rate environment showed improvement in 2013 for at least part of the year, according to Kenneth Monahan, financial analyst for A.M. Best Co., who co-writes the annual state of the market report.

“The rate environment continued to improve in 2013, however it started to moderate toward the end of 2013 and through the first half of 2014,” Monahan said. “Rates are getting to the point where changes are going to be incremental, more or less.”

Rates climbed after Superstorm Sandy in 2012, but now with some excess capacity in the market, rate increases are moderating, he said.

The rate moderation has to do with the capacity in the marketplace, according to Blades. There’s a lot of interest in surplus lines and more companies that are headquartered outside of the U.S. are looking to get in and get a piece of the surplus lines market, he said. “That interest has sparked some of the capacity and I think that’s held the rates down to a moderating perspective,” he said.

According to Monahan, given the continuing trend of low interest rates, which creates a challenging investment environment for surplus lines insurers, even incremental rate increases will be very important going forward. “There’s no vehicle for these companies to invest in to get any type of investment returns,” he said. Profitability needs to come from somewhere, he said, and adequate rates are where it needs to be.

Blades said that the hallmark of the most successful surplus lines companies has been their commitment to adequate pricing and underwriting integrity. “That’s something that you’re going to continue to see be consistent in surplus lines.”

It’s one of the key reasons surplus lines once again outperformed the overall P/C market.