A.M. Best says surplus lines is pretty much suffering the same fate as the rest of the industry. Its report Surplus Lines Continue to Overcome Market Pressures said for the second straight year underwriters saw just modest growth with premiums increasing just 2.8% for all of 2016.
An underwriting loss was also posted for the second straight year.
Not all is bad news. The good news is in pre-tax and net profits. The report also says the balance sheet — in bottom-line terms — was strong.
A.M. Best notes that direct written premium volume was “sluggish” because of exposure bases and increased competition. And that competition includes admitted companies competing for surplus lines business.
• Direct premiums — as noted earlier — rose 2.8% in 2016
• The jump in 2015 was 2.5%
• The 2016 rise — the report said — is driven by an 11% growth in non-admitted premiums written by Lloyds
Take away Lloyds and 2016’s figures are pretty minimal. This is especially true with the domestic professional surplus lines (DPSL) insurers. They normally write 50% — at least — of the business on a non-admitted basis. Historically they account for 2/3 to 3/4 of the surplus lines market.
When it comes to direct written premium (DPW), surplus lines grew by 6.7% in 2014 and topped the industry peak done in 2006. But things started to go sour in 2014 when a less than favorable net underwriting performance generated a combined ratio of 101 for the DPSL composite and exceeded the P&C combined ratio by three points.
In 2016 that gap grew to a full seven percentage points to 107.8.
A huge part of the problem — A.M. Best said — is due to the net results of the surplus lines’ largest insurer Lexington Insurance. It had a net combined ratio in 2016 of 130.8. Take it away and the combined ratio for everyone else is a bit over 91.
That would lead to a pretax operating profit of $1.2 billion on $2.2 billion of net income.
Take away Lexington and other things look good, too says A.M. Best. The DPSL companies generated $17.3 billion in direct written premiums in 2016. That’s 40.9% of the total surplus lines market. A.M. Best said these “solid results are due to effective strategic analysis, product diversification, underwriting discipline and an environment conducive to opportunistic mergers and acquisitions.”
In the end, the report said the surplus lines market is financially sound 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.”
Source link: Insurance Journal