Lloyd's: Loyalty To U.S. E&S Market Undiminished

By Susanne Sclafane

NU Online News Service, Sept. 17, 11:49 a.m.EDT?-With $4 billion of direct premiums, Lloyd's of Londonstill had a commanding presence and a hefty share of the $25.6billion U.S. surplus lines mar-ket in 2002, according to a reportby A.M. Best released at this year's NAPSLO meeting last week.

At that same session, a Lloyd's executive noted that, whilelagging behind some competitors, Lloyd's is a consistently strongperformer. He also rejected any suggestion that prices in thesurplus market are softening.

The Best report found that American International Group had shotpast Lloyd's to reclaim its position on the top of a list of 25E&S carriers, with Zurich in third place and that the growthpercentage of Lloyd's premiums between 2001 and 2002 is laggingbehind the competition.

A comparison of figures in the most recent A.M. Best report witha similar one published last year indicates that direct premiumswritten by the Lloyd's market for U.S. E&S business grew 21percent from 2001 to 2002. Over the same period, E&S premiumswritten by AIG's Lexington jumped 72 percent to $3.6 billion andAmerican International Specialty Lines' premiums more than tripled,rising to $2.4 billion.

At $6 billion, overall, AIG's premium total eclipsed the Lloyd'stotal by nearly $2 billion, the report showed. E&S premiums forthird-ranked Zurich Group leaped 75 percent.

But while the 21 percent Lloyd's growth figure is also below its35 percent growth in 2001, its commit-ment is unwavering, accordingto Lloyd's executives.

In an address here at the annual convention of the Kansas City,Mo.-based National Association of Professional Surplus LinesOffices, Chairman Lord Levene said: "We are the second-largestunder-writer of surplus lines business in this country, with amarket share of 16 percent. That's a tremendous achievement forwhat your regulatory system labels ?an alien insurer.'"

Prior to Lord Levene's address, Julian James, director ofworldwide markets at Lloyd's, told National Underwriterthat the figures in the A.M. Best report for Lloyd's revealed a"consistency" in its commit-ment to the U.S. E&S marketplace.Indeed, figures in Best report dating back to 1988 show thatLloyd's market share has been in range, extending from themid-teens to low-20s each year.

"Frankly, I was amazed to see some of the other numbers in thereport," Mr. James responded when asked about the relativedifferences between the premium growth for Lloyd's and some topcompetitors.

Kevin Kelley, chief executive officer of Boston-based Lexington,pointed to the affiliation with AIG as a key reason for hiscompany's substantial jump in volume. "We just have superior accessto the business," he said, pointing out that a vast distributionnetwork means that Lexington has sources of U.S. surplus linesbusiness everywhere. "We're in London. We're in Bermuda. And we'rein the United States," he said.

Mr. James did point out that Lloyd's underwriters have beenlooking more closely at relationships with coverholders (who placeU.S. surplus lines business for underwriters) and that the numberof cover-holder relationships has shown some decline. At the sametime, he said, the volume of business placed among thosecoverholders has increased, he said.

While Mr. James said that the terms coverholder and bindingauthority are used almost inter-changeably, some people make thedistinction between those surplus lines brokers who can issueperform rating and issue documentation?the binding authorities?andcoverholders. Coverholders, he said, operate on behalf Lloyd'sunderwriters, while the rating is done by the Lloyd's underwritersthemselves.

Mr. James described a marketwide effort to improve the qualityof relationships between coverhold-ers, binding authorities andLloyd's underwriters. There has been a process of "weeding out"some coverholders in situations where the relationships haven'tproved to be as strong as the underwriters would have liked.

"This is all in keeping with the overall drive in the [Lloyd's]market to improve standards," he said.

In spite of strides the Lloyd's market has made, when asked whatissues keep him up at night, he responded in the same vein as hisU.S. counterparts at the meeting.

"We're still living in a very, very risky world," he said.Taking note of the advancing threat of Hurricane Isabel, hecommented, "We, as an industry, are only one event away fromserious problems. And frankly, I'm annoyed at all the soft marketcommentary that's being talked about," he added.

"Some people seem to have forgotten that this industry lost $50billion in the space of six hours two years ago," he said,referring to the events of Sept. 11, 2001, and suggesting that theindustry could not withstand a second similar event.

Mr. James said that one can "easily make the case" that theindustry needs to go through a period of sustained profitability."We shouldn't be embarrassed that we want to make returns for ourshareholders," he said.

When asked to contrast the talk of a softening market reportedon in the trade press with the reality he experiences when dealingwith underwriters in London and at NAPSLO, he said, "I have yet tofind one underwriter at Lloyd's or outside that is prepared toadmit that they're reducing prices. They con-sistently say much thesame--that the talk of prices softening is just not happening."

Mr. James said he is "optimistic" that discipline will persistin the market. "But we all need to keep our heads," he said.AtLloyd's, he said, current activity is devoted to the planning cyclefor 2004, and the leaders are fix-ated on one goal?making anunderwriting profit. Neither Lord Levene nor Lloyd's CEO NickPrette-john are worried about the size of the market, he said.

A comparison of this year's A.M. Best report with two priorreports reveals the following noteworthy additions, omissions, andmovements:

? Zurich Group, which ranked sixth two years ago, based on 2000E&S premium writings, maintained its third place spot for thesecond year.

? ACE INA Group jumped from a 16th-place ranking two years agoto eighth last year, and seventh this year.

? New players among the top 25 included Bermuda-based ArchCapital, the IFG Companies (including Burlington Insurance) and HCCInsurance Holdings.

? Allianz Group (Fireman's Fund), Swiss Re Group, and PMA Group,which ranked 16th, 20th, and 22nd, respectively, in last year'sreport, are no longer among the top 25.

While it's interesting to see who ranks where in terms ofpremium volume, the main thrust of the A.M. Best report--as it hasbeen for nine prior years?is to compare the financial strength ofthe E&S mar-ket with the rest of the p-c industry. In thatvein, Best concluded that a composite of surplus lines in-surershad a higher average rating?an "A" rating--than the p-c industry intotal, which has a median rating of "A-minus."

The report also noted that the combined ratio for a composite of62 domestic surplus lines insurers has been 10 points better thanthe overall industry, on average, over the last five years.

Since 1973, Best also reports that surplus lines companies'insolvency rates have mirrored those of traditional insurers with afrequency less than 1 percent. Noting, however, that surplus linesinsurers had a higher rate of failure from 1988 to 2003, Bestattributed this to the "increased failure of program writers thatheavily used managing general agencies, to which they granted toomuch authority for binding business.

Best's "Annual Review of the Excess & Surplus LinesIndustry" was commissioned by the Derek Hughes/NAPSLO EducationalFoundation?a foundation set up in 1991 to improve industryeducation about surplus lines.