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Fitch says surplus lines remain strong; growth to continue in 2015

WASHINGTON—Surplus lines underwriters outperformed the property and casualty insurance industry’s combined ratio by an average of 10 percentage points for the 2009−2013 period, according to a new report by Fitch Ratings.

The report said direct premium in the U.S. excess and surplus lines insurance market direct written premiums expanded by 8 percent.

Moreover, premium growth is up 5 percent for the first half of 2014, meaning that underwriting profitability is expected to be sustained in 2014. That follows a strong 2013 performance that beat the P&C industry aggregate by almost 10 percentage points on a direct combined ratio basis, the report says.

At the same time, Fitch analysts say in the report that premium growth is expected to continue into 2015, but profitability is likely to decline because of increased capacity, which is leading to pricing pressure. Rate increase growth has already slowed and turned negative in some segments, particularly commercial property, the report said.

Another factor likely to lead to lower profitability is diminishing favorable loss reserve development, which is reducing underwriting performance, and continued low asset yields, which is adversely affecting investment income, the report says.

At the same time, Fitch said that the non-admitted or surplus lines industry constitutes only five percent of the U.S. premiums-written property and casualty market.

The report said higher SL industry premiums are driven by rising rates in various lines, increased exposure due to a continued, albeit slow, economic recovery and a reduced appetite from standard carriers to write non-standard risks.

The report said that Lloyd’s of Lloyds of London and American International Group, Inc. continue to dominate the non-admitted market. The report said Lloyd’s’ premiums grew 13 percent in 2013, while AIG premiums declined 5 percent. The Lloyd’s premiums consisted are gross of outward reinsurance and commissions on a calendar-year basis and excludes pools.

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