Although the term “stabilizing” has popped up in reports on insurance market conditions in the last two weeks, “unpredictable” was the more common word on the lips of E&S insurers and brokers heading into the NAPSLO annual meeting in San Diego.

At the meeting, which took place before Hurricane Ike hit the Texas coast and before Hurricane AIG shook the financial markets, members of the National Association of Professional Surplus Lines Offices, Ltd. viewed competition and an economic slowdown as their biggest headaches for the year up to that point.

Phil Ballinger, executive director of the Surplus Lines Stamping Office of Texas, noted that U.S. businesses have been “more reticent to hire people, to invest in expansion, to construct new facilities, to build inventory.”

“All that has an impact on the insurance exposure base,” he said.

“My biggest competitor is the economy,” said Tap Johnson III, president of TAPCO Underwriters, based in Burlington, N.C. “We insure small businesses, many of which are in trouble. If they’re not in business, then they don’t need insurance,” he said.

Mr. Ballinger said an influx of more newly eligible E&S insurers coming into markets like Texas is increasing pressure on existing E&S insurers, compounding the impact of broader admitted carrier appetites.

In Texas, oil field risks have been placed in the admitted market in 2008, Mr. Ballinger said. That used to be the turf of the surplus lines industry, he said, citing one example of broader appetites outside the E&S market.

With rates down as well, the result is a double-digit drop in E&S premium volume, he said. In Texas, the number of E&S policies was down 3.3 percent for the first seven months, while the average premium per policy reported was down 7.6 percent.

This led to a drop in premium of 11 percent for the first seven months, he said.

One common theme that emerged in discussions with E&S insurers was that the 2008 soft market has been unlike others they’ve lived through.

“What is different about this soft market is the unpredictability,” said Robert Lala, senior vice president of primary casualty for Liberty International Underwriters in Chicago. “In past soft markets, you could name who was doing what, and you knew which accounts you were going to have a chance of writing with good terms,” he said.

“There’s just no predictability to it” even in terms of guessing which companies will be aggressive. “Companies you thought were very staunch in their underwriting now will open up the floodgates. Others who you thought would open up the floodgates are holding their ground,” he said.

Scott Bayer, senior vice president for the casualty division of Valiant Insurance in New York, gave a similar assessment. “What we’ve found is that we have to wind our way through all the accounts that come in the door to really see where there’s an opportunity. Where we may have success with one account, we may see a very similar one come in, but there’s no opportunity–depending on the distribution, how it’s marketed, what the prior carrier has done.”

“The consistencies really aren’t there,” Mr. Bayer said. “You’ve just got to roll up your sleeves and dive in to figure out where there is opportunity.”

E&S insurers also highlighted the speed with which market conditions deteriorated as a distinguishing factor of this soft market.

Grace Meek, chief business officer of Naxos Insurance, pointed to September 2006 as the point when rates “hit a cliff,” falling off quickly in the months that followed.

Commenting on the property side of the business, Nathan Warde, president of Aspen Specialty, also said the market had deteriorated a lot faster than he anticipated based on more than 20 years of experience in the segment.

“What concerns me is that ceding companies have given up much more ground than the reinsurers have,” he said, adding that inflationary pressures also loom large in the property arena. With underlying costs of commodities rising, “it really raises the issue of [property] valuations,” he said. “Are valuations appropriate and are claims cost going to increase dramatically in the near future?”

Mr. Warde noted that underlying commodity price hikes aren’t just driven by rising oil prices in 2008. “Prices of steel [and] building materials were skyrocketing even before the hurricanes in 2004 and 2005, he said, noting that wallboard to repair hurricane damage was difficult to obtain in those two years because much of it had been sold to customers in China and other parts of the Far East who were willing to pay higher prices.

Speaking to NU two days before Hurricane Ike hit Galveston, Mr. Warde said that the prior “near misses” this year had only resulted in a very modest pushback on deteriorating property terms for the industry in affected tier 1 wind areas.

Also commenting before Hurricane Ike’s U.S. landfall, Paul Springman, chief operating officer of Markel Corp., speculated that even a major storm event might not change the market. Some insurers have probably been overly optimistic in their budget assessments of potential catastrophe activity, Mr. Springman said. Even if three Category 3 or higher hurricanes hit this year, because there was no activity in 2006 or 2007, executives closing their books in early 2009 may only budget for one event per year, he said.

NAPSLO members asked to size up the competition were hard-pressed to find any line of insurance business free of competition or any market segment that’s not fighting against them for business.

Alan Jay Kaufman, chairman of Farmington Hills, Mich.-based MGA Burns & Wilcox Ltd., summed up the observations of almost every one of a dozen brokers and insurers interviewed by NU when he said no lines had been immune from the impact of the soft market.

While premium declines in some lines are just attributable to “standard admitted market and specialty lines carriers…competing for the premium dollar,” others are affected by the construction downturn. The downturn “has spun off constrictions in real estate errors and omissions, appraisal E&O and mortgage brokers E&O. In addition, manufacturers and suppliers such as lumber, concrete and plumbing also are affected,” he said.

“Trucking is tough,” Mr. Kaufman added. “Many independent owners are parking their rigs; others are signing on fleets, eliminating their need for primary auto coverage. In addition, there are new carriers such as Progressive, which are working truck accounts very competitively via retail agents,” he said.

“Fuel prices also are affecting independent owner-operators. They are paid by the mile, and unless the rates they get from the fleet operators are sufficient, they will be forced to go out of business.”

William Newton, president of Lemac & Associates in Los Angeles, listed primary and excess casualty, earthquake and workers’ compensation among the lines where rates had come down. “West Coast contractors is probably the line that has seen the biggest hit,” he added.

“I don’t know what isn’t coming down,” he said, noting, however, that prices for some smaller professional liability and employment practices liability accounts had “held up pretty well.”

Robert Piller, president of IronSelect, an excess casualty unit of Ironshore Insurance, said lead umbrella and first-excess casualty rates were still dropping, but only in areas where there’s enough premium to warrant an underwriter going after the account.

There’s a leveling off that’s starting to occur as premium levels get closer to minimum premium levels. “Minimums are minimums,” he said. “You can’t get further south than that.”

The general consensus among those interviewed was that the fiercest competition exists for the largest accounts.

Steve Vaccaro, CEO of Max Specialty, said that for the small contract binding authority accounts that his company writes, averaging $2,500 per account, pricing has remained realistic. “Our wholesaler and his retailer and insured are more interested in consistency,” he said, noting that long-term partnerships take on more significance than price considerations. “An insured on that business is really going to think twice before moving a $2,500 account to save $200 with a market he really doesn’t know.”

On the other hand, he said, there’s major price competition on catastrophe-driven accounts that have total insured values of $3-to-$5 billion, and on large casualty accounts with premiums north of $100,000–”where companies can fool themselves and price business below the profit margin that should be expected because they feel they can hold on to the cash flow.”

TAPCO’s Mr. Johnson, whose firm specializes in binding small account business, said he was surprised to report “there’s a lot more sensible capacity out there than in the past.”

“If you’d asked me a week ago, I probably wouldn’t have been as confident,” he said during a Sept. 10 interview at NAPSLO, basing his revised assessment on meetings he’d already had with carrier partners there.

“They are budgeted to be down 10 or 15 percent, and they have accepted it. They’re not calling and bugging us about why there’s not more production.”

“They are very interested in new products and niches, and they’re very interested in giving different agents different authority,” he said. “I think this time, a few people are smarter. They’re not so desperate just to stay even,” he said.

Other E&S market participants, including Joseph D. Scollo Jr., COO of American Safety, expressed surprise over the degree of price competition in construction lines in particular.

While the housing downturn has had an impact on insurance revenues, “I would say the construction line experienced the most competitive pressures from the soft market”–even in the residential area, “which is probably the most difficult and complex area of the construction business,” Mr. Scollo said.

“We actually walked away from a lot of business” because it was underpriced, he said. “Our renewal retentions in construction are extremely low, he said, noting that other E&S and standard markets have come in to write the business “sometimes at 40 percent below what we’re quoting for the renewal.”

“What surprises me is how irresponsible some companies have been,” he said, noting that some of the competitors are new to this market. “They’re looking for new areas to grow,” and in spite of the complexity, the residential construction market has always had higher premiums.

“I think people get excited when see they can get premiums at above ISO [Insurance Services Office] rates, but they’re not truly contemplating the exposure behind those premiums,” he said.

Mr. Scollo also noted that in spite of the more litigious environment on the West Coast, rate cuts are more pronounced there than in the eastern United States. “Now we’re starting to see terms and conditions slip also, which is not a good sign,” he said, pointing to the elimination of prior work exclusions and broader additional insured forms used out West by some competitors.

Turning to the ripple effects of the mortgage crisis on construction insurers, Mr. Lala said his company hasn’t been heavily impacted because its writings are heavily weighted to the commercial contractors’ side. Investment money available for commercial construction has not waned as much as the residential, he said.

“I actually was somewhat surprised by the continuation of construction activity,” he added. “In the Southeast now instead of contractors building condominiums, they’re building ‘apartments.’ From the outside they look the same, but they’re calling them apartments because it’s easier for them to rent now than to sell,” he said.

Joseph George, president of IronBuilt, a newly launched division of Ironshore writing residential and light commercial wrap-ups and liability policies for artisans, believes construction “is still the hardest market out there relatively speaking.” He based his assessment on a 30-year career participating in nearly all casualty lines.

Within the construction segment, the softest areas are probably residential custom home rework and then commercial, he said. “Every admitted carrier does commercial construction, he said, noting that admitteds also dominate the Midwest landscape for residential business. The opportunities for E&S carriers remain on the West Coast, in new construction, and in condo and tract rather than custom homes, he concluded.

(Additional reporting by Arthur D. Postal)