In an August review of the excess and surplus lines (E&S) market, A.M. Best noted that E&S enjoyed banner years in the not-so-distant past. “Direct premiums grew by 225 percent from year-end 2000 through year-end 2003 for domestic professional surplus lines companies,” it said. However, it went on to note that with a softening market in 2004, premiums flattened in 2005, grew a bit in 2006, and declined a bit in 2007. Then along came 2008. While final figures for 2008 are still being gathered, it was, by all accounts, a year that many were glad to see end.

“I've been through a lot of ups and downs in my 40 years in this business, and this past year was a unique 'down,'” said Tom Enright of Enright & Wilson in Hollywood. Enright, whose firm writes commercial risks, mainly P&C and professional liability, reported rates in the E&S market were “20, 30, or even 50 percent lower than the year before. I'm hopeful that 2009 will be a better year for all of us. I sure don't see how it could be any worse.”

The National Association of Professional Surplus Lines Offices' (NAPSLO) Executive Director Dick Bouhan may have good news for Enright and others. “We think the worst of the soft market in most segments is over,” he said. “Our sense is that the declines are stopping. We're hearing little bits of optimism here and there. 'Stable' is the word I keep hearing. Although where it goes from here, we're not quite sure.”

“Everyone is glad to see 2008 behind us,” agreed R.C. Chaffin, president and CEO of SeaCoast Underwriters, Inc., with offices in Coral Gables and Lake Mary. Chaffin, who in addition to serving as chairman of the board for the Florida Surplus Lines Service Office (FSLSO) also is a director for the American Association of Managing General Agents (AAMGA), recalled discussions at a Fall 2008 AAMGA meeting. “We were talking about where are we now, where are we going. The industry had lost about $42-43 billion in surplus. We had a combined ratio [at that time] of about 113 percent with the storms. A.M. Best was predicting a 103-106 combined loss ratio for calendar year 2008. Premiums were way down. We had to contend with the admitted markets getting back in to increase their market shares. And on top of all that, here in Florida, we had to deal with the Citizens issue.”

Elephants in the Room

In any discussion of Florida's E&S market, the elephants in the room are Citizens Property Insurance Corp. and Essex v. Zota.

The call to “fix” Essex v. Zota is unanimous, at least on the E&S side. “We have to solve Essex v. Zota now,” Enright said. “We need the OIR to come out [with a Rule] and say we don't have to file forms.” [See page 12 for a history and update on Essex Insurance Company v. Meriades Zota.]

With Citizens, the comments range from cautious to exasperated.

While Chaffin noted that, “Citizens is trying to get a gradual rate increase, and maybe that will translate into higher rates overall,” Enright said, “They started writing commercial accounts in November, including wind, and they are writing them entirely too cheap. It's going to hurt some of the people writing huge property accounts for big bucks. We just got an assessment in December. They're not making money when the wind doesn't blow.”

Expanding Through Acquisition

While many were treading water and trying to keep afloat in 2008 amid a sea of red ink, others were seizing opportunities, operating on Warren Buffet's maxim to “Be fearful when others are greedy, and be greedy when others are fearful.”

According to an A.M. Best report, 2008 saw a resurgence in E&S mergers and acquisitions (M&A). Best cited several factors for the activity: in a soft market, one of the best ways to facilitate growth is through M&A; many small and mid-tier business owners are aging and have no one in-house interested in taking over; owners are reluctant to invest hundreds of thousands of dollars in the technology needed to keep current, and are eager to sell larger firms that already have that in place.

Activity appears to be continuing into 2009.

Delaware-based Rockwood Programs, a wholly owned subsidiary of E.W. Blanch, recently announced a partnership with Modern Insurance Consultants of Homestead. The business model of the new subsidiary, Modern Insurance Consultants, LLC, will not change, according to Modern's President Mark Lann. “We'll continue to focus on E&O insurance for insurance agents, insurance companies, and miscellaneous professional liability classes,” he said.

Market data reports on the FSLSO Web site show Lann as the top surplus lines agent for Agent E&O in Florida, which gives him a unique perspective. “In 2008, we saw a lot of new agents coming into the business, and also a lot of agents going out,” Lann reported. “We had more cancellations than we normally would in Florida. The smaller agencies are struggling.” However, Lann noted that the soft market “has brought along more bells and whistles on the E&O policy. Even a low-end policy provides defense cost outside the limit now,” he said.

“In Florida, there are always new markets coming in, old ones going out,” he said. “I expect a significant increase in our business this year, particularly in the second half. If I don't get 15-20 percent growth this year, I won't be happy. I think the economy in general is going to improve, and we have this new relationship [with Rockwood] to build on. I expect to have two new carriers this year who have not been licensed in Florida before.”

2009 Pricing and Predictions

Calling 2008 “a horrible loss year,” Letha Heaton, vice president of Markel Corporate Marketing in Deerfield and a member of AAMGA's marketing committee, predicted that “the realm of players is going to compress over time significantly. 2009 will not be the 'same old, same old.' We expect some companies that are still rated well to fail. The market has compressed pricing for the past five or six years. We think it is under-priced by a factor of 20 percent a year over five years.”

“Cautious optimism” seems to be the prevailing attitude when it comes to pricing in 2009.

“Prices can't go down any more than they already have,” said Enright. “You couldn't renew an account last year unless you came down 20-30 percent. I think that time is over.” Enright, who writes commercial lines, predicts a “flattening up through June, with no increase in premium. And that's kind of like a victory, after you've been reducing things by 30 percent or so. In the second half of the year, (minus any hurricanes), we will see a slow and gradual rise, maybe five to six percent increases. I'm optimistic that we've been through the worst.”

Also taking an optimistic outlook for 2009 are the executives at Regency Insurance Brokerage Services, Inc., of Hallendale, who just announced new offices in Staten Island and Manhattan. According to Executive Vice President David Hershberger, the firm has wanted to expand outside the Florida area for some time. “[Company founder] Stephen Riemer is from New Jersey. We have been lucky in picking up new carriers and markets lately, and many of them are interested in expanding in the Northeast. Eventually we want to have a presence nationwide, but our expansion focus will be on the New York, New Jersey, and Pennsylvania areas for now.”

Regency currently writes primarily commercial P&C, and Hershberger understands both the risks and rewards. “The only way to make money in Florida is to write wind, and if you write wind, you are going to get hit at some point,” he said. “But this is a long-term business. You have to be willing to write in the tri-county South Florida area. We think this will be a growth year for us, even in Florida. As the market starts to harden and flatten out, we'll still be here.”

Admitted Market Encroachments

Hershberger and others have had company — perhaps more than they want. Admitted carriers trying to hit their numbers have been going after business that they previously shunned.

“This past year, the admitted market came in and took back a lot of the commercial P&C,” Hershberger said. “E&S is a significant player in commercial P&C in Florida. But as the market ebbs and flows, our market share changes.” With minimal hurricane damage here, the voluntary market has once again moved in. “They skew the market from time to time,” Hershberger noted. “The E&S market has been chasing the standard market downward. In 2009, we're not sure where it's going to go. We are seeing conflict in the marketplace.”

Part of that conflict may be placed at AIG's door. The impact of the giant's implosion in 2008 is still being calculated. NAPSLO's Bouhan said, “AIG group companies wrote about 22 percent of the total surplus lines market last year. Lloyd's wrote 17 percent. How [the AIG situation] resolves itself could have a lot to say about what happens to the market.”

Stakeholders have expressed concern that if AIG tries to regain its footing by going for market share and cutting rates, the impact will be enormous. A December report from Advisen Ltd. may put those fears to rest. After polling 17 commercial lines brokers, Advisen stated, “AIG appears to be competing vigorously, but not irresponsibly. Brokers generally concurred that AIG should not be singled out for driving down rates – other insurers also are fueling the soft market. One broker commented that some insurers are so obsessed with winning AIG customers that they, not AIG, are more responsible for cutthroat competition.”

Reinsurance, Rates, And Underwriting

The one place where everyone agrees rates will be up this year is in the reinsurance arena. “Some Cat reinsurance people have been asking for Jan. 1 renewal rates that are 30 percent higher,” Hershberger reported. “Whether or not that will hold, I don't know. My best guess is they will get 10-15 percent in most cases.”

Lann said he has heard “grumblings from London about raising reinsurance rates. We also just had one of our major carriers raise their rates. I think that the lower premiums have caught up with them.”

With a universally dismal economy, minimal investment income, and questionable rates, companies are talking more about underwriting for profit than building market share. As Hershberger noted, “We probably are not going to make gains on more policies, but rather on underwriting profits. When we start tightening underwriting standards, rates go stagnant or increase. Today's market offers everyone an opportunity to hone their skills. You will see more people going back to solid underwriting and a recognition of the need for underwriting at a profit.”

Bouhan agreed. “The investment environment is so poor, the return is down to zero. Companies have to make money with underwriting profit,” he said.

On the bright side, Enright said, “I had an increase in production in December for first time in 13 months. January will show a substantial increase also. I don't know about March, April, and the rest of the year, but the past few months have been encouraging. Maybe things are changing for the better.”

As he said, they couldn't get worse.

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