San Francisco–Premium growth in the surplus lines industry was essentially flat in 2004, according to a rating agency report released late last week.
A.M. Best, as it has for a dozen years, published its annual report on the excess and surplus lines market. In the report, the Oldwick, N.J.-based rating agency said that in 2004, direct written surplus lines premiums of $33.0 billion were just 0.65 percent higher than comparable 2003 premiums.
In contrast, direct premiums for the entire industry rose 4.5 percent.
The report revealed that 2004 was the first year since 1997 that growth in total p-c industry premiums eclipsed surplus lines. The meager 2004 surplus lines growth rate followed three years of extraordinary jumps–35.7 percent in 2001, 61.7 percent in 2002, and 28.3 percent in 2003. In the 12-year history dating back to 1998, there was only one prior year of double-digit surplus lines growth (13.1 percent in 1993), the report said.
Individually, growth was uneven among E&S players. A comparison of premiums for the top 25 surplus lines writers with those listed in the prior Best reports reveals that while many of the biggest U.S. surplus lines insurers posted declines in 2004, second-ranked Lloyd's saw its E&S premiums rise 2.3 percent to $4.5 billion. (At top-ranked American International Group, E&S premiums fell 12.1 percent to $7.0 billion.)
As a group, insurers that are part of Bermuda-based organizations had the largest E&S growth rates. They include Arch Insurance, rising 23.6 percent to $824 million; XL America, jumping 32.7 percent to $396 million; and Axis, up more than 50 percent and making its first top-25 appearance with $383 million.
The Best report, distributed at the annual meeting of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd., was commissioned by the Derek Hughes/NAPSLO Educational Foundation–set up in 1991 to improve education about surplus lines.
Comparing other financial indicators for surplus lines and standard lines companies, Best also found:
o With $33 billion in direct premiums, the E&S market share was 6.9 percent of p-c industry premium last year, and 14.1 percent of commercial lines.
o Surplus lines insurers had a higher average rating–an "A" rating–than the p-c industry in total, which has a median rating of "A-minus" as of July 2005.
o Since 1976, the failure rate for surplus lines carriers (1.09 percent) has been slightly higher than the overall industry (0.90 percent). Best attributes some of the difference to higher E&S failure rates in 1999 to 2003, related to the demise of some program writers that afforded too much underwriting authority to MGAs.
o In 2004, the combined ratio for 65 surplus lines companies was 92.7 versus 98.1 for the industry. On average, surplus lines writers bested the industry's combined ratio by 10 points over five years.
o Outside of Bermuda, top E&S growers on Best's top-25 list were Greenwich, Conn.-based W.R. Berkley, where E&S premiums rose 15.1 percent to nearly $1.1 billion, and Los Angeles-based Argonaut, which reported 11.5 percent growth to $421 million.
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