AA&B Special Report: Will E&S Markets Have the Capacity to Feel Competitive in 2006?

FROM 2001 through 2003, the excess and surplus lines marketplace enjoyed a remarkable run. As standard insurers curbed their underwriting in the hard market, direct written premiums in the E&S segment increased by 35.66% in 2001, by 61.67% in 2002 and by 28.3% in 2003, according to A.M. Best.

Since then, however, growth has stalled. According to an A.M. Best report released last September for the National Association of Professional Surplus Lines Offices, the E&S marketplace grew by just 0.65% in 2004. That was the lowest rate since 1996, when E&S premiums actually fell by 0.4%.

It will be interesting to see the numbers for 2005. While it's unlikely that premiums grew much in the first half of the year, it's hard to predict just how last fall's unprecedented hurricane season affected, and will continue to affect, the balance of business between E&S and standard insurers.

It also remains to be seen just how the hurricanes and the damage they did to reinsurers will affect the E&S marketplace. The early signs are that capacity problems are likely to hit only large coastal property risks, but some industry executives say the jury is still out.

What is indisputable is that the importance of the E&S marketplace continues to grow. In 2004, it topped $33 billion in premium, according to A.M. Best, and accounted for 14.14% of the total marketplace. That was up from 13.1% the year before and from 6.43% a decade earlier.

Where will the E&S marketplace go from here? That was a question we recently put to the current presidents of NAPSLO and the American Association of Managing General Underwriters, as well as four past presidents of the associations. We also contacted executives of our leading E&S insurers. In general, the intermediaries saw a more competitive year ahead with few significant capacity problems. Certainly, they seem to feel under pressure to produce. Some insurers, on the other hand, seem to see more storm clouds ahead, particularly as reinsurance renewals continue to come in, and are predicting a relatively flat year. The following are their comments.

Lawrence M. Wesson
U.S. Risk Insurance Group
For Mac Wesson, president and COO of U.S. Risk Insurance Group, and the current president of NAPSLO, the aftermath of last fall's hurricanes has not played out as he expected.

“After the storms, I–along with a number of other people–predicted that not only would property capacity become restricted… I predicted there would be a 'follow-along' effect on the casualty lines. That didn't happen.” Instead, he said, prices for everything except property prone to wind damage either remain flat or are going down.

U.S. Risk has headquarters in Dallas and a number of branch offices around the country. It also has a London-based Lloyd's broker and various subsidiaries, some of which offer fee-based services, like claims adjusting. In regard to its domestic insurance operations, about 55% of its business isconducted as an MGA or program manager, and 45% as a surplus-lines broker. More than 90% of its business is nonadmitted.

Although many 2006 reinsurance contracts have yet to renew, Wesson declined to speculate on whether they will be more restrictive or even if they significantly will harden the market if they turn out to be. “Our industry is a global industry, and the economies are so large that it's really difficult to predict what is going to happen,” Wesson said. “But we do hear of a lot of capital finding its way into our market, and that means more capacity, which typically means more downward pressure on pricing.”

“Anytime a market starts to soften, the tell-tale symptom is the migration of business back to the standard market,” Wesson continued, adding that he has seen such movement in regard to loss-free accounts that have somewhat predictable risk characteristics. Products liability, he said, is one example.

“There was a day that that was almost exclusively an E&S line,” he said, but as the line has become more predictable, standard carriers have shown more interest in it. While an admitted carrier may have jettisoned such a risk during the hard market, “if it's relatively clean and has some size to it, it's finding its way back,” he said, “sometimes at a significantly reduced price.”

Despite such competition, E&S carriers continue to find opportunities, Wesson said. For instance, he cited a company that he declined to name that believes it has a good chance to write a lot of reconstruction contractors in areas affected by Hurricane Katrina. “They're going after that very aggressively,” he said.

Despite what he believes will be softening market conditions, Wesson said he expects U.S. Risks to grow and be profitable in 2006. “There's plenty of business out there; you just have to go find it,” he said.

Wesson said U.S. Risk brokers and underwriters will spend less time in the office this year. “We encourage, and in some cases require, our people to be out in the field visiting with their retail customers on a more frequent basis, understanding what their needs are and asking them for business,” he said. Wesson said he calls such encounters “at bats.”

“You can't get a hit, unless you get an at bat,” he said, “and you can't get an at bat unless you ask for it.”

Wesson said U.S. Risk also is making strategic changes as it adapts to a shifting marketplace. In the past year, it sold an alternative-market subsidiary and a division that wrote professional liability insurance for public entities. On the other hand, it has opened a branch in Southern California, staffed by 10 employees, and last month acquired Lighthouse Underwriters, a $60 million program manager.

Nor does Wesson expect E&S carriers to retreat, even if markets soften. “The E&S market segment now is north of $30 billion (in volume),” he said. “It is impossible not to proclaim that as a significant portion of the overall property-casualty business. I think a lot of E&S carriers see opportunities, even in a flat or softening market, to increase their market share. I know that all of them are in aggressive growth modes.”

Francis Johnson
Johnson & Johnson Inc.
Although the Carolina coasts were not severely damaged by last fall's hurricanes, Francis Johnson said they certainly affected the E&S insurance climate there.

“Rates at a minimum have flattened or gone up slightly, and deductibles have gone up,” Johnson said, adding that for some larger property risks the effect has been more pronounced. “Rates have gone on from 10% to 15%–even as high as 25%, depending on construction and location.”

Johnson is the president of Johnson & Johnson Inc., in Charleston, S.C., and the current president of AAMGA. His agency does business in Georgia, as well as the Carolinas. About 70% of the agency's business is placed with nonadmitted carriers. Johnson & Johnson writes a broad array of risks, including specialty personal lines, and has a sizable book of commercial coastal property insurance.

Johnson said that by necessity, his evaluation of E&S marketplace conditions are preliminary. He said, for instance, that it probably will take all year to gauge the impact of last year's storms on reinsurance markets. So far, however, Johnson said his E&S markets have not announced major changes in rates. While some have decreased their writings on the coast, “not many have taken their whole book and said, 'We have a 5% or 10% increase,'” Johnson said. “Most have said, 'We're going to stay right where we are.'”

For 2006, Johnson is projecting a growth rate of 10% to 15%, which would be down slightly from last year. He said he is concerned about having adequate capacity and that the eventual answer to any shortage probably will be the entry of new nonadmitted markets into his territory. Both South Carolina and North Carolina are fairly deregulated, he said, making it relatively easy for new carriers to come in. Such was the case after Hurricane Hugo struck South Carolina a little north of Charleston in 1989.
“After Hugo, we lost some markets,” Johnson said, “but in the next couple of years we had new markets come in. I think we're going to see that again.”

Len LoVullo
LoVullo Associates Inc.
As he looks ahead, Len LoVullo said it's hard to see anything other than softer markets and more competition.

“There is a lot of movement on renewals,” said LoVullo, who is president and CEO of LoVullo Associates, in Buffalo, N.Y, and a past president of AAMGA. “Our retailers are becoming very sophisticated at putting their renewals out to the marketplace. They know that their standard markets are loosening up, and they also know there are some very good wholesale markets” available to them.

LoVullo Associates writes almost all of its business in New York. About 15% of its volume comes from specialty personal lines, which is all placed with admitted markets. About 85% of its commercial-lines business is insured by E&S carriers, LoVullo said, although standard insurers are giving them a run for their money. Risks that normally would be considered E&S in nature, like restaurants, daycare centers and vacant properties, are finding their way into the standard market, he said. “Even contractors, to a certain degree.”

Last fall's hurricanes fell far from New York, but LoVullo said they've affected him nonetheless. The agency primarily represents national carriers. “They're dictating what our pricing should be, based on what happened to them in the Southern states,” he said. Meanwhile, regional insurance markets that had no exposure to the storms and buy little if any reinsurance are in prime position to pick off accounts. “We're losing property (business) because we can't be competitive with the regional carriers up here,” he said.

Some 20% of LoVullo Associates' business is transportation-related. Competition for it has become intense, LoVullo said. This business is placed with admitted markets, LoVullo said, because New York, like most other states, requires commercial auto insurance to be written on that basis. Many major E&S companies, however, have admitted affiliates they use to write commercial auto while sometimes placing motor truck cargo and other truck-insurance lines in their nonadmitted facilities. LoVullo said they're facing competition in New York, however, from admitted insurance companies that are entering the market and writing everything on a package basis.

“Trucking is very competitive, especially in Downstate New York, where there is a lot of business and everyone wants a piece of the action,” LoVullo said. “If this competition continues, the pricing can only go down.”

LoVullo said the E&S carriers he's spoken with had a great year in 2005 and still expect moderate growth–in the 4% to 8% range–in 2006. Despite all the competition in the Empire State, LoVullo said many E&S carriers say they continue to see opportunities. They include risks in urban areas with values under $500,000, including commercial habitational property, vacant property, and small mercantile accounts. “These are the things we specialize in and love to look at,” he added.

Getting such business, however, is going to take effort, he said. “We've pretty much got to go back to the basics on the marketing side,” LoVullo said. “That's really the theme for us throughout '06.” He said LoVullo Associates and other MGAs will need to train underwriters not only to provide good service over the telephone but also to make calls on retail agents and ask for new and renewal business. “We call it 'feet on the street' and being 'road ready',” he said.

Joseph Timmons, CPCU, ASLI
Midwestern General Agency
After two successive years of heavy catastrophe losses, standard insurers who think 2006 will be business as usual may be fooling themselves, according to Joe Timmons. If they are, the year ahead could be a good one for the E&S marketplace, he said.

“Hopefully, I'm not looking through rose-colored glasses, but I see a resurgence of the hard market, particularly in the property area,” said Timmons, who is president of Midwestern General Agency in Kansas City, Mo., and also a NAPSLO past president.

Midwestern primarily does business in Missouri, Kansas, Iowa, Nebraska, Illinois and Arkansas. It derives about 60% of its business from MGA operations and 40% from brokerage. About 90% of its commercial business and 20% of its personal-lines business is placed with nonadmitted markets. On the commercial side, it writes an array of Main Street and middle-market accounts, including habitational risks.

Timmons said the E&S insurers he's spoken with are projecting a flat or slightly down year in 2006. But he noted that the insurance industry has suffered tremendous catastrophe losses in the past two years (nearly $57 billion in 2005 and $27 billion in 2004, according to the Insurance Information Institute), which standard insurers don't seem to be acknowledging. That could be making E&S carriers unnecessarily downbeat, he said.

“I don't think anyone on the standard side is willing to admit the king has no clothes,” Timmons said. But the day of reckoning for standard insurers has to come, he said. “They can't afford to take another hit on the chin, so they are going to have to pull back from certain areas and perhaps even look at some of their marginal classes of business.”

Timmons said he also expects a significant correction in the standard-lines marketplace because of likely changes to flawed catastrophe models. The attachment point for reinsurance under these models was too low, he said. That may have been a boon to insurers, Timmons said, but it was a bane to reinsurers. Furthermore, many models did not adequately take business income losses into consideration. After models are revised, he said, “the price of poker” is likely to increase as primary insurers find more of their own surplus exposed to loss and reinsurance above the higher attachment points more costly. He said all of this could lead more standard insurers to ask themselves, “Do I really want to stay in this game?”

Timmons said a number of his standard carriers already have been affected. Following Jan. 1 reinsurance renewals, he said the rates for one of his carrier's reinsurance treaty increased significantly, despite the fact that its attachment point also rose to $15 million from $7 million.

Because of the heavy losses and the withdrawal of reinsurance, Timmons said he expects to see tightening first affect large property accounts and catastrophe exposures, then continue to “ripple” through other property and liability lines. Consequently, he said, the surplus-lines market is likely to see a resurgence later in the year.

For the year ahead, Midwestern General Agency is budgeting for 18% growth, Timmons said, “which I know is fairly aggressive.” Some of this will come by providing admitted commercial-lines products to small retail agents and brokers in rural areas, he said, but he added that he also sees good opportunities for E&S business–particularly if the industry goes through another rough hurricane season.

Marketing will be important in the year ahead, Timmons said. He said he's getting more visits from E&S carriers asking how they can do more business with his agency and offering co-op advertising and other forms of marketing assistance. MGAs and surplus-lines brokers, meanwhile, have to step up their marketing efforts as well. “We've seen retailers who are consolidating the number of wholesalers they are doing business with,” Timmons said, making it imperative for wholesalers to stay in touch.

Maureen Caviston, CPCU
Partners Specialty Group LLC
Sometimes E&S carriers don't seem that much different from standard-lines insurers–particularly in how they regard their distribution forces. Like insurers everywhere, E&S carriers are closely monitoring the effectiveness and efficiency of producers, and are looking to partner with the best ones.
“Companies definitely are allocating their capacity to the brokers that make their jobs easier and that are presenting the risk in the most concise manner possible” said Maureen Caviston, president of Partners Specialty Group, a surplus-lines broker that has headquarters in Norristown, Pa., and operates eight other offices around the country.

While MGAs tend to have steady relationships with the carriers for which they are authorized to underwrite and bind business, surplus-lines brokers today face a less secure environment, said Caviston, who is a past president of NAPSLO. Technology, she said, has allowed E&S insurers to capture much more data about brokers than they could in the past, enabling them to know, for instance, which have the best hit ratios. So now they are doing business only with brokers who really understand their products and are proficient at selling them, she said. “They are seeing the value of limited access,” she said. “It's good for them and good for the broker, because it's better to do business with a market that is not open to all brokers.”

While Partners Specialty Group has been increasing the amount of binding business it does, well over 90% of its business remains brokerage, she said. About 75% of it is placed with nonadmitted markets, she said. Partners Specialty Group writes all types of business but prefers to handle more difficult accounts, for which there is less competition, she said. “I would say that if there is a constant, it would be 'the tougher the better.'” Construction, health care, medical products/life sciences and environmental risks are among the niches in which the brokerage is active.

Caviston said it will be more challenging in the year ahead to arrange property coverage for larger risks with catastrophe exposures. Surplus-lines brokers will be forced to arrange more coverage layers, she said, so placements will become more time-consuming. She said some E&S markets have told her they are cutting the limits offered on such properties by a third to a half, depending on the severity of the risk.

Other than for property with catastrophe exposures, Caviston said, last fall's hurricanes so far don't seem to have affected the E&S marketplace greatly. At last September's NAPSLO convention, many people predicted tightening would spread to other sorts of accounts, she said, but “the typical, non-cat E&S property risk still draws plenty of interest.”

It's still too early, however, to make a final assessment of the hurricanes' impact on insurers and reinsurers, she cautioned. “I was with a specialty carrier (in early February) that said the adjusters are still getting out to some of those losses and assessing them,” she said.

In regard to casualty coverage, Caviston said some people expect tamer risks to flow back to the standard marketplace, just as they predicted they would last year. But larger E&S markets may be reluctant to let some business go, she said. “Our insurance companies rarely budget to lose business,” she said. “Most want to continue to grow.”

Large carriers are particularly likely to compete more aggressively for E&S business, she said. “Some of the biggest companies have the biggest budgets for growth, which has to concern you.” If one assumes that rates are going to flatten or moderate, as many people do, then the only way companies can grow is by increasing market share, she said. One way they may do so is by putting pressure–subtly, in many cases–on surplus-lines brokers, she said. For instance, she said, a carrier may leverage lines of business, saying, in so many words, “I'll quote the cat property, but we'd like an opportunity to quote the liability as well.”

Smaller E&S insurers, by necessity, seem to be showing a lot of discipline, Caviston said. They carefully are studying the lines of business they are getting into and doing a good job of managing their books across those lines, she said. “They don't want to be top-heavy in any one line. They're saying, 'I'm getting into this tough line of business, but I don't want to write any more than $X, and once I reach $X, I'm out of it.' I think that's smart.”

James A. Roe, CPCU, ASLI
Arlington/Roe & Co. Inc.
At Arlington/Roe, an Indianapolis-based MGA, E&S carriers are likely to play a smaller role in the year ahead, according to James Roe, president.

“We see the excess and surplus lines vehicle being challenged more and more in our marketing territory,” said Roe, who also is a past president of AAMGA.

Other than for an aviation program that it offers nationwide, Arlington/ Roe primarily writes business in Indiana, Illinois, Michigan, Ohio, Kentucky and Tennessee. While it does a substantial amount of brokerage business, it defines itself primarily as an MGA. Most of its employees have underwriting backgrounds from standard companies, Roe said. “Even our brokerage people underwrite business that they send to our brokerage markets.” About 65% of Arlington/Roe's business is placed with admitted markets. The facility bills itself as a “one-stop shop” and writes a variety of business, including transportation, professional liability (including medical malpractice), workers comp, specialty personal lines and bonds.

Roe said last fall's hurricanes so far have had little effect on Arlington/ Roe. “The impact in our area is slim or none,” he said. In the Midwest, property and short-tail liability business just continues to get more competitive, he said. Limits are going up and prices are heading down, as standard companies continue to expand their underwriting appetites, he said. For instance, Roe said he recently used a nonadmitted company to compete for a classic E&S risk: a plastics manufacturer with $3 million in values–and no sprinkler system or other protection. “A standard company just decided to write that account,” Roe marveled. ” Unsprinklered–so if you have a loss, you're probably going to have a good one.”

Roe said the percentage of his business that is placed with admitted markets probably will continue to grow a bit if, as he expects, more states go to some form of rate deregulation. “It means that the admitted companies can price their products a little differently, and you don't necessarily have to go to a surplus-lines company for that freedom of rate anymore,” he said, adding that his general counsel has informed him that Indiana may enact commercial-insurance deregulation legislation this year.

Roe said that E&S companies appear to be “taking a little step back and kind of waiting to see what the rest of the market does.” He said a couple of carriers he's talked with see a flat year ahead, but most are shooting for at least some growth–5% or so–in policy count and premium. “But as the year goes on, it will be interesting to see if they can truly get there,” Roe said. “I suspect that by year end–probably starting in the third quarter–we're going to see a lot more competition in rate and underwriting, as companies try to fill out their budgets.”

Kevin H. Kelley, CPCU
Lexington Insurance Co.
In 2006, the E&S marketplace likely will go wherever reinsurance takes it, according to Kevin Kelley, chairman and CEO of Lexington Insurance Co., the nation's largest E&S insurer. “This is a reinsurance-led market,” he said, “at least at this point.”

In regard to property insurance, Kelley said the Jan. 1 reinsurance renewals were up sharply for catastrophe covers–by as much as 50% to 150%, depending on exposures, and retentions rose too. Rates also are up for pro-rata property treaties and per-risk excess, “so reinsurance is going to influence the market in many different ways,” he said.

“I think (property rates) will harden throughout the year as more and more reinsurance treaties pass the renewal cycle” on April 1, July 1 and Oct. 1, he said, “and I think with each cycle, the terms probably will get more stringent.”
It's too early to say whether property rate increases will be confined to coastal areas or become more widespread, Kelley said. “If you're a national property writer, regardless of how much wind- or earthquake-exposed business you have, you're going to see a material increase in your catastrophe covers. So it's a question of where and how you apply that increase.”

While Katrina and the other hurricanes of 2005 played havoc with major personal-lines insurers like Allstate, Kelley said E&S carriers did not necessarily get off any easier. Insurers like Lexington that mainly are first-layer markets wrote checks for whatever their limits were, thus capping their losses, he said. But carriers that wrote large excess layers wound up paying much more on some losses than the primary insurers did. In some ways, Kelley observed, Katrina was as much like an earthquake as a hurricane, producing enormous claims for infrastructure and other high-valued property, as well as a multitude of homeowners and small-business claims. The results are still being sorted out in the excess property and reinsurance markets, he said.

As Lexington looks ahead, “we're not shying away from property business,” Kelley said, adding, however, that “we are looking to manage our catastrophe exposures in this new reality. We believe that rates have to go up, deductibles have to be increased and, in some cases, terms have to be tightened.” While making the necessary adjustments wouldn't keep Lexington out of the red in the event of another hurricane season like last year's, if there were to be a repeat of the 2004 season, which was formidable in its own right, Kelley said, “We think we would make money.”

So far this year, casualty reinsurance renewals are not up sharply, but Kelley said it's still too early to tell how they will play out. Reinsurance issues could wind up affecting casualty risks where excess limits and capacity are required, he said. An example would be directors and officers liability coverage for Fortune 2000 companies, he said. Kelley said he also sees such risks as an opportunity for E&S carriers. “One trend we are seeing is that (large) clients are beginning to buy higher limits,” he said, for commercial general liability as well as for D&O.

Lexington derives about 80% of its business from surplus-lines brokers and about 20% from about 100 program administrators, Kelley said. A continuing goal in 2006 will be looking for ways to enhance Lexington's relationship with these specialists, he said, including through the use of proprietary technology.

John Edack
Arch Insurance Group
As he looks ahead, John Edack sees the E&S market growing modestly in 2006. Casualty premiums, which he said make up the bulk of E&S business, likely will decrease, as rates for liability risks continue to soften. Any drop, however, should be more than made up by higher premiums commanded for property coverage, he said.

Edack is the western regional executive vice president of Arch Insurance Group, the nation's fifth-largest E&S insurer. In all, Arch derives about 52% of its business from surplus-lines brokers and MGAs, including program administrators, he said. The rest comes from retail agents and brokers. Among the nonadmitted business it writes through its wholesale channel are primary and excess casualty, property and medical malpractice, he said.

Like just about everyone else contacted for this article, Edack said property insurance will be the big story for the E&S marketplace in 2006. He predicted a “robust” market, as insurers analyze their costs for catastrophe and per-risk reinsurance programs and the rating-agency capital requirements. “The market … will be better defined as the year goes on,” he said.

Edack said the reinsurance market “appears to be acting in a very responsible manner. As they figure out their own retrocessional costs and capacity, they too will have to pass those costs on to the ceding companies.” For the year ahead, Edack predicted “plenty” of reinsurance capacity for casualty lines. “In property, there probably will be shorter limits, with more players on layered programs,” he said.
For the year ahead, Arch continues to see E&S opportunities in California residential construction business, Edack said. “Products risks also continue to be a home for E&S writers,” he added.

Edack said Arch plans no major changes in its wholesale distribution force, although individual brokers are added and dropped on an ongoing basis. “We have a well-seasoned distribution plant,” he said. “We continued to weed it and to work with those who feel we have mutual opportunities.”

From his post in San Francisco, Edack has an excellent view of the California market, the largest in the country for E&S business. He said he expects it to more or less reflect the market at large. Property rates may not be up as much, since the state does not have an inordinate wind-storm exposure, he said. On the other hand, he noted, the casualty market is not likely to soften as much as it may elsewhere.

Mike Miller, CPCU, CLU, ASLI
Scottsdale Insurance Co.
As noted at the beginning of this article, the E&S marketplace grew at a torrid pace during the hard market, then barely grew at all in 2004. Mike Miller, the president of Scottsdale Insurance Co., which is the nation's fourth largest E&S insurer, doubts that the numbers for 2005 will look much different. For 2006, he predicts direct written premiums will do no more than rise (or fall) by 1%. Nor does he think that's necessarily a bad thing.

“I keep saying it's a sensible market right now,” Miller said. With the Fed signaling that interest rate increases may end soon, carriers can't look to big gains from their investment portfolios. Reinsurance is likely to remain tight and the economy, while reasonably strong, is no barn-burner. In such an environment, E&S carriers have strong incentive to maintain underwriting discipline, he said. “That doesn't mean that there isn't competition, but it hasn't gotten so cutthroat that people are doing things that ultimately result in the significant deterioration of results.”

Scottsdale would appear to have been one of those “sensible” players in 2005. “Our growth was less than what we had hoped for,” Miller said, “but still we ended up growing a few percentage points–and our combined ratio was in the mid 90s.” For 2006, the company hopes to grow a couple of percentage points more than it did last year while maintaining the same combined ratio, he said.

Miller said he expects the market to continue to soften next year, except for Southeastern coastal property, where capacity problems are appearing and rates are headed up. He said there could be “some opportunity” for Scottsdale in such areas, but only to the extent its reinsurance treaties will permit. “The rates will be good,” he said, “but it comes back to how much capacity you have for catastrophe losses.”

In 2004, the four hurricanes that hit Florida collectively caused extensive losses, but since they were four separate events, reinsurers got off relatively lightly, Miller said. Katrina, however, was another matter. “There was a big pop, and a big chunk of that went to the reinsurance market,” Miller said. That was reflected in the rates for catastrophe covers in Jan. 1 reinsurance renewals. “We have a July 1 renewal, and we would anticipate prices will be going up then as well,” he said.

At the moment, Scottsdale has no new products on the drawing board, Miller said, and rather will look for ways to enhance its existing ones in response to perceived opportunities. Scottsdale derives about 80% of its business from MGAs and program managers, and the rest from surplus-lines brokers. Miller said the brokerage end of the market was the more competitive segment last year, as standard insurers aggressively went after large accounts. He said he expects that pressure to continue in 2006, as the hard market becomes a memory. “The significant price increases have stopped,” he said.

Letha E. Heaton
Shand Morahan/Evanston Insurance Co.
In terms of its overall combined ratio and solvency rate, “the E&S industry is probably as well poised as it ever has been in its history,” according to Letha Heaton. Having said that, however, she added that the jury is still out on the effects of last season's hurricanes.

Heaton is senior vice president for sales and marketing at Shand Morahan & Co., a surplus-lines underwriting company that places business with Evanston Insurance Co., the sixth-largest E&S insurance company, and Essex Insurance Co., which is the ninth largest. All three are owned by Markel Corp.

In regard to hurricanes Katrina, Rita and Wilma, Heaton said Markel has reported losses, as have many insurance companies, higher than those associated with 911. “We as an industry are revising not only our expectations regarding the frequency of these kinds of storms, but working to assure that we have the models to guide us for an expected higher loss frequency, from an actuarial perspective,” she said.

Heaton said that Markel's E&S companies plan to continue providing capacity to coastal areas, however, as long as it is possible to get an adequate rate to cover the exposure. “If you look at what is going on just in Louisiana,” she said, “property markets are exhausted. There is no capacity there any longer. That says something about whether the right rate was there on line to begin with.”

Heaton said reinsurers apparently were as surprised as carriers by the ferocity of last season's storms and that the E&S industry could experience capacity problems as a result. “Having said that,” she added, “we believe we have strong financial partners, and we are not having any difficulty with our placements.”

As she looks ahead, Heaton said Markel sees opportunities in the marine and energy niches, and recently formed a unit to serve them. “There is a lot of indication that that market is getting a little harder now,” she said.

On the whole, however, Markel's E&S units probably will remain cautious, Heaton said, in keeping with what she predicted will be a flat year overall for the E&S industry. “Right now our plans, frankly, are pretty much to stick to our knitting.” she said.