NU Online News Service, Oct. 9, 10:30 a.m. EDT
Orlando–There's been lot of talk on the acquisition front by excess and surplus lines insurers, but little action to date, even in a year that followed back-to-back declines in organic growth for the segment overall, according to a rating agency analyst.
Indeed, U.S. E&S insurers haven't reported two consecutive years of falling premiums since the late 1980s, according to the latest update on the state of the surplus lines market prepared by Oldwick, N.J.-based A.M. Best Company on behalf of the National Association of Professional Surplus Lines Offices, Ltd.
The report was delivered here during NAPSLO's annual conference.
The rating agency tallied direct U.S. premium written for domestic professional surplus lines insurers (U.S. insurers writing more than half their direct premiums on an E&S or non-admitted basis) at $24.8 billion for 2008–a full 11 percent lower than the $27.7 billion figure for 2007.
According to the report, the last double-digit drop occurred in 1988, when the decline was 10.4 percent
Report author David Blades, a Best senior financial analyst, said he's been a little surprised by the fact the soft market has dragged on so long, and by the lack of deals getting done.
In an interview before the official release of the report, Mr. Blades said a lot of due diligence is still being done by company management teams intent on making acquisitions. That's to be expected, given the continuation of a soft market that's impeding the possibility of organic growth.
"There's a lot of activity behind the scenes, but the actual [merger] deals getting done still seem to be a little bit slower than in previous years," Mr. Blades said.
A lot of insurance organizations still have solid balance sheets, "so there is capital there to make smaller acquisitions on the company side–to buy an MGA, to buy an underwriting manager," if the insurer has its sights on expanding into a certain type of business in which it's not currently involved. "I think that's where the focus is right now, but even those deals don't seem to be as frequent as in the past," he added.
He said he believes most potential deal activity hasn't moved past the interested-shopper stage because of concerns about the investment markets overall.
"There was trepidation at the start of the year as to how bad investment losses would still be–whether the markets would come back. What capital you had you wanted to hold a little bit closer to the vest," he said.
Company managers who weren't sure investments were "going to come back didn't want to go using the capital" they had–capital that "could actually be used to fill in some holes if they had more realized investment losses."
That conservatism meant that only small deals–those that could be executed using disposable capital–could get done. While Mr. Blades believes the conservatism was well-placed given the volatility of the investment markets, he also believes that if insurance companies are going to make deals, now is the time to get them closed–before year-end.
"If conditions do start to turn around, and the market looks a little more favorable from an underwriting standpoint, then there might be some opportunities for which the price will only go up," or deals might be taken off the table entirely, Mr. Blades reasoned.
"So for those companies that do have the capital, the balance sheet strength to go out and purchase somebody–a smaller competitor or an MGA, maybe even one of some size–it may be easier to do that now," he said.
A.M. Best's 16th annual report on the surplus lines market was commissioned by the Derek Hughes/NAPSLO Educational Foundation, a foundation set up in 1991 to improve education about surplus lines.
(For more details about the A.M. Best report, see the Oct. 19 edition of National Underwriter, available online on Oct. 16 at www.property-casualty.com.)
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