While the excess-and-surplus-lines sector is maintaining good profitability and strong balance sheets, challenges from high catastrophe exposures and low interest rates remain, says a report from Moody's Investors Service.

“Collectively, E&S companies reported an underwriting loss in 2011 due to the high level of catastrophes,” says the report, citing last year's earthquakes, tsunamis, floods and severe storms.

But Moody's says that even with current challenges, E&S insurers are expected to continue to generate top-line growth through product innovation and development.

In addition to the sector's success in creating new products, the report, authored by analyst Enrico Leo, attributes the sector's strength to underwriting discipline and risk-management practices, which served the sector well through the soft market.

Leo says E&S insurers have responded to a changed environment by raising rates, tightening underwriting standards, purchasing additional reinsurance and, in some cases, reducing line sizes.

In further good news for carriers, E&S pricing is stabilizing and beginning to improve in some business lines, Leo says, particularly for catastrophe-exposed property risks.

“As pricing gains traction and standard carriers shed poorly performing accounts, E&S insurers' revenue and profitability metrics will improve, notwithstanding significant competition, low interest rates and still-difficult economic conditions,” Leo writes.

Expense ratios are generally higher for E&S carriers because they use wholesale-distribution channels, though their loss ratios have tended to be lower over time than standard carriers, Leo says.

New regulations in some states are negatively affecting E&S insurers, Leo cautions, noting that in the past two years, four states have passed laws that define construction defects as commercial general liabilities.

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Moody&rsquo;s: Discipline in E&S Helping Sector Overcome Challenges

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