September 20, 2016 by Canadian Underwriter
Underwriters of surplus lines in the United States generated growth in direct premium of 2.5% in 2015, the smallest annual increase in the last five years, according to an A.M. Best special report released on Monday.
The Best’s Special Report, titled Surplus Lines Financially Sound Despite Market Pressures and Economic Challenges, stated that this small increase is attributable to competitive market conditions and sluggish growth in some industry sectors that impacted exposure bases. But despite the lower growth and the inability to sustain what had been two straight years of underwriting gains entering 2015, surplus lines underwriters still generated pre-tax and net profits for the year, albeit reduced by more than 30% from the above average levels achieved in 2013 and 2014.
“Although the sector has historically benefited from favourable prior year loss reserve development, in 2015, adverse loss reserve development was a primary contributor to the drop in operating profits,” A.M. Best said in a statement. “Nonetheless, in spite of instability remaining in the capital markets and interest rates remaining low, growth in investment income helped surplus lines companies again add to their bottom lines.”
A.M. Best’s domestic professional surplus lines (DPSL) composite, which is a consolidation of 72 U.S.-based DPSL companies that wrote more than 50% of total direct business on a surplus lines basis in 2015, represented more than 70% of the total surplus lines market in 2015, the ratings firm reported. While the composite experienced far less favourable underwriting results in 2015 compared with the previous year, “the market position of surplus lines insurers continues to be favorable overall, with most carriers being well-capitalized and consistent performers,” the statement said.
These solid results are due to effective strategic analysis, product diversification, underwriting discipline and an environment conducive to opportunistic mergers and acquisitions, A.M. Best suggested. “A.M. Best believes the surplus lines market is financially sound at present and should remain solid for the foreseeable future despite competitive market pressures and challenging economic factors,” the company concluded.