The U.S. excess and surplus lines market is experiencing a period of growth because of rate increases and an improving economy, while profitability is strong, New York-based Moody's Investors Service Inc. says in a report on the sector issued Friday.

“These characteristics will help E&S companies navigate the property and casualty insurance cycle with strong balance sheets, despite challenges from catastrophe losses and low interest rates,” says the report, “U.S. Excess and Surplus Sector Profile, Profitability Remains Strong as Competition increases.”

The report says the marketplace is dominated by two insurers: American International Group Inc. and Lloyd's of London syndicates, which together account for nearly 35% of the market.

The top 25 insurers account for more than three-quarters of the market, according to the report. The E&S sector accounted for 6% of total industry premiums in 2013, the report says.

The report says E&S casualty rates continue to rise, although at a slower pace than in recent years.

“We expect casualty rates to rise moderately into next year while commercial property rates will continue to decline, given increased competition and barring a major catastrophe,” says the report.

“The flow of casualty business into the E&S market is expected to slow as standard commercial insurers seek to retain existing profitable business and expand their risk appetite for new business but not necessarily higher risk E&S lines,” the report says.

The report also says that while the E&S sector outperforms the property/casualty industry, it “remains volatile given catastrophe risk.”

Expansion activities are focused on hiring underwriting teams, mergers and acquisitions, and Lloyd's syndicates, the report says.

“Significant pressures in the reinsurance sector for alternative capital, combined with the relative attractiveness of E&S and specialty business could lead to higher levels of merger and acquisition activity in the E&S sector,” it says.