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E&S capacity still plentiful despite cat losses

E&S capacity still plentiful despite cat losses

Capacity in the excess and surplus lines market remains abundant, and while select lines of coverage have hardened, increases have been less than expected considering last year’s catastrophes, say experts.

Meanwhile, there has been a renewed emphasis on managing general agency business, and cyber continues to be a growth area for the industry, along with representations and warranties-related business, among other lines, observers say.

The trends in the marketplace remain the same in terms of “generally poor underwriting results that are being offset by significant investment returns,” said David J. Bresnahan, Boston-based executive vice president of Berkshire Hathaway Specialty Insurance Co.

The underwriting losses for surplus lines insurers caused by 2017 catastrophes “was more than offset by record investment gains,” with last year’s tax reform an issue as well, he said.

That situation continues this year, he said. “You see a lot of poor underwriting results,” but they are often offset by investment gains, he said.

“It’s really a tale of two cities,” said James Drinkwater, New York-based president of AmWINS Group Inc.’s brokerage division. “The majority of the markets are very competitive, but there are pockets, as always, which are experiencing a hard market.”

“There’s plenty of capacity in other segments, which are experiencing flat to marginally increased prices,“ Mr. Drinkwater said.

Some observers say last year’s catastrophic activity did not lead to the more general hardening in surplus lines that was expected.

“A good many of us made the assumption the market would get a little bit stronger as we carried on through 2018,” which was predicated on poor 2017 results due to weather conditions and poor underwriting, said Alan Jay Kaufman, chairman, president and CEO of H.W. Kaufman Financial Group Inc., the Farmington Hills, Michigan-based parent company of wholesaler and underwriting manager Burns & Wilcox Ltd.

But “there’s still an overabundance of capital even with the vicious storms and the devastating results,” and rates are flat, he said.

“There was an expectation the rates would go up a lot higher, given what happened with the storms of 2017. That did not happen,” Mr. Drinkwater said, adding there has been low single-digit rate growth instead.

“Everyone’s underwriting on razor-thin margins if they’re making any money at all,” said Christopher J. Cavallaro, CEO of Jericho, New York-based ARC Excess & Surplus L.L.C. “If you do have a mature book, it’s harder to make money.” However, Joseph Cellura, president of the North American casualty division of Allied World Assurance Co. in New York, said, “We’re starting to see significant rate momentum in the E&S market,” although “it’s hard to forecast how long it will continue in that direction and at what pace.”

John Edack, San Francisco-based senior executive vice president of E&S casualty for Arch Capital Group Ltd.’s U.S. insurance group, said, “I continue to be impressed with the health of the E&S casualty market. Yes, it is competitive, but as always there are pockets of opportunities for the talented wholesale brokers to serve the general casualty marketplace.”

“Rate change appears to be positive in most classes of business,” with increases in the low single digits. “It’s most pronounced in the lead umbrella product, where it’s probably most needed,” Mr. Edack said.

Rates are improving even more in trucking and New York construction and are in the high single digits, if not low teens, because of “more opportunity and a scarcity of market,” he said.

New York construction is “certainly a very difficult class,” particularly for construction-related vehicles, which is “extraordinarily difficult to deal with,” said Mr. Cavallaro.

“There’s continued firming in the property/casualty sector in some niche areas,” including any commercial risks that are affected by the wildfires in the West, said Timothy W. Turner, Chicago-based president and CEO of R-T Specialty L.L.C., a division of Ryan Specialty Group L.L.C. Transportation risks, including trucking, continue to firm as well because of losses and portfolio deterioration, Mr. Turner said.

Meanwhile, Mr. Bresnahan said risks associated with the opioid industry, including manufacturers, distributors, pharmacies and even pharmacy benefit managers, are facing exclusions in their medical malpractice and casualty programs, he said.

New companies include Phoenix-based Ategrity Specialty Insurance Co., which is being formed by Mike Miller, who was previously president of Scottsdale Insurance Co., which was renamed Nationwide Excess and Surplus.

Ategrity has recruited several other former Scottsdale staff and plans to write brokerage and contract business across all states. It is in the process of securing a license in Delaware and a rating from A.M. Best Co. Inc. (see related story).

Another Scottsdale Insurance veteran, Gary Romay, who was Nationwide Excess’ senior director for contract underwriting in the Mid-Atlantic region, is now president of KW Specialty Insurance Co., a unit of North Hollywood, California-based Kramer-Wilson Co., in Phoenix. A.M. Best Co. assigned the insurer an A- financial strength rating in May.

KW Specialty, which is funded with $105 million in capital, is initially focusing on commercial auto and trucking accounts and nonstandard auto on a quota share basis, in addition to writing primary personal business, but there are plans to eventually expand into primary commercial lines, Mr. Romay said.

Mr. Bresnahan said, “The opportunity for a new entrant would probably be limited to a very focused and a very specialized area that the new entrant felt they really understood and could add value,” because “you need to take on a big proportion of customers’ risk to carry on as a carrier in this market.”

The market outlook is unclear, said Mr. Cavallaro. “I think the market’s going to be choppy for the next year, and there are questions” as to the soundness of insurers’ reserves. “Even if there is a pocket where you can make some money, the capital’s going to chase that business and drive the prices down,” he said.


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