Surplus lines carriers post underwriting loss for a second straight year in US
The US domestic professional surplus lines (DPSL) insurers posted a combined ratio of 107.8 percent in 2016, its highest in 10 years excluding 2012 which was impacted by Superstorm Sandy, AM Best said in a Sept. 5 report.
The composite’s bottom-line results were notably affected by the net results of the sector’s largest single insurer, Lexington Insurance Company, which reported a net combined ratio of 130.8 percent in 2016. Excluding the impact of Lexington’s results, the DPSL composite would have recorded a combined ratio of just over 91 percent.
In 2015, a less favourable net underwriting performance had already resulted in a combined ratio of 101 percent for the DPSL composite, exceeding the property/casualty (P/C) industry’s combined ratio by about three percentage points.
Commenting on the 2016 results, AM Best noted that direct premium volume was constrained by sluggish growth in industry sectors that affected exposure bases and by increasing competitive pressure, including admitted companies competing for surplus lines business.
The modest growth in direct premium in 2016, which followed a 2.5 percent growth rate in 2015, was driven by 11 percent growth in non-admitted premium written by Lloyd’s, which generated the largest percentage of direct premium volume of US surplus lines business.
Top line growth excluding Lloyd’s was minimal, especially among the domestic professional surplus lines (DPSL) insurers, which write more than 50 percent of their business on a non-admitted basis, and historically, have accounted for two-thirds to three-quarters of the total surplus lines market.
Nevertheless, insurers were still able to generate both pre-tax and net profits and maintain solid balance sheet strength, the ratings agency added.
Despite the underwriting loss, the DPSL composite’s overall operating results benefitted from relatively steady net investment income of $1.9 billion, leading to a pre-tax operating profit of $1.2 billion and $2.2 billion in net income. The companies in the DPSL composite also generated approximately $17.3 billion in direct premiums written in calendar-year 2016, accounting for approximately 40.9 percent of the total surplus lines market.
These solid results are due to effective strategic analysis, product diversification, underwriting discipline and an environment conducive to opportunistic mergers and acquisitions, AM Best said.
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