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Captive Insurance Issues and Trends 2018

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Excess and Surplus Lines Market Poised To Make Underwriting Profit

Profit Increase SF
September 28, 2018

Modest recovery is expected to continue for the US excess and surplus (E&S) lines insurance market, which will provide a boost for US property-casualty (P&C) insurance companies that have significant operations in this specialty segment, says Fitch Ratings in a new report.

Typically more volatile than standard admitted insurance markets, the E&S business vastly underperformed P&C insurers overall last year with a 116 percent direct statutory combined ratio, significantly higher than the 5-year average of 95 percent. The E&S industry also absorbed a substantial hit with large net natural catastrophe insured losses, which eclipsed $50 billion for all US insurers in 2017.

Signs of a rebound emerged for the E&S market premium base, which grew by 5 percent last year due largely to fast-growing commercial auto lines. Premium volume is likely to accelerate this year from premium rate increases in both property and auto lines along with some casualty segments. "The strength of the economy overall will also serve to fuel growth for several E&S-related products, including property and construction," said Fitch Ratings Director Gerry Glombicki.

Based on midyear performance and favorable premium trends, the E&S market is poised to generate a significant direct underwriting profit in 2018, barring another round of large catastrophe losses. "Besides uncertainty tied to catastrophe losses, loss costs in areas like automobile bodily injury severity, medical costs, and litigation settlement trends warrant close watch for unfavorable shifts that may influence future profit potential," said Mr. Glombicki. 

Another area worth keeping an eye on in the coming months for the E&S segment will be industry consolidation. This comes off of several notable E&S mergers and acquisitions (M&A) last year, most notably Markel Corporation's acquisition of State National Companies. "The E&S market has become an increasingly viable M&A target in the last 2 years and more transactions are likely going forward for candidates with unique specialty product niches and favorable profit margins," said Mr. Glombicki.

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