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E&S Market Premium Growth Expected in the Near Term

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October 01, 2019

Direct written premiums in the US excess and surplus (E&S) lines market for 2018 grew at the greatest rate since 2012, increasing 11 percent, according to Fitch Ratings. The trend continued to strengthen in the first half of 2019 with premium growth of 15 percent, a rate nearly double the overall property-casualty market's growth rate.

"Underwhelming underwriting results have accelerated premium rate increases, particularly in the commercial property and auto segments," said Doug Pawlowski, senior director, insurance. "The specialized nature of E&S attracts more challenging property and liability business, which generates more volatile loss experience over time. In the last 2 years, unusual catastrophe losses took their toll on market results."

The E&S market reported a 107 percent direct statutory combined ratio, significantly higher than the 92 percent ratio average over the prior 5 years. Catastrophe losses from Hurricanes Michael and Florence, as well as the California wildfires, contributed to this result, despite being lower than 2017 losses from Hurricanes Harvey, Irma, and Maria.

Fitch anticipates that further premium rate hardening and movement of underwriting exposures toward nonadmitted markets will support above-average E&S market premium growth in the near term. Efforts to improve profits by leading E&S market participants, including Lloyd's and American International Group, Inc. (AIG), via changes in policy limits and risk appetite are also significantly affecting underwriting conditions.

Merger and acquisition activity is having less influence on market share shifts in the E&S market. Transactions that included significant E&S business in 2018 and 2019 were AIG's acquisition of Validus Holdings and Hartford Financial Services Group's purchase of the Navigators Group.

From an organic growth standpoint, Berkshire Hathaway Inc. (BRK) expansion continues to stand out. BRK is now the fourth-largest E&S writer, with market leading 5-year average direct premium growth of 31 percent.

The full report, U.S. Excess and Surplus Lines Market Review—Consecutive Weak Results Spur Stronger Revenue Growth, is available on the Fitch Ratings website.

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