AIG returned to surplus lines growth last year following Validus acquisition

The recent decline in AIG’s surplus lines premium was reversed in 2018, but the growth was still below that of the wider market, AM Best’s figures reveal.

AM Best today revealed in a market review that the surplus lines market grew direct premium written by 11.2 percent in 2018.

AIG’s recent decline in surplus lines DPW was reversed in 2018, with a 9.5 percent increase resulting from the impact of its acquisition of reinsurer and specialty insurer Validus Holdings in mid-July 2018.

The acquisition gave AIG a Lloyd’s arm, Talbot, in addition to specialty E&S insurer Western World, which wrote about $470mn in US surplus lines premium.

AM Best said that AIG’s strategic reshaping in recent years was responsible for a drop in the group’s top-line nonadmitted premium along with the planned move of some premium from its US nonadmitted carriers to offshore affiliates.

“This has brought other leading US surplus lines writers closer to AIG in terms of written premium volume,” AM Best said in a market review.

However, AIG’s Lexington remains far and away the largest US surplus lines writer on a company basis, as it has been since AM Best first published a report on the sector in 1994.

“The company still accounts for 5 percent of all surplus lines DPW, a sizable amount for any single company, and the AIG/Lexington brand maintains its considerable market strength, especially when it comes to developing creative coverage solutions for surplus lines risks,” the report said.

AM Best noted the rest of the top 10 includes familiar names such as Markel, Berkshire Hathaway, WR Berkley, Nationwide and Chubb.

In 2018, the top 25 surplus lines groups and Lloyd’s generated 79 percent of surplus lines direct written premium. The premium written by the Lloyd’s market is aggregated in the ranking. Excluding Lloyd’s, the top 25 groups account for 56 percent of the market.

AM Best said that industry consolidation has led to considerable changes in the top 25 ranking over the years. A number of companies have risen in the rankings through consolidation: Chubb merged with Ace, while other acquisitions include Axa/XL, Fairfax/Allied World, Liberty Mutual/Ironshore, Tokio Marine/HCC and Sompo/Endurance.

This consolidation has slowed in the past few years, although The Hartford and Axa have expanded their presence with their acquisitions of Navigators and XL, respectively.

“Over the near term, we may see fewer consolidations of large global multiline insurers and reinsurers, and more strategic acquisitions of niche, specialty insurers, possibly insurers that have a well-established market presence or advanced technological capabilities,” said the report.

“The M&A-conducive environment could lead to a marked change in the surplus lines and specialty market’s competitive landscape, with a smaller number of companies with greater specialty capabilities and greater market capacity.”

New entrants have been attracted to the surplus lines market. Some of these are structured as surplus lines carriers, but function more as transformers and fronting entities.

“Regardless, AM Best expects that the footprint of surplus lines carriers will continue to grow as technology adds levels of complexity to manufacturing and other types of risks,” the report said.

AM Best believes that surplus lines insurers remain targets because they can provide new growth opportunities, desirable market expertise, diversification opportunities and generally favourable loss experience.

“Technology-driven service providers have proven their value to companies seeking strategic acquisitions, as evidenced in the AIG-Validus and Axa-XL Group deals,” the report said. “Additionally, organizations with Lloyd’s platforms provide strategic enhancements and synergistic benefits for acquiring organizations.”