E&S entrants should not overlook regulatory “sea change” since last wave

Lawyers at McDermott Will & Emery have suggested that the capital looking to get into the US excess and surplus lines (E&S) market should ensure they are using the post-Dodd-Frank playbook taking note of US regulatory changes in recent years.

Michael Byrne and Michael Halsband, New York-based partners at McDermott Will & Emery with experience in complex insurance transactions, regulation and insurtech matters, said in an interview with this publication that capital targeting the E&S market has a new playbook available for entry.

The beginning of June brought a flurry of news about new entrants to the E&S market.

As this publication reported, two significant start-up and scale-up initiatives are set to bring nearly $2bn of capital to the market, largely from private equity backers.

The furthest advanced is the relaunching of StarStone US with $850mn of capital and a management team led by Ed Noonan as chairman and Jeff Consolino as CEO. It is supported by Aquiline, Dragoneer Investment Group and SkyKnight Capital.

A more nascent project, which is also expected to have a significant E&S focus, involves Dinos Iordanou and Greg Hendrick with up to $1bn of potential start-up capital from Hellman & Friedman and The Carlyle Group.

In the US, other names linked with potential initiatives include former Navigators CEO Stan Galanski and former Endurance and Sompo executive Jack Kuhn.

New entrants to the E&S market may be using a tried and tested way of getting into the market.

“What seems to be the idea that you have to find an existing platform in order to get to the market as fast as possible,” said Byrne. “Obviously, it’s helpful, and might be quicker, to have an existing platform of quote unquote licenses, management team and existing business. But the regulatory options for launching E&S carriers in the US have changed since the Classes of 2005 and 2001, where Bermuda was effectively the only option to set up and then write on a surplus lines basis in the United States.”

First, these companies can get approved to write E&S business on the National Association of Insurance Commissioners (NAIC) listing of alien insurers.

Byrne said that is still a valid route for new capital looking to get into the E&S market.

“You can still do that,” he said. “You could form in Bermuda, get a license in Bermuda, get on the NAIC’s list, which takes maybe three months. What has changed since 2001 and 2005 is that, under Dodd-Frank, NAIC listing gets you automatic surplus lines eligibility throughout the whole country. You don’t have to do any individual state filings, anything like that. So you could do a new company, and maybe some of the capital providers are looking at that.”

Recent examples of companies getting into the E&S market by getting on the NAIC list include IGI’s Bermudian subsidiary gaining approval in March and Chaucer’s Irish subsidiary doing likewise in January.

Byrne said that some existing direct insurers based outside the US have looked at NAIC listing but have not taken that step yet.

“There are certainly existing Bermuda insurers that traditionally have avoided any kind of US status that have looked at this,” said Byrne. “They generally have not taken that step yet.”

A new way

But there has been a big change since the last major wave of start-ups that some of the capital looking at the E&S market may not be not fully considering. The Dodd-Frank Act included a section on surplus lines eligibility for US domestic insurers that also went into effect in 2011.

“So now the other way to do it is you could form a US company in a single state. If you have [a minimum of] $50mn in capital and surplus, you would also be eligible nationwide for surplus lines,” said Byrne. “And in an increasing number of states you can actually write surplus lines in your state of domicile, which is another difference.”

“It strikes us that maybe this route is not top of mind for the capital behind these initiatives and the management teams, based on their experience with US E&S regulation from prior Bermuda formations.”

Halsband, who is global leader of McDermott Will & Emery’s insurance transactions and regulation group, said the ability to quickly set up from scratch and instantaneously write E&S business across the US is a big difference from before.

“This is a sea change from the last time the leaders that we see out there now who are trying to set things up actually set things up,” Halsband told The Insurer. “Post the Dodd-Frank Act it is an accelerated process that just wasn’t in place back then. So you can stand up an E&S company in a fraction of the time that you could have 10, 15 years ago before Dodd-Frank.”

One example of a US domestic company that took this route is medical professional liability writer Coverys, which created a New Jersey-based E&S company in 2015 led by former Arch executive Sam Mezzich.

Companies could also quickly get up and running instantly by buying an E&S shell company, like Halsband’s client Transverse Insurance Group did at the start of the year with the acquisition of Arrowood Surplus Lines Insurance Company, since renamed Transverse Specialty Insurance Company.

Byrne said that US regulators should be eager to compete for new companies.

“I do think with Dodd-Frank there is an opportunity,” he said. “US regulators should be making it be as easy to form in the US and obtain nationwide E&S eligibility as it is to form offshore and get that eligibility through the NAIC. Dodd-Frank gives them that ability. There are only going to be so many new companies formed in this next cohort. Bermuda is going to get a couple probably of the new companies, but the US should get their share.”

This issue is only just coming into focus because, until now, there have not been many major start-ups because of the high level of capital in the industry. There is still a lot of capital, but it is being deployed more cautiously. This is especially true in the E&S space where AIG and Lloyd’s in particular have pulled back.

“There haven’t been any new formations because there’s so much capital,” said Byrne. “There’s no need with other ways to access the market. But I think now there is an opportunity we haven’t seen before, and I don’t know that everyone is seeing all the tools that they might have.”