Comment: E&S outlook underrated

AM Best holds a negative outlook on the US surplus lines sector. But the data for the first half of 2020 shows strong momentum, despite the challenges of Covid-19.

Anecdotal evidence from sources in the wholesale broking community and at E&S carriers has indicated that the surge in submissions seen last year and into the early part of this year has remained strong, while rate momentum has if anything accelerated in some areas in the fallout of the pandemic.

And the numbers reported by the surplus lines stamping offices in the US appear to speak for themselves.

In its annual report card on the sector, AM Best noted that data collected from surplus lines stamping and service offices through mid-year 2020 revealed a 10.3 percent increase in surplus lines premium in the first half of the year compared to the prior-year period.

While submission flow moderated in March, the phenomenon proved temporary.

The growth came after the E&S sector generated 11.2 percent direct written premium growth in 2020 to a record $55bn, taking the surplus lines share of overall US commercial insurance business to 16.1 percent – above the 13 to 15 percent range seen in the years since 2002.

Speaking on a panel last week to discuss the AM Best report, Brady Kelley, executive director of the Wholesale & Specialty Insurance Association (WSIA), said the stamping office data was a strong indicator of the market for the full year.

The data is compiled from 15 states that represent almost 70 percent of total premium volume of the surplus lines sector in the US.

“It’s one of the key gauges of the market. The good news is that growth continues in 2020 despite all the economic challenges and disruption we’ve all faced with the Covid-19 pandemic.

“I’ve got to tell you many of our members are still pretty optimistic about continuing growth – double digit growth – through 2020 and into 2021,” said Kelley.

That is supported by commentary from market participants – including industry leaders speaking on the same panel last week.

And it begs the question, why does AM Best hold a negative outlook on the sector?

Unexpectedly resilient

In the same discussion, AM Best associate director David Blades explained that the decision to lower the outlook from stable to negative back in April was taken in line with other segments of the US commercial lines industry.

“That decision directly reflected economic disruption stemming from the Covid-19 pandemic and the effect we expected that contraction in the US economy to have on the surplus lines market.

“AM Best believes there is a direct link between a healthy US economy and demand for surplus lines insurance products,” he explained, highlighting the impact on new and emerging markets and demand from the small business sector of the economy.

The firm had previously held a stable outlook that reflected its belief that market conditions would be dynamic and supportive of premium growth, as well as other metrics around underwriting performance and maintaining strong risk adjusted capitalization.

“AM Best has been somewhat surprised as to just how resilient the surplus lines market segment has proven to be through these headwinds from Covid-19 in terms of how surplus lines companies have fared through the second quarter based on the results we’ve looked at so far”

AM Best’s David Blades on the E&S market’s resilience to the global pandemic

And Blades acknowledged that the ratings agency had not expected the surplus lines sector to avert the negative impact of the pandemic and come through with the strong performance it has shown in recent months.

“It is important to add that AM Best has been somewhat surprised as to just how resilient the surplus lines market segment has proven to be through these headwinds from Covid-19 in terms of how surplus lines companies have fared through the second quarter based on the results we’ve looked at so far.

“Our plan is to see how things play out through the rest of 2020 and to update market segment outlook during the first quarter of 2021,” he commented.

On balance, AM Best was probably right to take a cautious approach as the pandemic took hold in the Spring. But as with so many other aspects of Covid-19, the outcome has been unpredictable.

What is now clear is that the factors driving the flow of business into the wholesale channel – including shifting appetite from admitted carriers – have not changed.

Coupled with accelerating E&S pricing, that means that growth prospects for the sector look to be undimmed.