Industry Issues | Surplus Lines Reform

Fitch Ratings: Excess & Surplus Lines Poised for Rebound in 2018

The U.S. excess and surplus (E&S) lines insurance market is set to continue on the path of "modest recovery" after significant underperformance in 2017, Fitch Ratings revealed in its latest market report.

The ratings agency added that the sustained recovery of the E&S market "will provide a boost for US property & casualty (P/C) insurance companies that have significant operations in this specialty segment."

In 2017, the E&S business underperformed P&C insurers with a 116% direct statutory combined ratio, considerably higher than the five-year average of 95%. The E&S segment also took a substantial hit with large net natural catastrophe insured losses - which came in at over $50 billion for all US insurers in 2017.

E&S's market premiums grew by 5% in 2017 primarily due to fast-growing commercial auto lines, promising a recovery for the market, according to Fitch. The firm expects that the market's premium volume is likely to accelerate this year from premium rate increases in property and auto lines, as well as several 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.

Fitch expects the E&S market to generate significant direct underwriting profit this year, based on mid-year performance and favorable premium trends. However, Hurricane Florence and the on-going hurricane season could bring another round of large losses for the market.

"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," Glombicki added.

Fitch also brought attention to an increase in industry consolidation activity in the E&S segment.

"The E&S market has become an increasingly viable M&A target in the last two years and more transactions are likely going forward, for candidates with unique specialty product niches and favorable profit margins," Glombicki explained.