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Professional Insurance Wholesalers Association of NYS Surplus Lines Market Review

Professional Insurance Wholesalers Association of NYS Surplus Lines Market Review. David S. Blades, CPCU Senior Financial Analyst – P/C Ratings September 24, 2009. 2008 Surplus Lines Market Highlights. Direct Premium Written declined by the largest percentage since 1988.

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Professional Insurance Wholesalers Association of NYS Surplus Lines Market Review

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  1. Professional Insurance Wholesalers Association of NYSSurplus Lines Market Review David S. Blades, CPCU Senior Financial Analyst – P/C Ratings September 24, 2009

  2. 2008 Surplus Lines Market Highlights Direct Premium Written declined by the largest percentage since 1988. The combined ratios rose due to weather-related losses on natural-catastrophe exposed business. Favorable loss reserve development reduced the combined ratio by 10.7 points. Total investment losses of 161.3 million were generated, after a $2.38 billion investment gain in 2007. Policyholder’s surplus for the surplus lines market as a whole declined for the first time since 2001. Despite the aforementioned negative factors, the surplus lines market generated a profit in 2007, albeit that profit represented a 67% decrease, year-over-year.

  3. Surplus Lines Composite vs. Total P/C IndustryCombined Ratios

  4. Surplus Lines Composite vs. Total P/C IndustryNet Loss & LAE Ratios

  5. Surplus Lines vs. Total P/C IndustryPretax Returns on Revenue

  6. Surplus Lines vs. Total P/C IndustryTotal Return on Surplus

  7. U.S. Surplus Lines – Market Share by SegmentCY 2008

  8. Surplus Lines vs. Commercial Lines – DPW(1988, 1998, 2008)

  9. Surplus Lines Specialists – Operating Performance (2008) Group Chg Loss/LAE Comb. Pretax Name in DPW Ratio Ratio ROR Admiral Ins. Group -14.6% 62.4% 87.6% 31.4% Markel Corp. -9.5% 59.9% 100.1% 12.9% Alleghany Ins. Hldg. -14.9% 59.8% 91.2% 22.5% Argo Group 5.1% 60.3% 93.9% 26.8% RLI Group 8.3% 46.7% 85.7% 30.5% UAI Group -34.2% 80.9% 116.8% 16.1% HCC Ins. Group 4.4% 50.5% 80.3% 39.3% IFG Cos. -27.2% 61.7% 98.7% 19.9% Western World -17.5% 65.0% 101.0% 21.5% AXIS Ins. Group -4.0% 74.6% 107.9% 19.0% Surplus Lines -12.7% 63.6% 92.8% 26.7% Total P/C Ind. -2.6% 77.1% 105.1% 7.2%

  10. U.S. Surplus Lines – Top 15 Companies (CY 2008) Rank Company Name Group Name Surplus Surplus Lines Lines DPW Mkt. Share • Lexington Ins. Co. AIG $5,962,384 17.3% • Amer. Int’l Spec. AIG $1,184,418 3.4% • Steadfast Ins. Co. Zurich Fincl. Svcs. $1,179,278 3.4% • Scottsdale Ins. Co. Nationwide $1,095,157 3.1% • Columbia Casualty CNA Ins. Cos. $712,603 2.0% • Evanston Ins. Co. Markel Corp. $615,722 1.7% • Landmark American Alleghany Ins. Hldg. $588,217 1.7% • AXIS Surpl. Lines AXIS Ins. Group $538,352 1.5% • Westchester Surpl. Lns. ACE INA Group $517,812 1.5% • Colony Ins. Co. Argo Group $517,599 1.5% • Illinois Union Ins. Co. ACE INA Group $508,365 1.4% • Arch Specialty Ins. Co. Arch Ins. Group $468,808 1.3% • Admiral Ins. Co. W.R. Berkley Group $424,139 1,2% • Indian Harbor Ins. Co. XL America $405,392 1.1% • Nautilus Ins. Co. W.R. Berkley Group $378,438 1.1%

  11. Domestic Professional Surplus Lines CompositeRatings Distribution Level Category # of Rating Percentage Units A++ Superior 2 2.6% A+ Superior 15 20.0% Subtotal 17 22.6% A Excellent 34 45.3% A- Excellent 22 29.3% Subtotal 56 74.6% B++ Very Good 2 2.6% B+ Very Good 0 0.0% Subtotal 2 2.6% Total Secure Ratings 75 100.0% Total Vulnerable Ratings 0 0.0% Using A.M. Best data as of August 1, 2009

  12. Total P/C Industry – Ratings Distribution Level Category # of Rating Percentage Units A++ Superior 16 1.4% A+ Superior 84 7.8% Subtotal 100 9.3% A Excellent 265 24.7% A- Excellent 357 33.2% Subtotal 622 57.9% B++ Very Good 149 13.8% B+ Very Good 101 9.4% Subtotal 250 23.3% Total Secure Ratings 972 90.5% B/B- Fair 67 6.2% C++/C+ Marginal 14 1.3% C/C- Weak 4 0.3% D/E/F Poor etc. 16 1.4% Total Vulnerable Ratings 101 9.4% Total Rating Opinions 1,073 100.0% Using A.M. Best data as of August 1, 2009

  13. Stamping Office Statistics – 2008 vs. 2007 State Premium (millions) Number of Items 2008 2007 % Chg 2008 2007 % Chg AZ $444.5 $540.0 -17.5% 69,325 66,554 4.2% CA $5,723.5 $5,864 -2.4% 466,397 489,998 -4.8% FL $4,400.3 $4,780.3 -7.9% 1,140,124 1,213,651 -6.1% ID $75.8 $86.3 -1.0% 14,598 14,747 -1.0% IL $1,062.0 $1,089.9 -2.6% 102,353 109,294 -6.4% MS $352.3 $387.5 -9.1% 86,194 69,614 23.8% MT $54.2 $68.8 -21.2% 13,174 16,261 -19.0% NV $293.1 $360.2 -18.6% 28,676 29,878 -4.0% NY $3,416.2 $4,042.4 -15.5% 215,698 218,566 -1.3% OR $300.03 $250.2 20.0% 38,877 35,378 9.9% PA $989.0 $973.7 1.6% 170,803 159,076 7.4% TX $3,282.6 $3,726.2 -11.9% 850,757 890,105 -4.4% UT $178.5 $176.3 1.2% 19,154 17,829 7.4% WA $595.1 $711.4 -16.3% 93,795 100,893 -7.0% TOTAL $21,168.5 $23,057.2 -8.2% 3,309,925 3,431,844 -3.6%

  14. Stamping Office Statistics – First Half of 2009 vs. 2008 State Premium (millions) Number of Items 2009 2008 % Chg 2009 2008 % Chg AZ $205.2 $249.3 -17.7% 34,055 36,059 -5.6% CA $2,252.9 $3,116.8 -27.7% 217,842 232,638 -6.4% FL $2,351.4 $2,585.8 -9.1% 550,116 586,476 -6.2% ID $29.2 $38.9 -24.9% 6,784 7,386 -8.2% IL $526.5 $608.4 -13.5% 57,816 51,854 11.5% MN $114.0 N/A N/A 11,507 N/A N/A MS $171.2 $156.9 9.1% 46,586 40,857 14.0% MT $34.6 $24.0 44.2% 7,130 5,412 -31.7% NV $116.5 $360.0 -27.2% 13,212 14,686 -10.0% NY $1,811.3 $1,841.0 -1.6% 102,059 111,305 -7.5% OR $105.1 $148.5 -29.2% 18,230 19,553 -6.8% PA $453.5 $504.2 -10.1% 86,231 88,894 -3.0% TX $1,770.9 $1,577.8 12.2% 420,852 426,494 -1.3% UT $90.6 $88.2 2.7% 10,023 9,479 5.7% WA $595.1 $711.4 -2.5% 42,170 43,360 -1.5% TOTAL $10,300.0 $11,373.8 -9.4% 1,625,153 1,673,453 -2.9%

  15. Key Federal Legislation Impacting the Surplus Lines Market • Non-admitted and Reinsurance Reform Act • Passed by the House on 9/9/09; Expected to be voted on in the Senate • National Association of Registered Agents and Brokers Reform Act (NARAB II) • Reintroduced in the House of Representatives in 2009 • Insurance Information Act of 2009 • Rep. Paul Kanjorski, D-Pa, introduced the bill in May of 2009 • Insurance Industry Competition Act of 2009 • Reintroduced in the House of Representatives in March of 2009 • National Insurance Consumer Protection Act • Introduced in the House of Representatives in April of 2009; the Senate has yet to introduce a companion bill

  16. Current Distribution Issues Impacting the Surplus Lines Market The Impact of the Recession Submission Activity has Increased but Revenue is Down The Admitted Market is still Competing Aggressively on Some traditional Surplus Lines Business Mergers and Acquisitions Utilizing Current Market Conditions to Spark Innovation Outlook (Near-term)

  17. U.S. Admitted Companies vs. Surplus Lines – Annual Impairment Count (1977-2008)

  18. Primary Causes of Impairments – Surplus Lines, Admitted & Total Industry Total Surplus Admitted Industry % of Lines % of Mkt. % of Primary Cause # of Cos. Total # of Cos. Total # of Cos. Total Affiliate Problems 54 9% 8 16% 46 8% Alleged Fraud 53 9% 7 14% 46 8% Catastrophe Losses 48 8% 2 4% 46 8% Deficient Reserves 241 40% 19 38% 222 40% Investment Problems 41 7% 5 10% 36 6% Miscellaneous 46 85 2 4% 44 8% Rapid Growth 77 13% 4 8% 73 13% Reinsurance Failure 24 4% 2 4% 22 4% Significant Chg. In Business 26 4% 1 2% 25 4% Subtotal 610 100% 50 100% 560 100% Unidentified 314 9 305 TOTAL 924 59 865 Source: A.M. Best

  19. Questions?

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