Speaking to National Underwriter here during the annual meeting of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd., some said new initiatives at their companies are aimed at putting more premiums on the books. Others are directing efforts toward enhancing relationships with wholesalers.

Still others speculated that Hurricane Katrina will harden a market where slow growth is no longer confined to large property risks.

"All of us casualty guys are saying we don't see how it [the hurricane] can not affect the casualty business," said Brian Evans, vice president for the E&S Individual Risk unit of GE Insurance Solutions.

Joseph Morris, chief executive officer of Hatboro, Pa.-based Penn-America, said, "What I've heard at this convention from my agents" is that property markets "are already informing them to expect rate increases--even outside the Gulf."

The comments came as rating agency A.M. Best, as it has for a dozen years, released its annual report on the excess and surplus lines market. In the report, the Oldwick, N.J.-based rating agency said that in 2004, direct written surplus lines premiums of $33.0 billion were just 0.65 percent higher than comparable 2003 premiums. In contrast, direct premiums for the entire industry rose 4.5 percent.

The report reveals that 2004 was the first year since 1997 that growth in total p-c industry premiums eclipsed surplus lines. The meager 2004 surplus lines growth rate followed three years of extraordinary jumps--35.7 percent in 2001, 61.7 percent in 2002, and 28.3 percent in 2003.

Individually, growth was uneven among E&S players. A comparison of premiums for the top-25 surplus lines writers with those listed in the prior Best reports reveals that while many of the biggest U.S. surplus lines insurers posted declines in 2004, second-ranked Lloyd's saw its E&S premiums rise 2.3 percent to $4.5 billion. (At top-ranked American International Group, E&S premiums fell 12.1 percent to $7.0 billion.)

Mr. Morris observed that Lloyd's has been a formidable competitor for risks that small-risk specialist Penn-America once wrote in its package book. "We're now seeing the monoline property put in Lloyd's, and we write the liability," he said.

As a group, insurers that are part of Bermuda-based organizations had the largest E&S growth rates. They include Arch Insurance, rising 23.6 percent to $824 million; XL America, jumping 32.7 percent to $396 million; and Axis, up more than 50 percent and making its first top-25 appearance with $383 million.

"I don't think they've moved to any kind of a first-tier position in agents' offices. But they're out there," Mr. Morris said.

Standard Markets Back In the Game

At GE Insurance Solutions, Mr. Evans said some habitational, products and service risks are flowing back into the standard market, while contractors' opportunities remain in the E&S liability market.

Liability pricing has been flat or decreasing, he said. "We have accounts where we've gotten increases, but across our book, we're a bit negative," he noted. In spite of declines, he said prices remain at levels needed to meet return targets.

Scott Bayer, senior vice president in the general liability division of Liberty International Underwriters in New York, agreed. "Our typical account is being shopped for a decrease, but rates are still adequate," he said, noting that most opportunities for LIU are in the middle market. "There's a market perception that the larger the account, the greater the price flexibility, which is why we don't write a lot of that."

Mr. Morris said Penn-America, whose average account premium is $2,000, is still getting "a few points of rate" on small contracting and habitational risks that remain beyond the reach of standard markets. But standard insurers are stepping up in retail stores and restaurants, he reported.

Mr. Bayer said that among three broad target classes for his company--owners, landlords and tenants, commercial contractors, and products--OLT had the most movement back to standard carriers, adding that price didn't explain the shift. Instead, standard markets offer to write at lower attachment points, or even first-dollar. That's an approach "we can't, or won't, compete with," he said.

Although Mr. Bayer and Mr. Evans both said there are still opportunities for E&S insurers to write tough classes of products liability, standard insurers now have broader appetites for products also. "That business never really hardened," Mr. Bayer added.

Katrina's E&S Impact Predicted

Looking ahead, most of the predictions voiced at NAPSLO centered around the impact that Hurricane Katrina might have on E&S business, even in liability lines.

Mr. Evans, noting industrywide loss estimates as high as $60 billion, reasoned that liability prices would have to rise within insurers' portfolios "to supplement returns that are missing" in property lines, he said.

"It's like an investment portfolio. If you have some stocks that are performing poorer than others, then you want to try to balance that. If something is performing poorly over here, you're going to have to get some more dollars over here," he said, gesturing alternatively with his left and right hands.

As for the prospect of direct exposure to liability insurers, carrier representatives agreed that environmental/mold issues and certain professional liability exposures (such as that evidenced by a lawsuit against a nursing home operator in Louisiana for failing to evacuate residents) were among the most likely to produce losses for liability insurers.

On the property side, Mr. Morris said areas outside the Gulf--specifically Florida and Texas catastrophe-exposed risks--are already being impacted with price hikes. He added that with Florida market rates back up to levels his company has been charging, there are now opportunities to put unused capacity to work in a state where it lost one-half of its insured property value to lower-priced competitors in recent years.

Changes In A Static Market

For LIU, new opportunities are mainly coming as a result of opening two new offices--one in San Francisco in March 2004, and one in Chicago last September. "From our standpoint, [existing offices in] Boston and New York are flat offices that have reached critical mass," Mr. Bayer said.

While opportunities in new offices still come from the same 150 wholesalers the company had been dealing with, they're controlled regionally. That made them unlikely to be sent to the East Coast before.

An even newer LIU initiative is a recently established casualty programs unit--an initiative that will further diversify the book of business, he said. Liberty will consider primary casualty programs within niches not entertained on the brokerage side.

"It could be a class we entertain but a smaller account," he said, clarifying the guideline, and adding that only existing programs will be considered. "We prefer not to hitch our bets to good ideas," preferring to stick with proven programs.

At Hartford Steam Boiler, Vice President David Schraeder reported progress with his company's initiative to add equipment breakdown coverage to surplus lines policies. In-force counts are up 45 percent, he said, referring to a program in which specialty insurers can automatically add equipment coverage to policies, while ceding premiums and losses for the coverage back to HSB. (See NU, Sept 20, 2004 for a complete description of the program.)

He chalked up increasing interest in this new business source to recent efforts to attract wholesalers--not just E&S insurers--to the concept.

Noting that United National has now joined AIG's Lexington among E&S insurers offering the coverage, he said: "United National can't just go to its wholesalers and say, 'Do this.' So...we'll price United National's business, but we then go wholesaler to wholesaler and ask if they want to include equipment breakdown in their United National packages," he explained. If they say yes, "then we flip the switch on."

A seemingly more dramatic change took place at United National--and Penn-America--in January of this year, when the two E&S insurers completed a merger. Mr. Morris explained that the deal was initiated when Penn Independent Corp., a 30 percent shareholder in Penn-America, decided to sell for estate-planning purposes. What was once a business with a rich family history became one of the operating units of United America Indemnity, a Cayman Islands-based holding company. (See NU, June 11, 2004 for more on the history.)

However, according to Mr. Morris, the core tenets of each company remain unchanged. "We run the businesses separately," he said, noting that the combination wasn't driven by goals of adding revenues or cutting expenses. "We rarely competed before and we rarely compete now. We don't appoint each other's agents or quote each other's renewals."

Currently, Mr. Morris said Penn-America is focused on improving relationships with 66 general agency partners. For example, an "overhaul" of an automated underwriting manual is nearing completion. The result will be an automated database, allowing agents to easily identify eligible risks, rates and exclusions.

The reworking comes in response to agency feedback, he noted. "They said our manual was no better or worse than anyone else's." Being "easiest to do business with," he added, "will facilitate getting more business."

Mr. Morris also said there is "room for more appointments" at Penn-America. While the company limits appointments in each state, he said, "ultimately we could be at 80 or 85 agents" without interfering with that strategy.

Flag: Best Reports

Head: E&S Market Still Strong

As it has for more than a decade, A.M. Best compared the financial strength of the E&S market with the rest of the industry.

The Best report, distributed at National Association of Professional Surplus Lines Offices annual meeting, was commissioned by the Derek Hughes/NAPSLO Educational Foundation--set up in 1991 to improve education about surplus lines. Best found:

o With $33 billion in direct premiums, the E&S market share was 6.9 percent of p-c industry premium last year, and 14.1 percent of commercial lines.

o Surplus lines insurers had a higher average rating--an "A" rating--than the p-c industry in total, which has a median rating of "A-minus" as of July 2005.

o Since 1976, the failure rate for surplus lines carriers (1.09 percent) has been slightly higher than the overall industry (0.90 percent). Best attributes some of the difference to higher E&S failure rates in 1999 to 2003, related to the demise of some program writers that afforded too much underwriting authority to MGAs.

o In 2004, the combined ratio for 65 surplus lines companies was 92.7 versus 98.1 for the industry. On average, surplus lines writers bested the industry's combined ratio by 10 points over five years.

o Outside of Bermuda, top E&S growers on Best's top-25 list were Greenwich, Conn.-based W.R. Berkley, where E&S premiums rose 15.1 percent to nearly $1.1 billion, and Los Angeles-based Argonaut, which reported 11.5 percent growth to $421 million.

Massive Katrina property losses are likely to spur price hikes in liability lines to help bolster multi-line insurer income statements

Flag: Growth Slumps

Growth rates of direct written surplus lines premiums for the last four years, according to A.M. Best, were:

o 35.7 percent in 2001

o 61.7 percent in 2002

o 28.3 percent in 2003

o 0.65 percent in 2004