While Berkshire's aggressive expansion in the excess and surplus lines space earlier this year through the hiring of top American International Group employees hasn't significantly altered the market yet, Fitch Ratings says it expects pricing implications related to this expansion “to materialize in coming quarters.”
In a recent report on the E&S market, Fitch says the recent strong profit growth over the last several years will moderate going forward, a victim of growing capacity, which limits rate hikes and promotes persistent competition in various excess and surplus lines markets.
The report said the formation of Berkshire Hathaway Specialty Insurance in the second quarter of 2013 “adds tremendous capacity to an already overcapitalized market, which will likely limit rate hikes and lead to more intense competition in 2014.”
However, the Fitch analysts, led by Dafina M. Dunmore, said that premium growth in the surplus-lines market is expected to continue into 2014, led by exposure growth in accordance with modest economic expansion and continued rate firming, albeit at a slower pace.
The analysts also said the costs of Sandy undermined underwriting profitability in 2012, but it is expected to return for all in 2013 “and should persist in 2014 barring unusually severe catastrophic events.”
The report says the operating environment remains competitive with sustained low interest rates and diminishing favorable reserve development, increasing the importance for strong underwriting performance.
Fitch analysts said they have found that that surplus lines underwriters' direct combined ratio outperformed the overall property and casualty industry by an average of 11 percentage points from 2008-2012. This was based on an analysis of statutory premium and aggregate underwriting performance of U.S. surplus lines insurers.
The report says the E&S market's reversal in 2011 of a four-year consecutive slide in direct written premiums (DWP) has continued through the first nine months of 2013.
DWP increased by 9 percent to $32 billion at year-end 2012, says the report.
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