Capital Migration

Large capital flows are entering the E&S market.
By: | October 1, 2013

Capital is flowing into the E&S market as carriers continue to focus on products that respond to emerging risks.

Leading executives in the excess and surplus market see good times ahead for their industry.

“I would say that you will see the E&S market expanding in terms of providing solutions to insureds and also new entries,” said Patrick G. Ryan, Chicago-based chairman and CEO of Ryan Specialty Group LLC and former chairman and CEO of Aon.

“Berkshire Hathaway is the classic case, but you are seeing capital that is quickly finding its way into the market, whether it’s from London, Bermuda or the United States,” he said. “This capital is anxious to get into the E&S market and some of these are very large enterprises.”

Added Ryan, whose firm has done start-ups and bolt-ons recently: “There’s a lot of movement from carriers, significantly more than I’ve seen before. Talent movement is quite active.”

Peter Eastwood, Boston-based president of Berkshire Hathaway Specialty Insurance, a newly formed business that at the outset is concentrating on E&S business and commercial lines, said: “I think there’s been a migration of Cat-exposed business into the E&S lines market.

“When there’s been dislocation in industry, it’s been the E&S market that’s been able to move in rapidly because of the freedom of rate and form the E&S market is afforded, which allows E&S carriers to be responsive to a customer’s needs.”

Eastwood, the former CEO of Property Casualty Americas region at American International Group (AIG) who joined Berkshire Hathaway Speciality Insurance in April along with three other heavyweights (David Bresnahan, Sanjay Godhwani and David Fields), added: “I think what we’ve seen is significant growth in the E&S space over the past 20 years, which today stands in excess of $30 billion annual gross written premium, up from something that was materially smaller than that not long ago.

“I would also say that approximately three years ago, and importantly as we move forward, there was a leveling of the playing field between the E&S market and the standard market due to the Dodd-Frank Non-Admitted and Reinsurance Act of 2010, which essentially simplifies a broker’s and an insured’s ability to access the E&S market,” he said.

Jeremy Johnson, Boston-based president and CEO of Lexington Insurance Co., the E&S division of AIG, and the dominant force in that market, said: “We have a 45-year history of E&S experience in the United States, with over 1,000 employees. E&S is a key part of the AIG strategy, especially with continuing growth in property and casualty, health care and financial lines.”

Johnson, who reports to Robert Schimek, president and CEO of AIG’s Property Casualty Americas region and who replaced Eastwood at AIG, cited property casualty as a key area for his firm, noting the vigorous innovation in that line.

“If you think back 10 years or so, we really didn’t talk about exposures such as cyber liability or terrorism risk or supply chain management or climate change risk,” he said. “As those risks have emerged, we’ve developed products to address them.”

In the fast-developing energy realm, Lexington has focused on creating solutions for the alternative energy sector, including wind and solar, and on warranty products facilitating further investment in new alternative energy technologies.

“It’s business as usual” at Lexington, which commands 20 percent of the E&S space, said spokesperson Matthew Gallagher.

Another major E&S player, ACE Westchester, has been aggressively expanding its activity in the market.

“Our E&S business is growing in a number of flavors,” said Bruce Kessler, division president of ACE Westchester, the E&S arm of ACE’s North American operations.

“In the last few months,” he said, “we’ve created a new specialty casualty division. What we’ve done is brought both our wholesale and retail businesses together so we can offer both products to both distribution channels. So it’s going to give us a much broader platform to offer our primary casualty for certain ACE Westchester Specialty Casualty products, such as public entity, energy and construction.”

Kessler noted that his group is focused on building up its wholesale business in medical, a space within E&S that it had not previously been in.

Also, Kessler said, his group has built up its property/Cat capacity to more than $30 million since mid-June. “In addition, we’ve brought in a bunch of underwriting talent recently to build out our D&O practice, focusing on private D&O.”

As for the overall state of the E&S market, Meyer Shields, a Baltimore-based managing director at investment and research firm Keefe, Bruyette & Woods, said, “Near term, I think it’s going to continue to improve. Rates are going up and business is now gravitating from the standard market to the E&S market.

“For the most part, I’d say the market is improving but it’s going to take additional rate increases to sustain it. If the economy is doing better, the E&S market will have room to improve, new trucks on the road and so on.”

Shields said one thing that has been going on in the E&S market that hasn’t gotten a lot of attention outside of the market “is the massive consolidation of the wholesale market, with business going through fewer and fewer brokers.”

David Miller, vice president for underwriting at third-generation family owned W.A. Shickendanz based in Belleville, Ill., agreed with Shields. “There’s lots of consolidation going on in the marketplace, but if you’ve been around long enough and you run your business right you can still compete with the big boys,” he said.

All executives and analysts Risk & Insurance® talked to for this story said the property and casualty market holds the key for continuing growth in the E&S market.

At Partners Specialty Group, an independent nationwide wholesaler, Stamford, Conn.-based President Maureen Caviston, noted: “We’re seeing a number of property opportunities in the Northeast after Sandy, especially in the flood areas. We’re still seeing the effects of that.”

As for the impact of the standard market on the E&S market, Caviston noted, “Where the admitted markets are not making money, they are shedding those segments of their business. That’s where the E&S market can step in. The beauty of our market is we can respond really quickly to those opportunities.”

Kenneth Petersen, president of Northfield Insurance, a wholly owned subsidiary of Travelers in Hartford and St. Paul, Minn., said that plenty of E&S opportunity has been created by tornado and hail activity in Oklahoma and Texas. He also cited hurricane activity in Florida and the Gulf Coast.

“Interestingly, I think we have opportunities up and around Montana because of fracking and that kind of thing,” Petersen said.

As for the overall economy, Petersen said, vacant properties in such struggling big cities as Detroit, Chicago and to a lesser degree in Nashville are a “perfect opportunity” for the E&S business to invest capital.

Petersen also said a great challenge for the E&S market is how to bring a quote quicker to wholesale brokers and, in turn, to clients. “The key to that is new and better technology,” he said.

For some firms in the E&S space, like Hendersonville, Tenn.-based Bailey Specialty Risks, the cyber liability business has been a very profitable line.

“We began to focus on that market five years ago and we’ve doubled in premiums every year since,” said company President Janet Smith. “The health care industry especially is where it’s grown. We preferred an E&S line so we could be flexible with the form and the pricing.”

As to the future of the E&S market, Ryan said, “We’ve made some acquisitions in our wholesale and our MGU [managing general underwriter] division. We’re in our third full year of revenue, so we’re seeing the impact of significant productivity improvements that have come as a result of our tremendous platform that has been created and the unique tools we have developed for our brokers and underwriters.”

At Lexington, Johnson said, his firm has introduced new products to insure the execution risk associated with the implementation of new technology, evacuation coverage for its personal lines customers, coverages to address the loss of income for colleges and universities when foreign students can no longer attend due to a local catastrophe, and crisis coverages to assist in the response to significant potential liability claims.

Johnson added that warehousing, transportation and construction will continue to see growth.

“They are the bellwether industries providing opportunities for the E&S market,” he said. “Strength in those areas will translate to growth in other areas.”

Eastwood, at Berkshire Hathaway’s specialty insurance group, said the organization has “a strong focus on E&S, but we also have admitted paper capabilities in the event a need or opportunity arises to write admitted business. At the core of our business are five product lines: property, casualty, executive and professional lines, health care professional liability and program business.

“In the relative near term, we will turn our attention to building our business outside the U.S.,” he said.

When it comes to any impending E&S marketplace battle between Jeremy Johnson’s team and Peter Eastwood’s group, Paul Newsome, a senior insurance analyst at Sandler O’Neill & Partners, doesn’t anticipate a major change in the environment this year or even next year.

“I think the short-term impact is very small,” he said. “Longer term, that may be different. Obviously Berkshire has an enormous balance sheet and a great reputation, but Lexington is clearly the largest E&S writer in the United States.”

Steve Yahn was a freelance writer based in New York. He had more than 40 years of financial reporting and editing experience. Comments can be directed to [email protected].

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