Capital Migration

Large capital flows are entering the E&S market.
By: | October 1, 2013 • 8 min read

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]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]