Typically, more volatile than standard admitted insurance markets, the E&S business vastly underperformed P/C insurers overall in 2017 with a 116 percent direct statutory combined ratio, significantly higher than the five-year average of 95 percent. The E&S industry also absorbed a substantial hit with large net natural catastrophe insured losses, which eclipsed $50 billion for all US insurers in 2017, Fitch noted.
Signs of a rebound emerged for E&S' market premium base, which grew by 5 percent in 2017 due largely to fast-growing commercial auto lines. Premium volume is likely to accelerate this year from premium rate increases in both property and auto lines along with some casualty segments, according to the report.
“The strength of the economy overall will also serve to fuel growth for several E&S-related products, including property and construction,” said Fitch director Gerry Glombicki.
Based on mid-year performance and favourable premium trends, the E&S market is poised to generate a significant direct underwriting profit in 2018, barring another round of large catastrophe losses, Fitch noted. Substantial losses may emerge from the landfall of hurricane Florence likely in the Carolinas.
“Besides uncertainty tied to catastrophe losses, loss costs in areas like automobile bodily injury severity, medical costs, and litigation settlement trends, warrant close watch for unfavourable shifts that may influence future profit potential,” said Glombicki.
Another area worth keeping an eye on in the coming months for the E&S segment will be industry consolidation, Fitch said. This comes off of several notable E&S mergers and acquisitions last year, most notably Markel Corporation's acquisition of State National Companies.
“The E&S market has become an increasingly viable M&A target in the last two years and more transactions are likely going forward, for candidates with unique specialty product niches and favourable profit margins,” Glombicki said.