Quarterly Newsletter    October - December 2004 Issue



Composite Financials for Texas Surplus Lines Insurers Show Improved Results for 2003
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Comparison of SLSOT Premium Processed by Line of Business

by Brian D. Wilds, CPA, ASLI, Director of Financial Analysis & Accounting

One of the important functions of the SLSOT is the evaluation of surplus lines insurers. We evaluate each currently eligible insurer annually and also evaluate insurers seeking initial eligibility. One component of the evaluation process is a five year 'financial summary' page for each insurer that is published on our website. The exhibit on page 2 is a composite of selected financial data for all currently eligible insurers. It highlights the characteristics of their 2003 results compared to similar data for the prior three years. (This composite financial statement data excludes Underwriters at Lloyd's, London (Lloyd's), as its financial information is not compatible with this compilation.)

● The state of the surplus lines market is good and showed improvement in 2003. Aggregate capital and surplus (C&S) for eligible surplus lines insurers was $55.8 billion at the end of 2003, an increase of 33% over the prior year's level. Average and median C&S also increased 30% and 25% respectively. (Lloyd's underwriting capacity increased to $26.78 billion beginning 2004 from $25.76 billion beginning 2003). C&S increased due to capital infusions, net income and the entry of new eligible insurers. Of the 167 eligible insurers in the composite, 148 insurers increased C&S, 133 insurers increased unassigned surplus (retained earnings) and only 17 had unassigned surplus deficits, all improvements over prior years.

● For the first time in many years there was an aggregate underwriting gain of $923 million, with the average underwriting gain $5.5 million. Ninety-four of 167 insurers reported underwriting gains. Net income after tax has been positive for several years, but there was more than a six-fold aggregate and average increase in 2003. There were 146 of 167 insurers reporting net income.

● Gross premium increased 22% and net premium increased 23% in 2003. Leverage ratios fell (125% gross premium to C&S and 61% net premium to C&S). This is explained by the large increases in total capital and surplus.

● Positive cash flow from operations was reported by 107 of the 125 foreign (U.S. domiciled) insurers.

● The combined ratio for this composite fell a whopping 13 points to 91% from the prior year's 104%. This is the first time in over a decade this ratio has been below 100%.

Other indicators of the health of the surplus lines insurance market in Texas are:

● There were six new submissions for eligibility in 2003 and twelve in 2002. The increases in new submissions coincide with the hardening of the P&C market and continues a trend started in 2001.

● Twenty-four insurers received improved SLSOT priority ratings, while only 12 insurers worsened in priority.

● Surplus lines premium was 9.1% of total Texas property and casualty premium in 2003, compared to 8.3% in 2002.

● Average premium per policy processed increased from $5,831 in 2002 to $5,915 in 2003 and at September 30, 2004 was $6,246.

The eligible surplus lines insurers making up the Texas surplus lines market are stronger than in recent years and the trends appear positive. As of September 30, 2004 there were 168 insurers (including Lloyd's) operating as eligible surplus lines insurers compared to 166 at September 30, 2003. At the beginning of 2004 there were 163 eligible insurers for a net increase of five thus far in 2004. Prior to 2002, the number of eligible insurers declined each of the past 14 years, from a high of 226 in 1988. Currently, 125 foreign (U.S. domiciled) insurers, Underwriters at Lloyds (64 syndicates) and 42 alien (non-U.S. domiciled) insurers are eligible. The market share (as of September 30, 2004) is similar to the prior year with foreign insurers writing 79%, Lloyd's writing 15%, and other alien insurers writing 6% of the Texas surplus lines premium. The top ten individual surplus lines writers in Texas commanded 50% of the market at September 30, 2004, slightly down from 52% in 2003 and 53% in 2002. Of the 168 insurers currently eligible, only four insurers are not affiliated with an insurance group. These write less than 1% of the Texas S/L market. Compiling premium statistics by group affiliation reflects the top ten groups plus Lloyd's wrote 66% of the total Texas S/L premium in 2003 and 2002, but only 61% through September 30, 2004.

Observers of the P&C market offer many varied conclusions, although the consensus suggests downward pressure on premium rates. Improved equity market returns, underwriting profit, net income and increased capacity indicate the P&C industry will become more competitive and reduce pricing in 2005. Offsetting trends may be the recent series of catastrophe losses and the need to recover reserve strength depleted over the past 15 to 20 years. Stamping office analysis of activity through September 2004 reflects continued premium increases (15.1% overall) and a 5.6% increase in average premium per policy. Based on composite financial data the surplus lines market in Texas remains strong.