Quarterly Newsletter October-December Issue 2007

      

Texas Surplus Lines Financial Update
Employees News
Ballinger Recieves NAPSLO Award
SLSOT Seminar Rewind
Bring on the Heat!
EFS Quick Tips
Helpful Hints - Paper Filings of Policies
Comparison of SLSOT Premium Processed by Line of Business

The surplus lines industry is a large, dynamic, sophisticated market commanding 18.5% of the commercial property and casualty (P&C) market in Texas in 2006 increasing from 11.8% in 1995. A comparison of U.S. surplus lines versus commercial lines premium in A.M. Best’s 2007 Special Report, U.S. Surplus Lines - Market Review shows surplus lines premium is 14.4% of the commercial market, increasing from 4.4% of that same market since 1985. The exhibit on page 3 compares the composite financial data over the past five years (2006-2002) for surplus lines insurers operating in Texas. The Surplus Lines Stamping Office of Texas (SLSOT) evaluates each surplus lines insurer annually and recommends to the Texas Department of Insurance (TDI) whether an insurer should remain on the Surplus Lines Insurers List (Eligible List). The TDI makes the final decision on which insurers are listed after considering the recommendation of the SLSOT. A by-product of the evaluation process is the creation of a one-page financial summary of each eligible surplus lines insurer that is published on our web site (www.slsot.org). After accumulating the key financial information from these summaries we compile the data into a composite financial picture of the surplus lines insurers eligible to operate in Texas. The composite information is compared to prior year data and compared to the U.S. surplus lines market as a whole to measure the relative health of eligible insurers in Texas.

Currently there are 175 eligible surplus lines insurers: 130 Foreign (U.S. domiciled), 44 Alien (non-U.S. domiciled) and Underwriters at Lloyds, London. The market share for these three types of risk- bearing entities has been consistent over the past five years with foreign insurers writing 77% of Texas’ 2006 surplus lines premium (down 1%), Lloyds writing 16% (up 1%) and other aliens writing 7%. As of September 30, 2007 we have seen some shifting in the market share with foreign insurers’ share declining 2% to 75% with Lloyd’s share increasing to 19% and other alien insurers share down 1% to 6%. In 2006 the top ten insurance groups commanded 61% of the Texas surplus lines market and the top ten individual insurers wrote 54%. As of September 30, 2007 the top ten groups wrote 64% of the total and the top ten individual insurers wrote 57% of the nine-month total. Reviewing the A.M. Best ratings for all eligible insurers, 99% fall into the secure range (B+ and higher) and 1% in the vulnerable range. This compares favorably with A.M. Best’s 2007 distribution of U.S. surplus lines insurers, where 100% were secure. However, both far exceed the total P&C industry, where 89.5% were rated secure and 10.5% rated vulnerable. There are several non-U.S. insurers that are not formally followed by A.M. Best, but those that were rated all fell into the secure range.

In 2006, aggregate, average and median capital and surplus (C&S) all increased: 28%, 24% and 9% respectively, compared to 2005. Since 2002, C&S levels have more than doubled, experiencing a 129% increase. This indicates an increase in size and capacity of the insurers operating here. The increase in C&S since 2002 is significantly greater than the percent increase in aggregate gross and net premium. Aggregate gross and net premium increased 41% and 49% respectively since 2002. In contrast, Texas premium reported by surplus lines agents and processed by the SLSOT increased 45% in aggregate and 61% on average during the same time frame. This trend indicates these surplus lines insurers are writing a greater portion of their premium in Texas. (See Financial, cont. page 2) Lloyd’s underwriting capacity for 2006 was £14.8 billion, an 8% increase over 2005’s capacity. Lloyd’s capacity for 2007 was £16.1 billion, an 8.8% increase. As of January 1, 2007 there were 66 active syndicates (up from 62 at the beginning of 2006) and there have been six new start-ups in 2007. For 2008 the top two Lloyd’s managing agents have budgeted capacity reductions and cut their 2008 goals up to 25% based on soft-market conditions. Among the eligible insurers in Texas, ten insurers are domiciled in Bermuda and one in Barbados. Five of these insurers became eligible during the past six years. At the end of 2006 these eleven insurers’ C&S was $5.6 billion (6% of the aggregate), gross premium $3.2 billion (4.1% of the aggregate), net premium $2.3 billion (5.2% of the aggregate) and Texas premium processed $81.7 million (2.7% of the aggregate). Even though these insurers’ percent of the Texas market is relatively small, there is significant potential for growth. Premium processed for these insurers grew $19.1 million or 29% over last year. On the other hand, Bermuda insurers’ volume is down for the first six months of 2007.

Composite results of operations for 2006 improved in most areas. The aggregate underwriting gain was $3.6 billion (average underwriting gain $20.9 million) compared to 2005’s aggregate underwriting gain of $1.2 billion (average gain of $7.1 million).

Composite net income declined in 2006 by 21% over the prior year. This decline is primarily due to one insurer that reported $245 million net income but had $1.979 billion net income in the prior year. Excluding this anomaly, net income would have been approximately equal to the previous year.

Return on policyholder surplus improved to 10.5% compared to 9.3% in 2005.

Gross premium to surplus was 84%, down 8% points from 2005. Net premium to surplus was 55%, up 8% points. The increase in the net leverage ratio may be due to insurers electing to retain more risk than in previous years.

The composite combined ratio improved to 88% from 94% with a five year average of 94.8%. This compares favorably to the 2006 combined ratio of 91.8% for the P&C industry overall.

Other indicators of a healthy surplus lines insurance industry in Texas are:

• Eight new submissions for eligibility
• 27 insurers (16%) received improved priority ratings
• 157 (91%) of the 173 insurers increased capital and surplus
• 110 (86%) of the 130 foreign insurers had positive cash from operations
• 124 (72%) of 173 insurers had underwriting gains
• 151 (87%) of 173 insurers had net income
• Average premium per policy processed by the SLSOT in 2006 increased 13.7%. The average at September 30, 2007 increased 9.3% compared to year-end 2006, but is now trending downward. The premium statistics of the Stamping Office are a lagging indicator of market trends and the effects of the softening market are just now being seen. A year-to-date comparison of September 2007 to September 2006 shows a 6% decline in policy count overall. Premium processed by the SLSOT was $3.57 billion in 2006 compared to $3.046 billion in 2005, an increase of $524 million or 17%. As of September 30, 2007 $2.828 billion had been processed and we anticipate the full year processing total to be approximately $3.5 billion, a small decline from 2006, indicating a softening in the market.

Surplus lines insurers operating in Texas are of the highest quality and most have an excellent financial picture with ample surplus. Despite recent years with multiple hurricanes and extraordinary losses they have weathered these storms and are in good position going forward. The softening market conditions generally will have an impact on underwriting gains and net income in the coming years, but with excellent management and underwriting, in partnership with professional surplus lines agents in Texas, surplus lines insurers will retain their vital role as the P&C industry safety valve.

Phil Ballinger, Surplus Lines Stamping Office of Texas Executive Director, was presented the Dana Roehrig/ Past President’s Award by Lawrence “Mac” Wesson, Jr., U.S. Risk Insurance Group, during the NAPSLO business meeting in New Orleans in October. This award is presented to a committee person who has performed outstanding service to the industry and to NAPSLO. Ballinger was honored for his work on NAPSLO’s Education Committee, including teaching at NAPLSO’s schools.

The SLSOT 2007 annual agents seminar was held via web cast on October 9. There were 324 attendees on-line for this event. Speakers from the Texas Department of Insurance, the Comptroller, and the Surplus Lines Stamping Office of Texas discussed several topics, including insurance regulation, tax filing, and surplus lines policy filing.

If you missed the “live” presentation, it was recorded through WebEx™ and is available for viewing through our website. The slides that were used during the presentation are also available for viewing and printing. For more information, visit the Stamping Office web site at www.slsot.org

The 7th Annual Employee Salsa & Queso Contest was held on Halloween this year. The competition is always tough as the competitors serve up their best recipes. Sandy Barnhart, Analyst I, Financial Analysis & Accounting, won top honors and bragging rights for Best Salsa. This is her 3rd win overall. John Feudo, Records Prep Clerk, Document Processing, took his first win with Best Queso. Employees are encouraged to sample all the entries and vote for their favorite in each category. The winners received $25 cash prizes in addition to custody of the famous sombreros to display proudly until the next year’s competition.

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