Fitch: Berkshire Hathaway overtakes AIG in E&S ranking by 2020 DWP
Berkshire Hathaway wrote more excess and surplus lines (E&S) premium in 2020 than AIG while the overall E&S market’s performance is tipped to improve this year after its combined ratio deteriorated to 107 percent last year, a new analysis from Fitch shows.
According to Fitch’s analysis, Berkshire Hathaway became the second-largest underwriter in 2020, behind Lloyd’s of London and moving ahead of long-time domestic market leader AIG. These top three writers accounted for one-third of the total industry DWP in 2020 while the top 15 writers generated more than two-thirds of all DWP.
Berkshire Hathaway’s E&S market share reached an estimated 6 percent in 2020, with Fitch suggesting the company is positioned for further long-term growth with multiple specialty underwriting platforms and the industry’s largest capital base.
The rating agency noted its analysis likely understates the Warren Buffett-led company’s growth and market share as Berkshire Hathaway Specialty Insurance (BH Specialty) is excluded from the E&S results because more than 50 percent of its premiums comes from states where it is licensed to do business.
However, BH Specialty’s E&S business is underwritten on the non-admitted paper of National Fire & Marine Insurance Company, which was included in the Fitch analysis. BH Specialty was formed in 2013 with former AIG executives including Peter Eastwood as president and David Bresnahan as executive vice president.
BH Specialty nearly doubled its net written premium to $1.2bn in 2020, and is known to have a significant amount of E&S premiums. Including just one-half of BH Specialty’s premiums in Berkshire Hathaway’s results would result in a full 1 percentage point gain in market share to 7 percent.
E&S “materially” underperforms P&C in 2020
According to Fitch, the US E&S lines market grew to nearly 7 percent of the total US property/casualty (P&C) insurance industry in 2020. This is higher than the 5 percent share over the past decade.
Total E&S market direct written premiums (DWP), including Lloyd’s, grew 12 percent to $49bn in 2020, far higher than the lower-than-normal 2 percent growth for the P&C industry. That was the third consecutive year of double-digit E&S DWP growth and the 10th consecutive year of growth.
The E&S market has grown even quicker this year with DWP expansion of 23 percent in the first half, which was up from 14 percent in the first half of 2020. All major product lines grew in H1 2021 except commercial auto due to pandemic-related exposure reductions that started in Q2 2020.
The E&S market growth has been fuelled by admitted markets continuing to shed unprofitable, volatile business.
However, Fitch noted that E&S “materially underperformed” the broader P&C industry in 2020, with the ratings agency suggesting it lacked the benefit of favourable personal lines’ results. E&S reported a 107 percent combined ratio, a deterioration from 2019’s breakeven results.
Last year was the E&S market’s second worst year in the past decade, and the fifth consecutive year of underperformance compared with the overall property casualty industry.
Fitch noted that US P&C insurers booked substantial insured losses related to the pandemic in 2020, including the E&S market.
“E&S market performance is anticipated to significantly improve in 2021 following a difficult 2020,” commented Fitch analyst Douglas Pawlowski. “Continued material rate increases and tighter underwriting conditions will move direct underwriting results towards break-even or better levels. Headwinds linked to pandemic-related losses are greatly reduced.”
Fitch believes that performance changes in E&S should outpace standard P&C market improvement for the next two to three years.
According to Fitch, 47 unique insurance groups wrote greater than $200mn of E&S premiums each in 2020.
All companies in the company ranking grew E&S premiums in 2020 except James River, whose premiums were hit by the end of the carrier’s relationship with rideshare giant Uber.
Of the top E&S writers, only AIG and Zurich American Insurance Company reported lower premium volume in 2020 versus 2016. From an underwriting perspective, Tokio Marine Holdings’ and Zurich’s results materially worsened during this period, while Travelers had the most profitable results.
“The strong pricing trend in E&S is likely to attract interest from new entrants, especially if underwriting results improve in 2021 as expected,” Fitch commented. “Recent acquisition activity was concentrated within specialty managing general agents and other distribution sources to gain access to new books of business.”
Property the worst performing E&S line in 2020
The proportion of E&S premiums has remained at around two-thirds casualty and one-third property.
In 2020 property lines led the decline in underwriting performance with an unfavorable impact of 25 percentage points on the combined ratio year-on-year. Higher loss ratios associated with inland marine, allied and fire lines were the most affected.
E&S casualty lines reported a 103 percent direct combined ratio in 2020, which compared to the ten-year average of 102 percent. “Given hard pricing across products in the overall E&S market, the segment is expected to move towards underwriting break-even or better results in 2021, with further improvement likely in 2022,” Fitch said.