Naxos Avondale Specialty Casualty, Inc.

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E&S market disruption may drive standard carriers away, open doors for others

SNL Insurance M&A

August 27, 2009 12:59 PM ET
By David Dankwa

The fierce competition within the excess and surplus lines market is hardly relenting and continues to be exacerbated by the intrusive behavior of standard carriers looking to expand their appetite beyond traditional risks and enjoy the freedom to set rates and forms, as evidenced by recent revelations from a spectrum of commercial insurers.

In the first quarter of this year, for instance, CNA Financial Corp., one of the country's largest commercial insurers, announced a major initiative that involved boosting its presence in the E&S lines arena. This initiative is already having an impact in the marketplace, as evidenced by the sharp increase in submission activity that CNA attracted in the first half of the year.

The added level of competition and the financial crisis having driven a lot of insureds out of business, limiting the number of accounts that carriers could chase, has substantially affected pricing in the E&S market, traditionally the place to obtain hard-to-find coverages for main street-type businesses such as liquor stores, restaurants and general contractors. E&S pricing is now considered among the softest in the entire property and casualty business.

So, while there may have historically been good returns, some standard carriers are finding that they may have bitten off more of the business than they wish to chew. ACE Ltd., for instance, has been shrinking portions of its E&S business. CEO Evan Greenberg said during a recent conference call that the insurer has shrunk its Westchester E&S casualty portfolio by about two-thirds relative to its apex in 2005.

Many are boldly walking away from inadequately priced business. Specialty insurer Markel Corp., a dominant force within the E&S space, said it has given up business due to its practice of pushing for price increases during renewals. The company blamed standard lines competitors for "extremely aggressive pricing" in the E&S market.

Regardless, not everyone is turned off by the disruption. In fact, some smaller players see the current environment as a prime opportunity to enter the E&S arena. Naxos Avondale Specialty Casualty Inc., a specialty underwriting management company, is a good example.

The company was formed recently as a joint venture between New York-based specialty insurer Delos Insurance Group, the parent of Delos Insurance Co., and Bermuda-based Avoca Insurance Holdings. Naxos Avondale will be the exclusive E&S lines general agency for Naxos Insurance Co., the wholly owned E&S subsidiary of Delos, which is majority controlled by a consortium of investors led by Lightyear Capital LLC.

Delos CEO William Davis told SNL that the principals behind the new venture are not under any illusion about the challenges in the E&S lines market. "We are aware that it is a very competitive market and with the admitted carriers jumping into what might traditionally be E&S businesses makes it even more difficult," Davis said.

Still, he insists that the timing of the new venture is ideal.

"We think we're positioning ourselves for an eventual turn in the market, and it's better to start now before the market hardens than to try to start when it hardens. We might miss it in that case," Davis said.

As a new participant in this market, Naxos Avondale's strategy is not to make a big splash by going after every business or try to dictate prices in the marketplace, said Chris Maciejewski, CEO of Naxos Avondale. Maciejewski was formerly president of Aspen Specialty Insurance Co., a unit of Aspen Insurance Holdings Ltd.

"The whole marketplace would move when it's ready to. Our job is to find those individual risks that are adequately priced and at which we can make a profit," he told SNL.

One advantage that Naxos Avondale would surely have over many of its competitors is that it is entering the marketplace with no legacy issues and a significantly light overhead.

"We don't have a big infrastructure in place that we're trying to support by having to write business. We don't need to write business. We can be patient … [and] wait for the cycle to get to the point where we are very comfortable with it," said Davis.

In fact, it may get even better. If the standard market begins to withdraw from the E&S market, it would free up greener pastures for smaller players like Naxos Avondale to feed on. That may yet be some time in the offing, but sooner than most people think, if one industry veteran is correct.

William Berkley, chairman of W.R. Berkley Corp., believes the E&S market is at a moment of transition where standard carriers are beginning to shift away from growing their appetite. It's not a dramatic shift by any standard, but a slow and gradual realization after years of writing business for cheap, Berkley believes.

"We see it on the cusp, or beginning to transition, into where we will see them withdrawing," he said recently regarding the exit of some standard insurers from the E&S market. "Even long-tailed lines of business, if you write it at a cheap enough price, with foolish terms and conditions, becomes short-tailed business," he quipped during a recent conference call to discuss quarterly results.

 

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