Jumping on the E&S juggernaut

The news flow of the past week has provided irrefutable evidence that the US E&S sector is the hottest place in the global P&C market right now, with private equity money flooding in to back carriers and mega distribution M&A taking center stage.

The growth potential of the E&S market is nothing new. Speaking on a panel at The Insurer’s New York Insurance Forum in late February, CRC CEO Dave Obenauer noted that the segment grew by 60 percent between 2011 and 2018 to become roughly a $50bn market.

But in the last 15 months that growth rate has picked up significantly, as demonstrated by the top line numbers of the wholesale broking giants.

AmWINS grew organically by 16 percent last year as overall revenues climbed 27 percent to around $1.4bn, with its P&C transactional business growing on an underlying by around 25 percent in 2019.

The firm’s president James Drinkwater said at the same event in February the dramatic growth was driven by rate increase and a huge increase in volume.

The third of the big three, Ryan Specialty – whose wholesale broking platform RT Specialty is close to buying All Risks in a $1bn+ deal revealed by this publication – saw its premium volume (placed and written) swell by 35 percent last year.

It is widely agreed that the drivers of growth have been the surge of submissions through the wholesale channel into the E&S sector, as retail brokers unable to fill placements in a retrenching standard lines market have increasingly relied on wholesale brokers to find surplus lines capacity.

Until now the E&S carrier market has not seen a significant influx of new capital to meet that additional capacity need, however, leading to a true hard market in many lines of business.

There have been strategic growth initiatives gaining some traction – including Munich Re’s refocusing of its US specialty insurance platform last year – and isolated new entrants, such as former Scottsdale Insurance executive’s Ategrity Specialty start-up that launched in late 2018.

That is set to change in a meaningful way, however.

Capital coming in

After a brief Covid-19 blip, momentum is expected to pick up at an accelerated pace through this year into next and beyond.

And this publication has now reported on two significant start-up and scale-up initiatives in the last week that together are set to bring close to $2bn of capital to the market, largely from PE backers.

The furthest advanced is the relaunching of StarStone US with $850mn of capital and a management team led by Ed Noonan as chairman and Jeff Consolino as CEO, supported by Aquiline, Dragoneer Investment Group and SkyKnight Capital.

Then there’s the more nascent project involving Dinos Iordanou and Greg Hendrick and up to $1bn of potential start-up capital from Hellman & Friedman and The Carlyle Group, which is also expected to have a significant E&S focus.

In the US other names linked with potential initiatives include former Navigators CEO Stan Galanski and former Endurance and Sompo executive Jack Kuhn.

On the other side of the pond, several Lloyd’s carriers are gearing up for opportunities in insurance and reinsurance, including Ark with a PE raise of up to $1bn, and Beazley, Hiscox, Lancashire and R&Q with equity raises.

“There is talk of a further explosion in 2021 as a true hard market takes a firmer grip across the sector”

As a market, Lloyd’s, of course, remains the large writer of E&S business and a portion of the capital raised by those entities is sure to be targeted at underwriting opportunities in the segment.

On the distribution side of the business, the biggest news of the week was undoubtedly the proposed acquisition of number four wholesaler by current number two RT Specialty.

That deal is likely to be motivated by the need for even greater scale – particularly on the part of the seller – to increase capabilities and access business flooding into the sector to maximise an opportunity that is the biggest since the early 2000s.

Senior wholesale broking sources have said they expect momentum to continue to build this year and next as the full Covid-19 effect is felt in the wider market.

Indeed there is talk of a further explosion in 2021 as a true hard market takes a firmer grip across the sector.

One senior wholesale broking executive told this publication that he was aware of in excess of 15 fundraising initiatives for start-ups or scale-ups.

But they suggested that even if they were all successful it would not tip the balance back to a position of excess capacity in the near term.

If that is so then there is plenty of road left for the juggernaut to run…