While the pool’s continued actions to reduce its exposure to natural and man-made catastrophes have benefited its risk-adjusted capital level, underwriting results in 2011 and 2012 reflect the effects of events that are within management’s risk tolerance. Further reduction of the net impact of catastrophe and significant weather events—which may be achieved through further underwriting actions, rate increases and changes in the pool’s reinsurance program—is expected during 2013. The generally favorable development of prior years’ loss reserves also has contributed to the pool’s supportive risk-adjusted capital position. Although the level of favorable development is likely to decline in future years, A.M. Best anticipates that Lexington will continue to benefit from even modest positive changes in reserves in the future.
Lexington remains the largest provider of excess and surplus lines insurance in the United States, with direct written premiums more than three times that of its next largest domestic competitor. The pool has historically maintained a significant expense advantage over its peers in the surplus lines composite, which has offset its historically above-average level of loss and loss adjustment expenses. Consistent generation of pre-tax operating and net income has resulted in steady organic capital generation, although substantial stockholder dividend payments in recent years have reduced the resulting benefit to surplus. In more recent years, the gap in expenses between Lexington and the industry as a whole has narrowed as it retains more risk and receives less benefit of ceding commissions. It is A.M. Best’s expectation that Lexington will continue to enjoy at least a several point advantage on its expense ratio relative to the industry.
Lexington continues to maintain significant gross and net exposure to natural and man-made catastrophes in the United States, although it has implemented a series of underwriting actions to reduce that exposure through achievement of higher rate levels, limits on aggregate exposures and reduced new business in catastrophe-exposed areas. Historically, the pool experienced higher-than-average loss and loss adjustment expenses than is typical for surplus lines insurers as a result of these exposures. Concerns related to this exposure continue to be tempered by Lexington’s ability to withstand catastrophes as measured by A.M. Best’s catastrophe stress test and were further enhanced by the minimal impact of losses from Superstorm Sandy on risk-adjusted capitalization. As noted above, the effect of events that are within Lexington’s risk tolerances have had a significant impact on underwriting and operating results in 2011 and 2012.