Two insurance rating entities see slowing rate increases for the surplus lines segment in the coming months, as competition grows and rate hikes slow.

Moody’s Investors Service said that the U.S. excess and surplus lines sector is experiencing growth and strong profitability, thanks to rate increases, an improving economy and the sector’s limited appetite to keep on risks at inadequate prices. Moody’s, as detailed in its report “U.S. Excess and Surplus Sector Profile,” expects those rates to rise, but at a slower pace on the casualty side. Commercial property rates will keep declining as capacity and competition both increase, the report concluded.

A.M. Best offered similar perspective but with a longer look back. The company’s latest Best Special Report noted that surplus lines insurers experienced a big rebound in profitability in 2013 because of relatively light catastrophe losses compared to the previous year, more profitable underwriting and big investment gains. The sector also continues to grow with a focus on “unique and creative products” designed in cooperation with both brokers and insureds, according to the report.

For now, A.M. Best said, the surplus lines insurance market is stable, but profit markets should shrink “in the near term” as average rate increases dip on various coverage lines and competition grows. A.M. Best said that the surplus lines could see some impact in the U.S. through a number of pieces of pending legislation, including a hoped-for renewal of the Terrorism Risk Insurance Act, which offers federal reinsurance coverage to help protect businesses in the aftermath of a terrorist attack. Another measure, the Flood Insurance Market Parity and Modernization Act of 2014, would make sure that surplus lines insurers can offer private market products to consumers that need specialized flood coverage.

Moody’s is more optimistic about excess and surplus lines trends, noting that these companies, lacking rate and form regulation, will be able to “navigate the property and casualty insurance cycle with strong balance sheets, despite challenges from catastrophe losses and low interest rates.”

Enrico Leo, a Moody’s vice president and report author, said in a statement that the sector’s profitability will likely “remain solid, given that ongoing casualty rate increases are at least keeping pace with loss ratio trends,” assuming no large catastrophes take place.

Moody’s predicted in its report announcement that the flow of casualty business into the E&S market will slow down , “as standard commercial insurers look to retain their existing business and expand their risk appetite for new business – but not necessarily higher risk E&S lines – over the next 12 months.”

Moody’s said that positive E&S market conditions have led to many insurers expanding in the space, either through acquisitions, new underwriting teams or Lloyd’s syndicates. M&A activity could be on the horizon, Moody’s said, because the E&S and specialty business remains relatively attractive. Big pressure in the reinsurance sector from alternative capital could also be an M&A driver, it said.

Sources: Moody’s and A.M. Best