Lex targets Main Street to Wall Street as growth momentum builds after turnaround

Net written premium growth at Lexington that accelerated to 25 percent in Q1 is being driven by above trend rate, high retention levels and an influx of new business without compromising tough foundational work including limit shortening that turned around the E&S carrier, according to CEO Lou Levinson.

On parent AIG’s first quarter earnings call last month, group chairman and CEO Peter Zaffino said wholesale distribution-focused Lexington has been “hitting it out of the park on just about every aspect”.

He highlighted top line growth, retention, new business, rate and how the carrier has become more relevant in the marketplace.

After 18 percent net written premium growth in 2022 the business was 50 percent bigger than it had been before the transition to refocus on the wholesale distribution channel which began at the start of 2019 under then CEO Dave McElroy, before Levinson took the helm later that year.

Lexington also improved underwriting profitability, ex catastrophe losses, by 60 percent last year with a sub-80 percent underlying combined ratio.

The accelerating first quarter NPW growth was led by wholesale property and casualty and rate that has increased at the double digit level for 16 consecutive quarters reflecting the carrier’s actions as well as a generational hard market in E&S.

And Zaffino said Lexington presents “tremendous growth and profitability opportunities” for AIG going forward.

In an exclusive interview with this publication, Levinson said that after a transformation of Lexington’s underwriting in recent years and the repositioning of its portfolio and distribution strategy it is “really well positioned” for the current market opportunity.

“I think we’ve become a really good E&S specialty market today. When you look at the way we’re growing, we’re still keeping our lines very short – think $5mn average lines – but we’re adding clients.

“So we’re going horizontally, but remaining very disciplined in the way that we’re deploying our capacity. We’re not adding volatility to our P&L or our balance sheet; we’re adding clients through good risk selection and problem solving and product,” he commented.

The widely reported changes in Lexington – and parent AIG’s – risk profile have been dramatic.

Lexington’s average property primary policy went from $100mn in limits deployed to just $5mn, with similar actions across liability and healthcare lines.

The large limits previously deployed meant that the carrier was more leveraged to losses than most rivals, so that it saw them sooner and they were often dramatically larger.

The significant shortening of limits and push for rate as well as improved terms and conditions that followed is widely seen as one of the main catalysts for the lengthy E&S hard market that continues today.

“By the end of 2020, our portfolio was in really good shape foundationally again, and that’s when we started to build on it,” said Levinson.

Product rollout

Lexington has added to its existing property, casualty, architects and engineers (A&E) and healthcare businesses with a roll-out of offerings, including several focused on the mid-market as well as at its small account-focused Western World unit.

These included bringing builders risk into its property offering around the same time as it built out Lexington mid-market property, before launching LexPro – which offers private and not-profit D&O, fiduciary, crime, cyber and D&O. The carrier also recently launched mid-market casualty.

At Western World additional offerings include garage, with coverages for a wide range of garage classes.

“When you look at how the portfolio composition has changed as well as the product offering, we’re really well-positioned to hit it out of the park – but it wasn’t overnight.

“It was a lot of deliberate thought around what we want the book to look like; the products we offer; how we become more relevant in the space; how we deliver product from Main Street to Wall Street. I think so far we’ve done a good job, but we’re nowhere near done,” said Levinson.

The executive pointed to a pipeline of mid-market and Western World launches planned for 2023 as Lexington continues to broaden its offerings.

“We continue to build on everything we have with the underlying premise that service and speed and ease matter. New products really are the lifeblood of an E&S carrier,” he continued.

The carrier has also built out its geographical footprint, and now has offices in cities including Boston, New York, Atlanta, Chicago, LA, San Francisco, Houston, Scottsdale and Denver as it looks to put feet on the ground where its wholesale distributors have a physical presence.

Pulling all three levers

Levinson said the broadening and diversification of Lexington’s offering was a big factor in generating “outstanding” new business at the carrier as the carrier has also sought to align with its wholesale distribution partners.

“There really is that recognition that suddenly Lexington can solve problems from Main Street to Wall Street,” he suggested.

And he added that the company is pulling on all three of its main growth levers.

“We’re getting good rate, our retention numbers continue to tick up, and we’re seeing just this influx of new business,” he said.

Rate is coming in above trend, while retention rates are in the mid-70s – described as high for an E&S portfolio by Levinson.

New business is coming not just from the rock-hard property market, but also casualty, healthcare, A&E, Lex Pro and Western World at rates “significantly better” than a year ago.

The executive said he is also confident of Lexington’s ability to hold onto the new business it has been adding, even if the cycle begins to shift and admitted carriers begin to take back market share from E&S carriers.

“When you look at the products we’ve added and the focus we have it’s really sticky,” he said.

He highlighted Western World – led by Tim Whistler – which serves Main Street clients. The business tends to stay in the E&S market because it’s highly transactional and needs to be done efficiently.

Levinson explained that the middle market franchises Lexington has built in property, casualty and A&E focus on the role of wholesalers as aggregators of the business.

“They provide service, speed and ease to the retailers to handle that flow business and we’ve deliberately built business units to align with them on that. That’s becoming a more important part of our business,” he added.

And on larger account more complex business, the executive said: “The beauty of Lexington is we still have the underwriting courage to write the most difficult risks, but we do them differently today than a few years ago. Everything from risk attachment to terms, limits and price is different.”

E&S hard market has legs

After 16 consecutive quarters of double-digit rate increases at Lexington, Levinson said he is confident that there is still runway in an E&S market that has rehardened in some areas in recent months – most notably property cat.

“If feels like it’s got a lot of momentum and it’s not going to stop or go away. Claims inflation is real, everyone is wrestling with trend and making sure we’re charging the right amount today for tomorrow’s claim.

“Freedom of rate and form matter so our ability to be nimble and solve problems means that it’s not going away and the market has some legs. I think the wholesale brokers are right and E&S is going to continue to grow and be an important part of the entire P&C industry,” he commented.

Levinson suggested that because Lexington took action on its portfolio sooner than others in the market, it is now in a strong position to grow, even as there are signs of further retrenchment elsewhere.

“In the first quarter we saw a number of carriers dialing back their appetite and limits in certain classes. What we did in healthcare two or three years ago others are seeing now, and some casualty markets are realizing they’re overextended in certain classes,” he observed.

More generally the executive said the discipline across the market seen in the last few years is greater than at any other point in his career as carriers respond to claims inflation by maintaining shorter limits and seeking the right attachment.