there’s been a compound three-year average rate increase for the E&S market in excess of 225%.
We believe the E&S market will continue to outperform the p/c industry, something that we learned back when, when we first started looking at some of the numbers and making comparisons and benchmarks. We believe that’s going to continue through indefinitely as far as we can see, at least through 2008 and certainly through 2009. There is a spread between the two. In 2007 it was an amazing 19-point spread between the p/c industry results combined ratio, trade combined ratio and the surplus lines market – just to give you an idea as to how far that spread is. We don’t anticipate that spread continuing. In fact that spread is likely to shrink down to something that’s more an average of 7 to 9% over the long term. But again, this spread has always been there as far as measuring the E & S market’s performance relative to the p/c industry.
I think a lot of the folks that are listening in, I believe they probably realize why that spread is there. In the E & S market, price competition is not much of a variable as much as it is finding availability for a market that in essence is hard to place. So, as a result, while price competition in any market is going to be something to consider, in many cases the E & S market becomes a resource to those folks that need to place that hard-to-place business. Rate and form flexibility is certainly another area that we find is very attractive to the E & S marketplace. It certainly alleviates, like I said, a lot of that price competition and it certainly gives them the flexibility in the hard market cycle and its ability to manage the hard market cycles.
Because of these advantages and healthier balance sheets, A.M. Best remains optimistic in the failure frequency rates of surplus lines insurers. We’ve been measuring failure frequency for some time now. We go back, roughly, 33 years and in fact if 2008 holds, where no failure frequencies will be recorded, this will mark the fifth consecutive year in which the surplus lines marketplace has yet to record an impairment; which is quite an achievement. This also goes to show how much capital is in the marketplace at this point in time. Further supporting some of that general optimism is the fact that 83 of our interactive ratings on the E & S market, professional surplus lines insurers, are all considered secure. All investment grade, which compares – if you look to the right of that exhibit to roughly 91% of the p/c industry which is considered investment grade – or secure – just to give you an idea of the differential between the two.
And lastly, while the roster of E&S companies at the top remains unchanged there is some question as to whether or not the brokers in the market and the insureds are going to look to shift business away from AIG given the turmoil and uncertainty surrounding the parent holding company. Now, this is not a statement that Best is in any way alluding to, it’s just reality in the market and at PCI there’ve been some discussions about certain prospects – in certain issues – moving away from AIG, given some of the flight to quality issues. But, we as an organization stand by what we’ve said in past in other press releases and Webinars, AIG, Lexington – as far as financial solvency and financial wherewithal – we believe that these entities remain strong. They have statutory capital and capacity in the market that they continue to deploy and continue to do very well. But, given that there may be some flight to quality, the rankings that we see in this exhibit could possibly change as we go out to 2009. That’s a possibility of course. Not to pick on Lloyd’s of London, but Lloyd’s of London is in the process of completing its auctions and raising capacity. That’s an area that certainly anyone who’s familiar with liquidity would be very cognizant of - the fact that they would be able to raise the capacity they need. We’re not saying that that’s an issue for them but it’s something to keep in mind as they go through their auction process and try to raise the capital, the billions of capital they look to raise for the 2009 year of account.
Other factors to consider in 2008: certainly the effects of the low investment returns. As we’ve seen today, the interbanking loan rate is down at 1%, which certainly puts pressure on prime and any returns that are out there. If fact, given the low returns in the investment market, we can only guess that underwriters will be conscientious of the underwriting decisions they make on an economic return basis. So, there is a lot to consider. Overall the market is, again, very strong, very solid. However, there are some of the challenges that I spoke about; but we think that the surplus lines marketplace is very healthy at this point.
Pricing
McDONALD: Thank you, Dan. So, we’re going to move from the prepared part of the presentation into a discussion and I’ve asked everybody to consider some questions and we all worked these out together. We’re going to go around table here and have some good talk about some of these topics here. Let’s start with pricing. We have a lot of producers on this call and it always comes up – at this point we’re going to hear – I was going to say conflicting things, but not really. We’re hearing that the market may be turning, that we’re in for some real changes that have already begun. What are you seeing, Tony.

MARKEL: Well, logic would tell you that prices
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