Surplus Lines Profits To Drop, Says A.M. Best

Surplus lines insurers whose 2007 direct premium written dropped for the first time in 11 years can expect profits to fall as the trend will continue, says a new report from A.M. Best Co.

The Oldwick, N.J.-based rating firm said the nonadmitted carriers overall outperformed the property-casualty industry in underwriting and operating performance, but declining prices and more aggressive competition foretell deterioration in the bottom line as premium levels decline.

Last year the sector's direct premium written fell by 3.5 percent. It was the first decline since 1996, when the line was off by 0.4 percent. The p-c market during 2007 eked out a 0.5 percent gain in direct premium written.

Best said without the arrival of a major catastrophe that halts the "incursion of standard market insurers and the new offshore market, the surplus lines industry's market share is expected to continue decreasing over the near term."

The firm added that a high level of surplus line company merger and acquisition activity is expected to continue near term.

Its analysis found that surplus lines after-tax return on equity--a measure of after-tax profitability from underwriting and investment activity--was a "still solid" 12.4 percent in 2007 compared to 15.05 percent at year-end 2006.

Examining net premiums written by professional surplus lines insurers, which fell 8.7 percent in 2007, Best said the impact of the softening market was evident.

Best noted that for the fourth consecutive year, in 2007, surplus lines recorded no insolvencies, compared with four impairments for the admitted property-casualty industry.

Best reported that the top three surplus lines groups were unchanged from 2006: American International Group, Lloyd's and Zurich Financial Service Group.

The rating firm noted that on the legislative and regulatory front an interstate compact designed to solve the surplus lines multistate tax and compliance problems was completed this year, as Congress considered the Nonadmitted and Reinsurance Reform Act, a measure backed by the surplus lines industry.