Breaking a two-decade run of fairly consistent gains, the surplus lines industry's direct premiums written declined for a third consecutive year in 2009. However, surplus lines should continue to generate positive underwriting results driven by adherence to disciplined underwriting and favorable prior-year loss-reserve development, according to the A.M. Best U.S. Surplus Lines Market Review report.

At 4.1 percent, the decline was still better than the previous year's 6.2 percent reversal, but higher than the overall property/casualty (P/C) industry's 3.3 percent DPW fall off. A major source of pricing pressure and profit margin compression still are the standard market carriers that compete on risks traditionally insured in the surplus lines market. Recessionary economic conditions, volatile financial markets and competition from Bermuda-based carriers are added challenges for this market, according to A.M Best.

The surplus lines market's total return on surplus (equity), reflecting the impact of unrealized capital gains or losses, was much improved in 2009, due to the financial market recovery noted earlier. While both the surplus lines composite and the P/C industry overall experienced tremendous improvement in return on surplus, the composite still outpaced the total P/C industry by more than three percentage points. In terms of both five and 10-year average returns on surplus, the surplus lines composite exceeded the total industry's by slightly greater margins.