American International Group has lost its long-held spot atthe top of the surplus market in 2010 after a 13 percent decreasein direct-premiums written, says insurance rating agency A.M. BestCo.

A special report on the surplus lines market reveals Lloyd's ofLondon has taken over as the leader in surplus-lines market sharewith 18.3 percent compared with 16.8 percent held by AIG companies.Direct-premiums written at AIG's Lexington Insurance Co. fell 15percent.

Combined, Lloyd's and AIG account for more than one-third of themarket.

Explaining some of the factors behind Lloyd's rise to the top,Hank Watkins, president of Lloyd's North America, says AIG “hadtheir challenges, and Lloyd's more than in the past, has beenpushing the U.S. market, trying to make [Lloyd's] less mysterious,trying to convince people to see us an alternative.”

After Lloyd's and AIG, next on the list in market share isZurich Financial services, with 3.8 percent. The top 25 providersof surplus-insurance coverage accounted for about 74 percent of themarket in 2010—down slightly from more than 75 percent in 2009,reports A.M. Best.

Overall, the top 25 groups of surplus-lines writers saw a 6percent dip in direct premiums written in 2010. It was the fourthyear of declining premiums, A.M. Best adds, as capacity exceededdemand once more.

Despite a drop in the exposure base due to the recession andincreased competition from companies in the standard market, A.M.Best says it expects surplus-lines carriers to generate positiveunderwriting income due to the industry's overall underwritingdiscipline during the soft market, as well as favorable prior-yearloss reserve development, which has been more favorable than theoverall property and casualty industry.

The gap in difference between the overall P&C andsurplus-lines industries has tightened as accounts at theborderline of the surplus-lines market have been written in theadmitted market during the soft cycle, says A.M. Best, adding thatit does not believe companies will be able to use prior-yearreserves releases to make up for inadequate pricing.

“This makes it more incumbent upon insurers to be conservativeand accurate with their loss picks,” the rating agency says. “Ifthey succeed, reserve development should be a positive, not anegative factor impacting companies in the surplus-lines marketduring the near term.”

As they have for the entire P&C industry, higher-than-normalcatastrophe losses will cut into operating results of surplus linescarriers—coverage providers for catastrophe-prone risks—andexposures remain depressed.