A.M. Best Report: Surplus Lines Results Remain Strong

The annual A.M. Best Co. report on the surplus lines industry showed that while surplus lines insurers outperformed the property/casualty industry in underwriting and operating performance in 2007, the softening market and more aggressive competition portend deterioration in profitability as premium levels decline.

Absent a catastrophe that curtails 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, according to the report

The report, which will be released at the NAPSLO Annual Convention, is commissioned by the Derek Hughes/NAPSLO Educational Foundation. This year's report noted that:

• After-tax return on equity, which measures after-tax profitability from underwriting and investment activity, slipped slightly to a still solid 12.4% from 15.05% at year-end 2006.
• The impact of the softening market was evident in the 8.7% drop in net premiums written in 2007 for professional surplus lines insurers.
• Merger and acquisition activity has been high among surplus lines companies and distribution through midyear 2008, and is expected to continue over the near term.
• For the fourth consecutive year, in 2007, surplus lines recorded no financial impairments, compared with the four impairments for the admitted P/C industry
• The top three surplus lines groups were unchanged from 2006: American International Group, Lloyd's and Zurich Financial Service Group.
• An interstate compact designed to solve the surplus lines industry's multistate tax and compliance problems was finalized in 2008, as Congress considered the Nonadmitted and Reinsurance Reform Act (NRRA), also supported by the surplus lines industry.