The surplus lines industry continues to experience a decline in direct premiums written (DPW). For a third consecutive year in 2009, the surplus lines industry's DPW fell 4.1 percent, an improvement over 2008 where the DPW fell 6.2 percent.

Even so, the surplus lines industry's drop in premiums came in at a higher rate than that of the overall property/casualty industry, where premiums overall fell 3.3 percent, according to an A.M. Best Co. special report.

But surplus lines brokers remain optimistic and say that the market is stabilizing and business is picking up in some areas.

The surplus lines market seems to be stabilizing, says Dick Bouhan, executive director of the National Association of Professional Surplus lines Offices (NAPLSO). Bouhan says optimism can be found in the number of attendees registered at this year's NAPSLO Annual Convention, Oct. 11-14 in Atlanta, Ga.

"We are ahead of last year by 300 registrants; total registration is at 3,100 this year and we could hit 3,200 by the conference," Bouhan says.

Even as times improve, standard market carriers competing on traditional surplus lines risks continues to drive pricing pressure and profit margin compression in the surplus lines market, the report says. Recessionary economic conditions, volatile financial markets and competition from Bermuda-based carriers are added challenges for this market, analysts reported.

Despite heightened competition, surplus lines specialists, particularly the market leaders, generated considerable operating profits and returns on both revenue and surplus.

"Things look OK for the insurance companies," Bouhan said, noting there have been no carrier insolvencies in the surplus lines industry for six consecutive years. "And that's a good trend."

Also, combined ratios for surplus lines specialists are solid and better than the total P/C industry. Surplus line specialists in 2009 released a significant percentage of prior year loss reserves relative to net premiums earned, as did the P/C industry, which led to a sizable benefit on their year-end combined ratio, A.M. Best reported.

The partial rebound in the underwriting performance can also be credited to the margins built up before the market softened. In 2009, favorable prior-year loss reserve development helped offset aided underwriting performance.

Bouhan says that while NAPSLO has experienced some contraction of its membership in recent years — mostly in branch office locations — thanks to the economy, market conditions and merger and acquisition activity — he's also seen new members come through the door. The association saw 15 new member applications this quarter alone.

"We are starting to see start ups being formed," Bouhan says. And he also expects to see some members who may have left NAPSLO for various reasons begin returning in the coming months.

Other Report Highlights

A.M. Best reported that nine of the top 10 U.S. surplus lines groups by DPW remained the same as in 2008, and the rankings from one to eight did not change. Berkshire Hathaway Insurance was the only group to drop out of the top 10, landing in the number 13 position.

Three groups experienced DPW growth: QBE Americas Group, Munich-American Holding Corporation and Endurance Specialty Group. QBE Americas Group is one of several groups that have made acquisitions to increase market share.

For the sixth year in a row, the surplus lines industry recorded no financial impairments.