A.M. Best Special Report: Excess & Surplus 2005--Premium Growth Slows Amid Softening Market.

OLDWICK, N.J. -- In 2004, after growing significantly for three consecutive calendar years, direct premium volume for the surplus lines industry remained relatively flat, according to a special report released by A.M. Best Co. The considerable growth had been a reflection of the hardening market conditions that accelerated throughout 2001 and then fully took hold in 2002 and 2003.

The softening trend within the overall insurance industry in 2004 slowed the growth of the surplus lines market, although the softening trend did not have a marked effect on the pricing of smaller and middle-market surplus lines risks. The premium growth experienced in 2001-2003 was in concert with historical trends, which generally follow price firming in the standard market.

Larger insurers continue to dominate the surplus lines market. Size and flight-to-quality trends have benefited the larger, well-established surplus lines carriers, with the top 25 groups commanding an 82% share of the market in 2004.

Despite rising loss costs, low investment yields and price decreases as the market softens, A.M. Best expects surplus lines industry results to remain strong.

The operating performance of the surplus lines market composite continues to outperform the overall property/casualty industry. This superior performance is evidenced by the surplus lines composite's better-than-average pretax returns on net premium earned and calendar-year combined ratios over a five-year period. A.M. Best believes the surplus lines market's advantage relative to its underwriting profitability results from its ability to set pricing and coverage terms without regulatory approval.

Recruitment and development of professionals, in addition to hiring experienced underwriters or brokers, is an ongoing challenge for producers and intermediaries involved in producing surplus lines business. Likewise, the effective management of an agent's or broker's relationships with its key markets during the period when conditions hardened may have pre-positioned those entities for more effective, productive operations as the market continues to soften. The relative lack of merger-and-acquisition activity, likely fostered by the hard market conditions of the past several years; the uncertain future of the federal terrorism backstop; and progress toward uniform licensing requirements are some of the other issues that are of paramount importance to surplus lines distributors.

A.M Best's annual studies have validated that the surplus lines market maintains financial performance and solvency rates that are at least on par with admitted companies. Surplus lines carriers have proven to be a viable and successful standard market alternative.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.