The surety industry seems to have had a banner year in 2005, according to a recent Surety Report put out by Aon Construction Services Group. For the first nine months of last year, the industry recorded direct written premiums of $3.5 billion, while its direct losses only added up to $1.1 billion, according to the report's estimates. That's a loss ratio of 31.5 percent--nearly 2,000 basis points better than the same period in the last four years.
To put those numbers simply, the surety market will have been profitable again for the first time since 2000, unless something unforeseen happened in the last three months of 2005.
Why the turnaround? "In large part because the economy was so good, and as a result, there weren't a lot of defaults in the commercial or contract segments," said Geoff Heekin, executive managing director, surety, at Aon Construction Services Group.
This global good fortune, he said, accentuated benefits gained from underwriters being more "disciplined with the pricing of credit," as the report put it. For many customers, "disciplined" didn't just mean higher premiums. The benefit of disciplined pricing was also a "level playing field" with "pricing consistency," said Heekin.
The one exception to the pricing trend could be the middle-market contractor market, where the report predicted downward pressure because of the 12 to 14 companies fighting over business in that arena.
The overall higher prices, though, are in line with the nature of surety risk. "The amounts of credit that are being put out, certainly the things that could happen when you make a bad bet," said Heekin, "are significantly greater in payout than other lines of insurance."
Thus, the 2005 surety industry put out the same amount of bonds in total value as it had in 2001, Heekin explained, but because premiums were substantially up in 2005, it could manage losses that, if they occurred five years ago, would have left it in deficit or a loss position.
One area where the market could flex its new financial muscles would be with the private equity firms swallowing public corporations with leveraged buyouts. More than $100 billion in LBOs were carried out in the last year.
"We recognize that there's a tremendous amount of capital out there chasing various business, and we foresee it continuing to be a major part of the economy," Heekin said. "There's a real need to bring the parties, that being the capital buyers, the private equity and the hedge funds, and the surety credit providers, together in a more cooperative, rather than adversarial (relationship)."
May 1, 2006
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