Last year's surety business results are expected to be the best in five years, with a 32 percent loss ratio, some 39 points better than 2004, and the industry should remain profitable this year, according to a brokerage firm's analysis.

This was the conclusion of a report issued by Aon Construction Services Group, a subsidiary of Chicago-based insurance broker Aon Corp.

Aon said that for the first nine months, the industry posted direct written premium of $3.45 billion for 2005, compared with $3.25 billion in 2004.

In terms of losses, however, the industry posted only $1.10 billion, compared with $2.15 billion in 2004, when the loss ratio was over than 70.

This compares to the best year, 2001, which saw direct premium written of $2.65 billion and losses of $1.24 billion, for a loss ratio of close to 50.

Aon said that, historically, the last three months record an increase in losses between $200 million and $300 million. If this holds true for 2005, since there are no major losses anticipated, the loss range is expected to be between $1.3 billion and $1.4 billion, for a total loss ratio of on the high end.

This result would still be below 2001's loss ratio of 46, or $1.6 billion.

Aon credited the improvement to the surety business' improved discipline in its pricing. The group noted that surety is not a risk transfer, but an extension of credit to cover the payment of bonds.

The pricing, Aon said, is more in line with several factors, including credit worthiness, amount of credit and operating capabilities of the firm, than with claims history.

Large users of surety business–those seeking coverage of $250 million or more–can expect rates to continue to increase and little increase in capacity, according to Aon.

According to the report, due to increased competition, middle market users may see some decline in pricing.

Overall, capacity is not expected to increase, despite a desire expressed by American International Group to increase participation. According to the report, AIG's appetite for the business is limited.

The market is expected to remain profitable in 2006, the report said, but it did not venture an estimate of profitability.

The full report is available at www.aonsuretyhub.com.

Special Reports /

Surety Business On A 5-Year High

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