Surety insurers recapture profitability.

The surety industry has seen a drastic reduction in loss ratio in recent years due mainly to disciplined credit pricing and underwriting effort that began in late 2001 with the commercial surety segment and the contractor segment in 2004 and 2005.

Last year, the aggregate loss ratio fell to 41%, from a high of 83% in 2001, marking the industry's first return to a profitable position in five years, according to experts.

John Welch, president and chief executive officer of CNA Surety, the second-largest surety writer, said before conditions worsened, the surety line had been profitable for almost a decade. "Underwriting got laxer and pricing got a little weaker, which led to the results in the 2001, 2002, and 2003 time-frame. Everybody got clobbered pretty good, and so people tightened up."

Signs the industry was turning around emerged fully last year, as contractor failures--a good chunk of the surety business--started to curtail.

Like Welch, Geoff Heekin, managing director of surety for Aon Construction Services Group, believes conditions that helped the market improve will sustain, although at a moderate pace. Heekin doesn't see, for example, carriers that dropped out of the marketplace returning, or even new players, anytime soon. That will take some time, he said. "We've found no serious discussions, either from reinsurers or primary, about anyone coming into this line of business."

The surety industry is highly concentrated, with the top 10 writers collecting 65% of the entire industry premium. The largest writers include St. Paul Travelers, Zurich Financial Services, CNA Surety, Safeco Insurance and Chubb Corp.

Welch said the industry certainly could use additional capital. There's capacity for smaller-type and even midsize risks, but not enough for "the large jumbo construction risk or large jumbo homebuilder risks that have big appetites," the chief executive said.

In recent years, the surety industry has been bullish on account of the booming U.S. construction market; residential construction particularly has been extremely robust for several years, and observers are seeing a similar surge in commercial construction.

The reconstruction effort in the hurricane-damaged Gulf Coast region, which hasn't yet hit full stride as a result of ongoing clean-up work, also has boosted market confidence. "There's a tremendous amount of development work going on, and it's not just the rebuilding down there in the Gulf area. There's so much demand and activity relative to private development, condos, hotels, convention centers, and now infrastructure with the passage of the federal funding authorization act late last year," Heekin said.

The real question now is whether contractors have enough men to do the work, and materials at the pricing that's built in with these projects to complete them, Heekin said.