After vastly improving their efficiency in the last five years, bond insurers will be hard pressed to keep future expenses down, according to a report issued this week by Fitch Investors Service.

Net operating expenses for the industry dropped to 22% of premiums written in 1993 from 41% in 1989, according to the report, "Bond Insurers' Operating Efficiency," as the combination of stable costs and skyrocketing volume enabled bond insurers to drastically reduce expense ratios.

However, the same fixed costs that made the insurers more efficient during peak volume years will "also make it more difficult to cut expenses as business activity drops," Fitch said, noting that "expense ratios have risen so far in 1994."

Through the first six months of 1994, the volume of insured issues was off 37% from the same period in the prior year, according to Securities Data Co., mirroring the drop in overall tax-exempt volume.

The expected increase in expense ratios affects the insurers' "overall profitability and ability to generate capital," but should not rise to a level that would threaten their credit quality, said Brady N. Tournilan, vice president at Fitch and co-author of the report.

As with other measures of performance -- like earnings, market share, and volume -- insurance executives says it is unrealistic to expect improvements in operating efficiency to continue at the same rate as in recent years, particularly 1992 and 1993. Those two years were anomalies, the officials say, and performances in those boom years should not be viewed as the standard for the industry.

Furthermore, industry executives say efficiency is influenced by different aspects of the business and must be examined in a larger context.

"You can control expenses, but there are other variables that are hard to control," like the size of the overall market, pricing, the use of insurance, each firm's market share, and the quality and mix of the insured portfolio, said Frank J. Bivona, senior vice president and treasurer at AMBAC Indemnity Corp. "The industry did very well in not ramping up expenses during a period of expansion, so I don't think we'll be under pressure to lower expenses" going forward.

From 1989 to 1993, AMBAC and Municipal Bond Investors Assurance Corp. were the industry's most efficient players, according to the Fitch report, with net expense ratios that averaged about 20%. Financial Guaranty Insurance Co. ranked third with average expense ratios of about 28%.

Net expense ratios in the period averaged as follows for the rest of the industry: Capital Guaranty Insurance Co., 48%; Financial Security Assurance Inc., 51%; Connie Lee Insurance Co., 64%; and Capital Markets Assurance Corp., 162.2%.

"Expense ratios for these smaller, less established players will improve if and when they are able to generate greater levels of business," the report said.

The net expense ratio measures the portion of each premium dollar an insurer retains for policyholder protection.

AMBAC and MBIA were also the most efficient insurers over the five-year period in terms of gross par expense ratios, with averages of 22% and 23%, respectively, Fitch said.

The gross par expense ratio compares an insurer's expenses with business volume before reinsurance agreements are taken into account.

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