Surety premium is historically very consistent but does fluctuate with economic cycles. Although total surety industry premium has dropped in the past two years due to the recession, the ongoing economic recovery is expected to restore premium growth in the next few years.

Contract Surety Premiums and Losses

This chart is part of a presentation by the Surety Information Office (SIO) and is used with permission of the National Association of Surety Bond Producers (NASBP). It shows premiums and losses through 2009. Growth has slowed because of the recession but not to the degree that the contractor marketplace has dropped overall. This is because surety bonds are issued mainly on public projects that have not been subjected to the same drastic cutbacks seen in private commercial and residential contracting.

The premium compared to direct losses also explains the current competitive surety marketplace.

For more information, contact:
National Association of Surety Bond Producers
1140 19th St. NW, Ste. 800
Washington, DC 20036

www.nasbp.org

A contractor that maintains a steady flow of projects generates a consistent revenue stream. The key to maintaining this flow is to not be restricted to only one type of customer. Prudent contractors work with both bonded and non-bonded projects that are within their expertise and geographic territories.

The surety bonding facility is the door a contractor must not only open but also keep open in order to reach new customers. The agent with the key to that door also opens the door to a new relationship with that contractor.

Here is a possible loss scenario:

Kerilian Contractors bid $10 million to build the Center City’s municipal parking garage. Careful Surety provided the required performance bond. The project completion date was 12/15/10. On 9/1/10 the job was less than 10% complete and Center City was very concerned that the project would not be done on time. Careful Surety and Kerilian met with Center City’s representatives. The result of the meeting was the declaration that Kerilian had breached its contract and that Careful Surety was taking over the job. Careful Surety worked with Center City and contracted with GoTo Contractors to finish the job. GoTo completed the project by the deadline and Center City was satisfied.

Careful Surety then proceeded against Kerilian to recover its loss due to the breach and its subsequent takeover of the project.

The surety bond market is healthy and ample capacity exists across the spectrum from small contractors to the very largest multinational contractors. Over the past 15 years, the insurance and surety industries have experienced considerable consolidation. As a result, there are fewer companies, but these larger companies are strong and more diversified. Liberty Mutual, State Auto, ACSTAR, American Southern, ACE, Capital Indemnity, CBIC, CNA/Western, First Sealord, Merchants Bonding, HCC Surety, Hartford, INSCO DICO, and Zurich are active markets that work with one or more of our experts.

Roland Richter, vice president–marketing at Liberty Mutual Surety, explains how Liberty Mutual, as the second largest surety in the United States, approaches agents and customers. “Following Liberty Mutual’s acquisition of Ohio Casualty in 2007, and Safeco in 2008, we listened to our agents and responded to their need for dedicated and separate underwriting expertise for the small to middle market and for the upper middle market to mega capacity market. We merged the small market capabilities of Ohio Casualty bonding and, Safeco’s First National surety program with Liberty Mutual’s sizable small surety portfolio to provide agents with a single, blended underwriting unit solely dedicated to serving small to lower middle contractors and commercial surety capacity needs.”
In 2010, Liberty Mutual Surety launched a new small to middle market surety division called Liberty SuretyFirst. Lloyd Geary, senior vice president and chief underwriting officer of Liberty SuretyFirst, explains, “Our market focus ranges from the first bond for very small contractors to middle market contractors with work programs up to $25 million. Contractors that outgrow Liberty SuretyFirst are seamlessly transitioned to the large-capacity capabilities of our parent division, Liberty Mutual Surety.”

This new division and the increasing appetite of many surety markets is good news for agents and their smaller contractor clients. Helen Parker, bond specialist–manager at Arlington/Roe, explains, “In our marketing territory of Indiana, Illinois, Michigan, Ohio, Kentucky, and Tennessee, smaller contractors represent of the majority of our business.”

Underwriting smaller contractors can be considerably different from underwriting larger contractors because only limited financial information is required when using small contractor credit-based surety programs.  According to Susan A. Sallada, CIC, president of Universal Service Agency, smaller contractors are primarily underwritten using personal credit scores. Changes in personal credit scores caused by unpaid medical bills, divorce, disputed charges, loan co-signing, etc., can be significant. These, in turn, directly affect the ability of contractors to use small contractors surety programs.

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