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 affiliated 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.

According to Mr. Geary, “Smaller contractors don’t’ operate in a corporate atmosphere. They tend to be entrepreneurial and much more hands-on than larger contractors with the owner often working alongside his or her crew.” The smaller contractor usually wears several hats and must prepare bids, order materials and supplies, hire and fire workers, and handle payroll and accounting functions. As a result, smaller contractors may not have the time to focus on longer-term strategy.

In addition, smaller contractors are affected by the economy itself. Ms. Parker explains, “The economy has obviously affected the financial strength of contactors, which in turn affects their ability to obtain a bond.”

“The American Recovery and Reinvestment Act of 2009 provided little help to the struggling construction industry,” according to Ms. Sallada. “Much of the funding was ultimately used for larger projects, providing few, if any, opportunities for small contractors. For cash flow purposes, many large contractors are now bidding on smaller projects that they avoided in the past. In addition, working capital bank lines have been reduced or withdrawn from many contractors, resulting in small contractors as a group being more affected than large contractors.”

Mr. Geary agrees. “Less work and more competition are having a major impact. Contractors are facing competition from not only contractors of a similar size but also from larger contractors who normally wouldn’t look at smaller projects but now bid on them because they need the work.”

Performance and bid bonds are not required for every job. Ms. Parker says, “Unless the project is overseen by city, county, state, or federal regulation, it depends on the risk the project owner is willing and able to assume.”

However, other types of bonds may be required. “Contractors may need licensing bonds and street opening bonds,” according to Ms. Sallada. “There are also wage and welfare bonds to guarantee payment of union workers’ benefits. Service businesses may need bonds to support contracts with governmental bodies, such as grass cutting, janitorial services, snow removal, building maintenance, extermination services, and digital mapping, to name just a few.”

Surety underwriting is based on the three C’s: Character, Capacity, and Capital, and they apply regardless of the contractor's size. Mr. Geary says: “It gets down to this: Does the contractor have the experience and the ability to perform the work? Does it have the financial wherewithal to work through those unexpected situations that invariably come up? Does the contractor have the right character traits to complete each project to specifications and on time?”

One particularly difficult type of contractor to place is one that builds subdivisions. According to Ms. Sallada, this is because there are so many risks and the completion bond does not have an end date. There are numerous elements involved that can fall apart in a project of this type in any size subdivision. A particular concern is that the developer, not the public agency, must pay the cost of building the bonded improvements.

Ms. Parker cites project length as having an impact on the ability to obtain bonds. “Long-term contract bonds (greater than two years) and contracts that require a bond to be issued even though the contractor does not begin the work for more than 18 months from the date the contract is awarded are difficult to place. Placing combined design-build contractors and those with real estate development in their operations is also difficult.”

According to Mr. Richter, there are no specific geographic capacity limitations affecting surety capacity. "No matter where a contractor is throughout the country, there is still ample capacity. Capacity is fairly well balanced and is not available for only large or jumbo contractors. It really is available to contractors of all sizes.” However, certain markets such as Las Vegas, southern California, and New York City present difficulties for contractors, due to local conditions and government regulation—not the bond market’s capacity.

Surety is not insurance, but the insurance agent is often expected to be a client’s surety source. Some agents do not want to be that source and refer the client to another agent. However, the agent who wants to respond to that client should consider working with a managing general agent or wholesale broker to meet the client’s needs. This helps the current client and also builds the agent's relationships, knowledge, and ability to work with potential clients in the future.

Ms. Sallada explains, “Partnering with specialists allows the retail agent to concentrate on the insurance needs of their clients and provide their contracting accounts with solutions to all of their bonding needs.”

The surety market is open and is accepting new clients. According to Mr. Geary, “There are many sureties. Each has a different appetite with respect to the types and sizes of contractors it will work with. That means it’s very important for agents to understand the markets and their capabilities and preferences."

Ms. Parker says, “Writing a bond is not a matter of fitting a contractor into a set of parameters. We study each client’s financials, business profit, experience, and resources. We are stricter than a bank when it comes to profiling bond clients. However, that’s what a retail agency wants or should want in order to do a good job for the client and the agency. That is because once a contractor defaults on a bond, it no longer is bondable and may be functionally out of business.”

The key is available. Now the question is: do you want to open the door?