It's a mixed bag in the surety bond industry

Hard and soft markets co-exist

By Phil Zinkewicz

In the past few years, insurance trade publications—and this one is no exception—have been reporting about an unusually prolonged soft market in just about every line of property and casualty insurance. Competition is strong for premium dollars, and most insurance products are available. The recession is in large part to blame for this situation. High unemployment depresses workers compensation premiums. When money is tight, people don’t buy as much insurance as they do in better times. They assume higher deductibles or, in some cases, go without insurance.

But in the surety bond industry, today there is a kind of combination of a tight market and a soft one. “Bonds are not insurance, but rather financial guarantee products,” says Susan A. Sallada, president of Universal Service Agency, a company that specializes in surety and fidelity products. “Bonds are much more credit-driven than property and casualty insurance products,” says Sallada. “Given the current credit situation in today’s economic slowdown, it can be seen why there is a hardening of the market.”

Universal Service was formed in 1983. In 1985, a bond department was set up to serve the growing needs of the agency’s clients. In 1987, the property and casualty book of business of the agency was sold to another agency and Universal Service became a bond-only agency. In 1988, Sallada purchased the company’s assets.

Universal Service accounts vary in size from clients requiring the smallest contract and license bonds to contractors doing $20 million projects. As a managing underwriter, Universal Service represents 25 companies and has powers of attorney and underwriting authority with many of those markets.

The company writes bonds for the more mundane types of business—broker bonds, court bonds, ERISA bonds, etc. However, Universal Service also provides bonds for more esoteric professions such as auctioneers, tobacco retailers, guardian of minor bond and boat dealer bond, to name just a few.

“The smaller retail agency can handle the standard requests for bonds, such as licensing bonds for plumbers and electricians,” says Sallada. “But with more complex bond arrangements, retail agents turn to the specialists, and that’s us.”

Sallada has extensive experience in the insurance business. Prior to joining Universal Service, she was an account executive with Aetna Life & Casualty. Before that, she was an agency operations manager with Bartsch & Associates, a $2.5 million property and casualty insurance agency, with an equal amount of business in personal and commercial lines. In addition, she did a five-year stint as an agent with Allstate.

Her move into fidelity and surety bonds, she says, was prompted by the fact that property and casualty insurance industry was just not capitalizing on the clients’ needs for bonds.

“There’s no question that the surety bond industry is hurting in the current economic climate,” Sallada says. “Small businesses are having difficulty keeping themselves afloat, and the number of them that are going out of business is increasing.

“As an example of how difficult things are out there, we have one client that is a dry wall contractor. In 2008, that contractor reported $3.8 million in sales. In 2009, total sales were $93,000. This doesn’t look very good on their balance sheet, which will make it difficult to obtain bonding when a job comes along,” she explains.

Sallada says that work on non-public buildings has virtually ceased. “Just look around and you’ll see that non-public building projects have been put on hold.” However, she says that public projects are going forward and competition for that business in the surety industry has increased tenfold. Therefore, for public buildings it is a soft market.

“The most attractive risks for bond underwriters are those with strong working capital and stockholder equity as well as a good line of credit with the banks. However, as we all know, banks have pulled back on lines of credit. So the bond market is hard for non-public buildings and mortgage brokers, but soft for public projects.”

Asked whether President Obama’s stimulus package would make a difference, Sallada maintains that would be difficult to see for some time. “Some of that money was aimed at infrastructure projects,” Sallada notes. “But those projects require permits from local governments. Sometimes, it takes between 18 and 24 months for those projects to get moving.”

Sallada says that Universal Service is doing well despite the down economy. “We have our marketing program, our direct marketing program and our strong reputation in the business that keeps us going. Sometimes, we even get referrals from insurance companies.”