By {{Article.AuthorName}} | {{Article.PublicationDate.slice(6, -2) | date:'EEEE, MMMM d, y'}}
{{TotalFavorites}} Favorite{{TotalFavorites>1? 's' : ''}}
Construction Executive surveyed top leaders in the surety bonding industry to create a big-picture view of the current state of the market. Overall, the news is positive for contractors. Experts say construction and surety market cycles have been strong, creating increased competition.

“Like so many markets, surety moves in cycles. Today’s profitability generates excess capacity, and this excess capacity will breed losses. These losses typically weed out some players, reduce industry capacity and may create an environment, as we’ve seen before, where too much demand chases too little supply,” says Ross Fisher, board chair, Surety & Fidelity Association of America (SFAA) and senior vice president of The Hartford’s large commercial businesses.

“Whether it is a small or mega-sized contractor, capacity looks to remain extremely strong again in the year ahead, and sureties continue to be hungry for more business. This is truly a buyer’s market,” says Michael J. Mitchell, vice chairman of The Graham Company.

Adds Scott Paice, vice president and head of surety for FCCI Insurance Group: “Everyone from large carriers to newer entrants are vying for your business. If you are new to surety, there has never been a better time to establish your surety credit.”

In this current cycle, surety losses have not been an issue; in fact, sureties have been profitable. Given the high competition, it is important that good underwriting discipline and terms are maintained.

The surety market for small contractors is ripe—with both appetite and availability, leading to increased competition among carriers—making it easier for small contractors to obtain surety credit. “Express” underwriting programs have become increasingly popular with some companies writing single bonds up to $1 million based on limited underwriting information,” Paice says.

Melissa Current, assistant vice president of surety and fidelity for First Insurance Company of Hawaii, Ltd., adds that “while there have been multiple mergers within, and exits from, the surety industry during the last decade, availability of surety credit has not waned.”

In keeping with the overall trend, surety losses in the small market segment have not been an issue. “Surety losses have remained well within the 20 percent industry standard despite the recent global economic crisis,” Current says.

However, Steven Swartz, president and CEO of South Coast Surety warns, “As competition for market share continues, losses may start to grow.” In addition, “subcontractors continue to feel the pressure as project owners and general contractors shift more responsibility down to their level. Subcontractors need to be on the lookout for onerous contract provisions and should look to their surety and trusted advisors for guidance,” Paice says.

JD Weisbrot, president for JW Surety Bonds, comments that the “surety industry is cyclical in nature, and the industry has enjoyed profitable underwriting for the past 12 years. This has meant new bond companies entering the surety space, allowing for an over-saturation in capacity and availability.”

“The number of sureties operating in the middle market segment is the highest it has ever been,” says William Waters, vice president of contract underwriting for CNA Surety.

The surety market for contractors performing projects under $100 million is very competitive, adds Josh Penwell, vice president of contract underwriting for Merchants Bonding Company. “We are seeing an adequate amount of surety capacity in this market segment for properly capitalized and well-managed contractors,” he says.

Adds Antonio C. Albanese, vice president and head of surety for Nationwide: “Senior management looks at the profitable results and allocates capital to this line of business as demonstrated by the new entrants into all segments of the marketplace. This ultimately increases overall capacity in the middle market.”

Lynne W. Cook, senior vice president for Early, Cassidy & Schilling, Inc. and president of the National Association of Surety Bond Producers explains, “The middle sector currently is one of the most competitive. Increased capacity from within the surety community is one major reason for this situation. Because the return on capital from surety has been higher than property and casualty insurance lines, some insurance companies that previously had not been in the surety market entered the surety business, and others that exited the surety market decided to return.”

Much like the small market segment, the middle market has not seen significant loss activity. “Given the increased pressure for premium production now that the economy is recovering, the marketplace will most likely see an erosion of underwriting discipline, which will lead to greater loss levels in the future,” says Alan P. Pavlic, president and COO of Old Republic Surety Company. “However, during the economic slowdown, some sureties remained fairly disciplined with underwriting.”

In addition, “efforts by sureties and agents to continually educate contractors about the benefits of managing backlog, bonding back significant subcontractors and identifying onerous contract terms continues to have a positive impact on results,” says Michael P. Cifone, senior vice president of surety underwriting for Hudson Insurance Group. “Mitigating risk for the contractor involves not only identifying and minimizing risks in the execution of work, but also understanding the terms of the contract and selecting the right owners to work for.”

The large market sector has seen new and existing sureties continuing to provide substantial capacity and may be the most competitive of all four market sectors. Fisher of The Hartford and SFAA offers three reasons why: “First, those sureties serving the ‘mega’ contractor space easily serve this ‘large’ space as well.  Second, sureties that are new to the market or serving the “middle” space often stretch into the large arena. 

“And finally, the number of contractors operating within the large range is decreasing due to construction industry-wide consolidation that tends to make these contractors sellers rather than buyers.”

Fewer sureties participate in the mega market segment given the high-capacity requirements. “Mega contractors with a strong credit profile are enjoying very strong surety industry support. Project sizes are bigger than ever, so this surety capacity is a key advantage for firms to acquire new projects,” says Robert Murray, Zurich’s executive vice president and head of surety.

Dillon Rosenhaumer, construction practice leader for INSURICA, adds that greater “competition is creating availability” in this market segment.

“Overall surety industry loss experience continues to be lower than historical norms, largely driven by excellent results in the mega contracting segment,” Murray says. “Contractors in this segment face challenging projects and demanding owners, but relentless focus on cost control and risk mitigation has produced favorable results.”

Kate Woerheide is communications manager of The Surety & Fidelity Association of America, Washington, D.C. For more information, email kwoerheide@surety.org.


 Comments ({{Comments.length}})

  • {{comment.Name}}


    {{comment.DateCreated.slice(6, -2) | date: 'MMM d, y h:mm:ss a'}}

Leave a comment

Required! Not valid email!