Research

Marketplace Realities 2018: Surety

November 6, 2017

    The one thing

    As the portability and flexibility of surety products change to meet the innovations in contracting methods, global fluidity, and rapid delivery, surety will become a strong financial product looking much less like a statutory necessity.
  • Preliminary surety premium results for 2016 (as of mid-2017) show premium at $5.8 billion and a loss ratio of 15.5%. Compared to 2015 final results ($5.2 billion and a loss ratio of 18.2%), these figures show growth with manageable losses. While the top 10 carriers write nearly 63% of overall surety premiums, the surety industry remains competitive, and we see underwriting terms and conditions softening. (Figures from The Surety & Fidelity Association of America.)
  • International surety is growing. Reverse-flow business in the U.S. is rising due to acquisition activity and more P3 opportunities. Leading U.S. sureties are now global, with significant premiums outside U.S., which improves premium growth and profits. Significant acquisitions took place as well for U.S. companies in 2017.
  • Sureties are aggressively pursuing new business as the construction economy continues to recover. The number of sureties competing in the middle-market construction space is the highest we have seen, increasing rate competition and capacity.
  • As with previous economic cycles, the current increase in construction activity will put pressure on contractors’ working capital, which will trickle down to subcontractors. The potential for more subcontractor defaults underscores the need for general contractors to emphasize subcontractor prequalification and to consider requiring surety bonds from subcontractors or using a subcontractor default insurance product.
  • Price prediction

    Flat
  • Alternative procurement methods such as P3 continue to grow in popularity, with more than 30 states having some form of P3 legislation. While conventional surety bonds continue to support billions of dollars in P3 projects, lenders remain focused on having more liquid security than traditional surety bonds typically offer. Several sureties continue to work toward addressing this demand for liquidity with the rating agencies and lenders.
  • As the banking industry continues to stretch to meet capacity needs, we are seeing a growing use of surety in place of bank guarantees as well as pay-on-demand facilities  for international projects in Australia, E.U., South Africa and South America and more opportunities to assist on non-construction financial and performance guarantees.
    Since surety remains the most cost-effective form of capital, many companies are maximizing their surety capacity to replace ILOCs and release restricted capital at preferred terms.
  • The Trump administration’s $1 trillion plan to renovate current U.S. infrastructure will have a positive effect on the construction industry — if the funding is confirmed.
  • A shortage of talent in the brokerage and surety marketplace is an industry-wide concern. Expanding current resources within the surety marketplace will affect a surety’s ability to maintain underwriting discipline.
  • Pricing should begin to stabilize. While capacity will continue to be under-subscribed, surety pricing will begin to reflect the increased demand brought about by the growing backlogs and increased interest in commercial surety products. It is doubtful prices will increase, however, as competition will remain high for the foreseeable future. Claim activity should remain static and gains in the equity markets will add to the pressure on rates.