State of the Surety Industry 2018 Report

NASBP ANNUALLY SURVEYS its affiliate membership of surety companies to gain an understanding of the state of the surety industry over the prior calendar year, together with a snapshot of the affiliates’ expectations of and experiences in the first quarter of the year in which the survey is conducted. Survey information is gathered through a written survey instrument and is complemented with information gathered through in-person discussions with selected company executives. Typically, 30 to 40 companies, representing all surety market segments, provide information for the survey, though exact respondent counts vary year to year. All information gathered is treated as confidential, with only aggregated information reported. The following summary report of survey results is divided by topic, with headlines reflecting the major findings and trends.

Company Performance: Profitable Growth and Solid Results
Respondents to the 2018 State of the Surety Industry Survey∗ (hereinafter, “Survey”) overwhelmingly indicated that 2017 company performance was superior to 2016 performance. This result continues a trend in recent years in which more than 80% of sureties have indicated that their present performance has exceeded their prior year’s performance. In 2017, 81% of respondents indicated that their company had experienced an increase in profits over the prior year (19% reported a decrease in profits). In 2016, 86% of respondents saw an increase in profits (5% saw no change, and 9% saw decrease). Sixty-nine (69%) of respondents also indicated that their 2017 performance beat their 2017 budget. This is down from the survey results in 2016, in which 85% indicated that their performance exceeded their budget, which may reflect better incorporation in 2017 budget assumptions for continued performance increases. Not surprisingly, however, continued solid performance corresponded with expansion of surety company branches, with 80% of respondents indicating that they had expanded in 2017 and that they had similar plans for 2018.
General optimism for 2018 company performance was reflected in written Survey comments, which cited the “continued good economy”/”healthy economy” as a driver for positive performance. When asked about accomplishments and challenges in 2017, respondents reported that “continued excellent results” and “profitable growth” were both an “accomplishment” and a “surprise” coming out of 2017. Sureties indicated that they did not see a reason to depart from optimism of performance in 2018, with one providing perhaps the ultimate self-expression of optimism, “We da bomb.” Respondents expected the construction economy to continue to experience growth in 2018.

Company Underwriting: Softening in the Short-term
Despite espousing general optimism regarding performance, respondents cited “overcapacity” and “aggressive competition” as conditions that would ensure that both contract and commercial surety markets remained soft or would soften further in 2018. Eighty percent (80%) of respondents anticipated that contract surety underwriting practices will soften in 2018, for such reasons as “many new competitors” and “results are good and memories are short.” Some respondents also remarked on how producer behavior is further softening the market. One stated that many producers “are reluctant to ask questions and quick to take the path of least resistance.” Remarking that “the producer’s helpfulness [in the underwriting process] continues to degrade,” another respondent offered that “rate and capacity seem to be the only measures of success.” On the other hand, a number of respondents related that their business plans are predicated on trusting relationships with “the professional bond producer,” which permits growth the “right way” and are critically important to continued success.

In terms of the commercial surety market, 47% of respondents indicated that the market would soften, while the majority, 53%, indicated that the market would remain the same. A comment given may explain the majority view that the commercial surety market will remain the same, as “it can’t get any softer in commercial,” which echoes a similar statement that the commercial surety market “is free money” made in last year’s survey.

Regardless of the type of surety market, respondents related that such markets were not likely to tighten without the occurrence of an economic downturn and/or the advent of a loss cycle.

Company Challenges: Managing Contractual Risks
Among the significant challenges facing sureties in the current environment is managing contractual risks, an answer given by 87% of respondents when asked to identify top challenges and opportunities for surety companies. One respondent framed this challenge in the following terms: “sureties need to make sure that they are not taking on contractual risk that they can’t handle.” This finding is further reinforced by the sureties’ assessment of top challenges for contractors, whereby 73% of respondents listed “difficult owner contract language” that places additional risk on projects where profit margins remain thin. Certain emerging circumstances, such as those presented in the context of public-private partnerships, also require that sureties be ever mindful of the contractual risks that they are underwriting, reasoned a respondent.

Respondents identified other challenges being faced by construction contractors, noting that, beyond difficult owner language, contractors are contending with subcontractor competency issues, qualified workforce issues, and cash management issues.

Company Challenges: Talent
As a shortage of talent/skilled workers is a significant issue for construction companies in the present labor environment, so too is it an issue for surety companies, as indicated by 80% of respondents. Seventy-three (73%) of respondents related that they plan to hire more underwriters in 2018 to fill either existing positions or newly created ones. How can they accomplish this goal when there is a shortage of talent? Nearly all respondents indicated that they had plans to hire talent away from competitors, underscoring the meaning of the phrase “war for talent.”

Working with persons of the millennial generation also is very much on the minds of respondents in 2018, particularly with respect to bridging generational differences among employees. Some respondents disclosed that they are trying to increase employee engagement and interaction. Among the means of accomplishing that is by pairing employees of different generations and experience levels in mentoring groups. Respondents also revealed that technology use is becoming more important as a result of the influx of millennials in corporate culture. Respondents, however, related that “developing people skills” may be more of a challenge and a need for some millennial employees.
Company Challenges: Maintaining Underwriting Discipline
Respondents reported that, in view of excess capacity, soft market conditions, and considerable competition, maintaining underwriting discipline is of great concern. Eighty percent (80%) of Survey respondents pointed out that “excess capacity” was a significant challenge in today’s surety market. Many cited “deteriorating” terms and conditions or “dilution” of underwriting terms and conditions as difficult present challenges and emphasized that continued soft markets would put added pressure on maintaining underwriting discipline in 2018 and beyond.

Respondents emphasized the importance of producer integrity in the current market and stated that producers have a critical role to play in evaluating sureties and in doing business with those that “will stand behind the product.” One respondent offered that producers can do the best job possible when evaluating sureties by evaluating their business plan, their claims philosophy, their underwriting consistency, and their support from senior management.

Company Claims Experience: Activity, Frequency, and Severity not Expected to Rise
Survey responses indicated that, as a whole, surety companies do not foresee significant claims activity in the near term. When asked, “Are you seeing a rise in the frequency and/or severity in your claims department?” 71% selected “no” and 29% selected “yes.” When asked to predict claims activity in 2018 relative to that in 2017, 64% believed that claims activity would remain the same, 7% believed that it would decline, and 29% believed that it would increase.

Company Claims Handling: Solid and Improving
As in past surveys, this Survey asked respondents to grade the industry’s claims handling on a scale of 1 to 10, with a rating of 10 being the highest. The average of the ratings came in just under a rating of 7 (6.8), the highest average rating since 2012. When asked how to further improve claims handling, many respondents related the importance of frequent communication with claimants. Other suggestions for improvements were investing in claims staff, paying proper claims promptly, and creating transparency of process. Producers can help too, added a respondent, by not taking bonds from those with a poor history of handling claims.
Industry Image: Mystery to Many; Education and Outreach Needed
A common refrain of Survey respondents on industry image was the need for the surety community to promote the value of surety bonds. To paraphrase a respondent, surety bonding cannot remain “a mystery to many outside of our immediate industry” if we are to improve surety’s image. Delivering message points to decision-makers that bonds save taxpayers money on defaulted contracts, provide contractors with the ability to grow responsibly, and provide ongoing jobs for construction workers are important, added the respondent. Other respondents identified image opportunities as “telling the story of how surety bonds helped obligees get their projects completed” and “linking successful project completion with the presence of a bond.” To that end, NASBP and the surety community must continue to be “proactive with advertising” and with “building relationships.”

End Note
∗The information contained herein was compiled through the efforts of NASBP leadership and staff, with NASBP CEO Mark McCallum being the primary author of the report, published April 2018.