What’s going on in the surety industry? Is now a good time to try to get bonded? Stephen has some useful insights and updates for you, including thoughts on why now is a great time to work on building a relationship with a bonding agent if you haven’t already.
Topics we cover in this episode include:
- Whether we’re in a soft or hard surety market right now
- What a hard surety market is and what causes it
- When is the best time to build a relationship with a bonding company
- How to get started if you want to get bonded
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re we’re giving an surety industry update. And just for you guys to know, this is 2021, right? What? What year are we in? Wait. Oh my gosh. Covid’s just killing me here. This is 2022. We’re filing our 2021 taxes for the late people that we’re dealing with.
So this update will be a quarter two update from what you saw, and we, by the way, are the Contractor Success Forum, and we are giving this information to you because we are here to help you run a more profitable, successful construction business. And we have Wade Carpenter, Carpenter, and Company, CPAs. And we have Stephen Brown with McDaniel-Whitley Bonding and Insurance Agency. And I am Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems.
So what are we talking about? What is this information from and where are we, Stephen?
[00:01:04] Stephen Brown: Well, first of all, you have to ask yourself, who cares to listen to this information. What does it matter to me? But as always, on the Contractor Success Forum, everything seems to tie together, doesn’t it?
And in this situation, I’m a surety bond agent. I represent many different surety companies, and whether those surety companies have an appetite for writing business or not is something that I have to be almost obsessed with because I need to know what’s gonna happen. There are hard markets where it’s hard to get bonds, and there are soft markets where it’s easy to get bonds.
[00:01:42] Wade Carpenter: Well, why don’t you tell us a little bit about which is which and what’s going on with it?
A soft surety market
[00:01:47] Stephen Brown: Well, the good news is right now we’re in what everyone considers, and I’ve interviewed a lot of my friends and peers, everyone and from their corporate headquarters level feel like this is a relatively soft surety market.
And that means the capacity for growing your program and getting approved for surety credit is in a very good position. And the reason that is, is because bonding companies since the last hard market, have generally kept their losses, as an industry, average of 20% or less.
So it’s been kinda level, and because of that, you as a contractor should be getting better deals, better rates, more bonding capacity from the sureties. Because if your surety won’t offer it, someone else will. And that’s a discussion you have with your surety agent. But just hot off the press the second quarter of 2022 is showing that the top 25 companies are showing well below 20% losses.
So that’s what we look for. And so they come out and these bonding companies are ranked by their size by how much premium is written. I may have mentioned before, but the top five for the last six or seven years have always been Travelers, Liberty, CNA, Zurich, Chubb, Hartford, in that area are considered the biggest of the big. And they write double and triple the size of premium that numbers 6, 7, 8, 9, and 10 do.
So when you look at the top surety underwriters, you look at the overall percent. And right now the top 10 are averaging 12%, the top 100 like 23%, so that’s good. So that’s means that we’ve still got a good market ready to write bonds.
[00:03:42] Wade Carpenter: Well, that’s great.
What is a hard surety market and what causes it?
[00:03:43] Wade Carpenter: I guess I would ask, what’s the difference in a hard market and what causes that? Can you give us some examples of things like that have happened in the past?
[00:03:51] Stephen Brown: Well, a hard market occurs when the surety companies have so many claims that they get a little bit, I don’t know if scared’s the word, but they gotta pull back their reins a little bit. They have to be a little bit pickier about who they’re underwriting. Because almost always when a surety company has losses above the 20% level they’re more carefully scrutinized in house.
Also, some surety companies spread their risk to what’s called reinsurance companies. And those reinsurance companies are micromanaging them even more so that creates a hard market and the bonds get harder to get. The last hard market, Wade, in the surety industry was really 2001 to 2004. It was really, 2003, 2004 was considered a hard market. We had Enron, $569 million of claims paid by bonding companies on the Enron situation. We had two surety companies go out of business that were relatively big players and we it created a perfect storm.
And right now it’s amazing how many clients we see that are showing a profit on their financial statement just cause of the PPP money. Covid took a bigger hit than we could understand.
Some of our contractors, PPP money still sitting in their bank. Some of them needed it to make it that year.
[00:05:15] Wade Carpenter: I guess I would ask too, the PPP did pump up a lot of contractors. There was a lot of contractors that got the disaster loan, the EIDL loans. Is that artificially making these contractors look better than they are? Or is it the fact that, it seems like construction is booming in several parts of the country right now.
So what do you see happening?
[00:05:37] Stephen Brown: Well, it might be Wade. And then also remember we’re looking at a financial statement that you did from the last fiscal year. The real current information we may not know. And you may show profit on the books, but then you may have bid a lot of work cheap. Or, say because of material supply issues or the timeframe of the project, you’re showing a loss on your work on hand. The bonding companies don’t know. So the more you can talk it out with your accountant and your bonding agent and communicate with the surety companies, the easier they’re gonna feel about continue to extend you bond credit. Because they don’t know if these material issues and these timeframe.
Associated General Contractors just did a survey. 74% of their contractors said their jobs are taking much, much longer than they anticipated. 74%. And 54% said they’re running four months over. So how does that affect the surety industry? Well, time is money and you lose money. It’s not there to back up your bonds.
Now is the time to build a relationship with a bonding company
[00:06:46] Wade Carpenter: So I guess in your opinion, given that the bond market is like this, is this a good time for contractors to really get in with a bonding company and really firm up that relationship?
[00:06:57] Stephen Brown: It is. You know this is the time to take advantage of a good market. And also to let a new surety company know that we’re doing business the right way. And our jobs have backlog gross profit, and we have money in the bank, and we’re ready to go. That’s when your program can be stretched.
And it’ll probably be two or three years from now before the surety industry sees the impact of what’s going on right now with the recession and the material supplies and the jobs taking longer to complete . How that’s gonna affect the market is probably three or four years out is what everybody tells me.
[00:07:40] Wade Carpenter: Yeah. I guess I would ask too, because you talked about the last really hard market was 2001 through three. But what about the 2008, 9, 10? A lot of the, commercial guys that I had well, I had a lot of people in grading and, concrete and things like that. Some of them didn’t survive. Some of them filed bankruptcy and some of them were trying to, there were some bond claims there too.
So did that not cause a situation there or was it just, people didn’t seem to be able to get bonds for a while.
[00:08:10] Stephen Brown: It did Wade, but it didn’t create a hard market. A lot of the top 10 type 20 were showing some big hits in the 40, 50% level, but the hard market is triggered when they surety companies are really up there in this, 60, 70% loss ratio. Because remember the bonding companies, well the reason 20% is the guideline for them is because they have a lot of expenses out of that.
And even though a surety bond is not an insurance product, they don’t anticipate paying claims. If they underwrite you properly, they don’t have claims, but they do have claims. We know that. And there’s also a lot of expense involved in producing a bond. So that’s the way insurance companies think. They take what profit they have from an insurance standpoint, a combined loss ratio that’s under a hundred percent is considered pretty good, because there’s a lot of premium coming in that’s invested.
So, but from a surety standpoint, there are a lot more expenses that come out of producing as surety business. Also, the surety business is growing. So, a few years ago an analysis was done. Surety industry we’re growing estimated to 2037, 6.8%. So it’s growing. Surety companies are making money when they’re making money, they want to make more and they wanna do more business, and they’re pushed to grow.
So a lot of surety companies do that by loosening up their underwriting requirements a little bit. Taking on new risk, getting more creative in how they look at those risks. And another way they’re doing is through mergers and acquisitions of other sureties.
[00:09:56] Wade Carpenter: Yeah, I think you just took the thunder out of my next question, because that’s exactly what I was gonna say is, I guess construction seems to be booming in certain parts of the country. And an insurance company is designed to make some money. So, given that, I guess that’s why they’ve sort of loosened the credit requirements and things like that, and do you see it changing in the near future?
[00:10:20] Stephen Brown: Folks I talk to and our perspective is no. We’re doing more bid bonds than we’ve done in a number of years here at McDaniel-Whitley. We kinda gauge things that way. The activity is there. The ability to get bonds for our clients is in the best possible position we can be in right now.
So that’s what I want our listeners to know. It’s a good market. Go out there and see what you can do.
[00:10:43] Wade Carpenter: And I guess just, I know we’re going all over the place with this one, but I know about 10 years ago I had some contractors that hit the bankruptcy thing and usually for credit reporting, seven or 10 years is pretty much letting people off the hook.
So I know you probably don’t want to go into this, but say a contractor ever had a bankruptcy, can they get bonded again, even in a soft market?
[00:11:07] Stephen Brown: Well even in a soft market that bankruptcy is a tough hill to climb. A lot of bond agents will say absolutely not. It’s impossible. But there’s ways to get the job done. I’ve had bond underwriters tell me that bankruptcies due to a health related problem, they can be more lenient.
Also, you have to have a really good backup story behind the bankruptcy that you can sell the underwriter that gives them more comfort level in that individual. See, because we’re, I guess we’re getting in the character issue here. You’re like, I had to file bankruptcy. Well, tell us the story, what happened?
And also a bonding company that maybe is not so heavy into reinsurance and the job is not that big. And they can also throw a few controls on there until they get your feet wet, like funds management and other items until they get a comfort level of working with you. So, no is never no.
[00:12:07] Wade Carpenter: I would also ask since we’re talking about this, if this is a good market for somebody to try to get bonded. I know there are always, it’s an intimidation factor, I think for a lot of people if they’re not used to it. I know Rob’s talked about that before, but what’s generally required and is this the time people should be coming to talk to you and, at least developing a relationship?
[00:12:28] Stephen Brown: I believe it is, guys.
[00:12:30] Wade Carpenter: Any particular things that they need to be getting in order or they would need to have to come apply for a bond that you can talk about?
[00:12:38] Stephen Brown: Well, the main thing is just call, and let’s talk. Let’s see where you are now and what you want to do. What’s your current situation and what do you wanna accomplish? Then based on the information that you give me, I can tell you, well, it sounds like we could do this. Let’s shoot for this. And we’ll get going on getting you what you need
[00:12:57] Wade Carpenter: I know a lot of times when I’ve had contractors try to get a bond for the first time, they really don’t have any job costing records and usually you’re gonna be asking us for a WIP schedule and we’re trying to create that. So I think I’ve preached before about hey, start early, but any other tips on that?
[00:13:17] Stephen Brown: Well, no, that’s a great point, Wade, because at that point where we don’t have work on hand schedules, then we are really capped at what the bonding companies will do. Used to be without work on hand schedule, you’ve got no bonds. But now with the credit scoring bonds, you can get bonds up to a million dollars or more.
Always ways to get things done, but your financial information that you help your clients put together, you teach them and you coach them on how to get this information to us. Really it greases the treads. It makes things happen. You know that.
[00:13:53] Wade Carpenter: Yep. Okay. Were there any other updates you wanted to fill us in on or?
[00:13:58] Stephen Brown: No, that’s it.
[00:13:59] Wade Carpenter: Okay,
[00:13:59] Rob Williams: Alright. Well that sounds good. Well I appreciate you answering those questions because to listeners, Stephen can’t hear me today. So I appreciate you working on that and I will take us out though, even watch Stephen smile because he can’t hear me.
So this has been the Contractor Success Forum with Wade Carpenter, Carpenter and Company, CPAs. And I’m Rob Williams with IronGate Entrepreneurial support Systems. And we have Stephen Brown. Thank you so much for that good update on 2022, quarter number two. Thanks for listening and come back to the next Contractor Success Forum.
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