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Contract Surety Bonds and Today’s Market

To better understand the surety market, it is important to review the history of losses and profitability.  Over a 50 year period, from 1958-2008 the average loss ratio is 39.3% for surety companies.  The surety industry is very cyclical; it goes through periods of huge profits followed by periods with large losses.  The surety industry mirrors the construction industry, and surety bonds actually help to smooth out the construction cycles.  This theory is supported by the failure rates of contractors, according to Bizminer in 2007 there were 1,424,124 construction companies by 2009 only 969,937 had survived.  The failure rate was 31.9% for those two years; it was even more difficult for start-up companies to survive with a failure rate of 37.0%.  After interviewing the top surety professional in the market, it is clear that surety professionals are optimistic about surety capacity and bonding even though the market will remain tight.  This means surety will be available for the best contractors; it will be difficult for marginal contractors to obtain bonding in the future.  As many contractors are already seeing, there is more competition on fewer projects, surety experts expect this trend to continue into the future.  Contractors are expected to have to run lean operations to continue to survive these economic conditions, the failure rate for construction companies is expected to continue to increase.

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