The Surety Association of America (SAA) publishes the loss ratio of its member companies on a quarterly basis. The loss ratio is basically the percentage of premium dollars that are used to pay surety bond losses. While every company has a different expense ratio, rule of thumb in the surety industry is any loss ratio in excess of 40% means the surety company will not return an acceptable profit. As the loss ratio increases, the surety companies generally tighten underwriting standards to stem losses. With rates on surety bonds being so low, (1% to 3%) it is virtually impossible to make up for losses through premium increases. The only way to really stem surety losses is by increasing standards required to obtain bonding.
The good news is the reported loss ratio through the third quarter of 2013 for the top 100 writers of surety bonds was a very good 17.6% and overall for the entire industry the loss ratio was 14.4%. Furthermore, of the top 20 writers of surety bonds, only 2 had a loss ratio of 40% or higher and only 5 has a loss ratio of 30% or higher.
This is good news for both performance bond and commercial bond customers. While the surety industry is very competitive, the fact that most of the companies are providing a significant return to investors bodes well for the near term availability of the surety product.