In a soft market, the competition is fierce. There’s also a surplus of surety companies trying to get your business. So how do you choose your market? Are all surety companies the same? Certain things are obvious when it comes to finding a surety market: pricing, speed of service, etc.; however, there are other components of sureties that should be taken into consideration when trying to place your surety business. In this article, we will discuss some key components of a surety that can differentiate them from the rest of the market.
What is a surety’s appetite?
While some sureties may have similar appetites, most largely vary when discussing a particular type of surety bond. Some sureties will look heavily at a credit report to qualify or unqualify an applicant while others will take the credit into consideration but rely largely on experience and the quality of a financial statement. Most surety companies are made up of individuals with vast experience. That experience can include claims or significant knowledge of a certain geographic area, which can play a role in the underwriter's decision making. Fluctuating economic factors can also play a role in a change in the surety's appetite. During a hard market, loss exposure heightens, and the surety may make the decision to retire from a class of business that they have previously accepted. Some sureties are specialty markets, zeroing in on certain classes of business that other surety company's steer away from based on high risk or lack of experience.
Does the surety accept cash collateral? Decline submissions where a bankruptcy is involved? Steer away from subdivision bonds? When choosing to partner with a surety company, it is important to have dialog about the surety's appetite when it comes to certain risks or their ability to mitigate risk through the use of collateral, or access to the Small Business Association (SBA).
What does it mean by “Treasury Listed”?
It is a good business practice for a surety to be treasury listed. This means that the surety holds a Certificate of Authority to write federal bonds. The U.S. Department of the Treasury publishes a list of sureties that hold these certificates (https://www.fiscal.treasury.gov/surety-bonds/list-certified-companies.html). The site will list the name of the surety, where they are incorporated, the states where they hold surety licenses and their underwriting limitations. The penal limitation is a "per bond basis"; however, a surety is able to write a bond above the listed amount so long as the exceeding penal sum is covered by reinsurance. Although this is at a federal level, some states, municipalities, and private sector GC’s will require a bond be written with a surety that holds a treasury listing.
What is an A.M. Best rating and what determines it?
A.M. Best is a global credit rating agency for the insurance industry. Formed in 1899, A.M. Best is the most recognized credit reporting agency for the industry. According to their website " A.M. Best's Credit Rating (BCR) is a forward-looking, independent, and objective opinion regarding an insurer's, issuer's, or financial obligation's relative creditworthiness. The opinion represents a comprehensive analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, and business profile or, where appropriate, the specific nature and details of a security.” The agency reviews the insurer's information annually and publishes the ratings. The "Long -Term Issuer Credit Rating" scale ranges from an "AAA" (Exceptional) to a "C" (Poor). The "Financial Strength Rating" scale ranges from an "A+" (Superior) to a "D" (Poor). It is important to know the surety's A.M. Best ratings as certain obligees will require an A.M. Best rating of a certain quality in order to accept a bond.