Surety business still profitable despite soft market

Surety business still profitable despite soft market

Zinkewicz, Phil

CNA Surety executive outlines opportunities for agents

In many respects the surety insurance industry in the United States is not unlike other areas of the property and casualty insurance arena, in that it in the midst of an extremely competitive market which has dominated the business for some time, and in that it is also in the midst of a good deal of consolidation with mergers and acquisitions abounding.

But the surety industry business does differ from other areas of the P-C business in that it is not pricedriven in terms of bottom line results. In other words, even though market conditions may keep premium levels depressed, it is the performance of the contractors that determines profitability. Consequently, according to Mark C. Vonnahme, president and chief executive officer of CNA Surety Corp., the surety business, despite the continued soft market, has been profitable for the last nine years and there are more opportunities for participants ahead.

That goes not only for underwriters, but for independent agents as well, says Vonnahme, who represents, with great enthusiasm, what has now become the largest surety company in the United States. Moreover, says Vonnahme, overseas markets represent areas for growth for the U.S. surety industry and, without giving too much away, the CNA Surety executive says that the company is exploring the possibilities of merger activities or other types of unions in particular overseas markets.

CNA Surety is itself the result of the September combination of the surety operations of CNA with Capsure Holding Corporation’s subsidiaries, Western Surety Co. and Universal Surety of America. CNA Surety, which is headquartered in Chicago, provides surety and small fidelity bonds nationwide through subsidiaries Western Surety and Universal Surety. Its reinsurance arrangements are with CNA.

According to Vonnahme, a complete line of surety bond products and small fidelity bonds is marketed through a combined network of more than 37,000 independent property/casualty insurance agencies. These agencies are supported by 900 employees in CNA Surety’s branch offices throughout the country and home office locations in Chicago, Sioux Falls and Houston.

“CNA Surety has built solid, longterm relationships with independent agency sales forces, with a long history of specialized, high-quality service,” says Vonnahme. “The special needs of medium and large contract bond and commercial bond accounts will generally be serviced by the branches and Chicago home office. Small commercial and fidelity accounts will be serviced through the Sioux Falls office, and small contract accounts through the branches and Houston office.”

CNA Financial Corporation, through its subsidiaries, owns approximately 62% of the outstanding common stock of CNA Surety. The remaining common stock of CNA Surety, which was initially issued to Capsure’s existing stockholders in the business combination, is publicly traded on the New York Stock Exchange.

The pro forma 1996 net written premiums are $229.4 million, making it the largest provider of surety bonds, initially controlling approximately 8.6% of the market.

Unlike a standard, two-party insurance policy, surety bonds are three-party agreements in which the issuer of the bond (the surety) joins with a second party (the principal) in guaranteeing to a third party (the owner/obligee) the fulfillment of some obligation on the part of the principal.

Surety bonds are designed to protect the obligee from exposure to loss. The surety business is divided into the following major categories:

Contract bonds

A contract bond is a performance bond, which guarantees the performance of a contractor’s obligations according to the terms and conditions of a construction contract.

Commercial bonds

A commercial bond is issued for a specialty area and includes custom and other business programs. Types of commercial bonds available include license and permit bonds, miscellaneous indemnity bonds, selfinsurers bonds, court and probate bonds and reclamation bonds.

“Approximately 80% of all surety business is required by federal statutes, state laws and local ordinances. The growing worldwide awareness of the need for surety bonding is one factor that will contribute to future growth in the industry,” says Vonnahme.

Agents predict surety growth

Observers of the CNA Surety picture see good things for the company and for the market overall. Ted Sever of J&H Marsh & McLennan, Inc., in Chicago says that CNA Surety is a major player in the surety business and has worked well with his firm. “CNA Surety has positioned itself for growth in the current marketplace and has longterm plans for global expansion. We’ve already done some international business with CNA.”

Michael M. Bill of MJ Insurance Agency in Indianapolis says that opportunities for independent agencies in the surety arena can only increase with the marketplace turning more aggressive than it was seven or eight years ago. Bill’s agency also does business with CNA Surety. “In the not too distant past it was almost impossible to obtain the necessary protection for small contractors. Today, the opposite is true. I think the surety arena is more exciting today than ever before.”

Vonnahme says that CNA is encouraging agents to become more involved in the surety arena. “Even those with no previous experience have opportunities. We’ll be there to help them.”

Copyright Rough Notes Co., Inc. Jan 1998

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