Contract Surety Bonds: Understanding Today’s Market
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Transcript of Contract Surety Bonds: Understanding Today’s Market
CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET
2010
Surety Losses & Profitability
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
100.0% 110.0%
LossRatio
Calendar Year
Contract Surety Industry Direct Loss RatiosCY 1958 - 2010
Source: The Surety & Fidelity Association of America
Ave
Surety Losses & Profitability
50.0%
70.0%
90.0%
110.0%
130.0%
150.0%
170.0%
CombinedRatio
Calendar Year
Contract Surety Industry Combined RatiosCY 1962 - 2010
Source: The Surety & Fidelity Association of America
A
Surety in the Early 1990s Strong economy Excess capacity in surety market Low premiums Relaxed underwriting Commercial surety expansion
Surety in the Early 2000s Sagging economy Significant commercial losses Heavy contract surety losses Increased failure rates
Surety in the 2000s
Source: BizMiner
Building, heavy/highway, and specialty trade contractorsIn Business Survivors Failure Rate2002 2004853,372 610,357 28.5%2004 2006850,029 649,602 23.6%2006 20081,155,245 919,848 20.4%2007 20091,424,124 969,937 31.9%
Contract Surety Premiums & Losses
0
0.5
1
1.5
2
2.5
3
3.5
1994 1996 1998 2000 2002 2004 2006 2008 2010
Billio
ns o
f Dol
lars
Direct Premiums WrittenDirect Losses Incurred
Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (1999-2010) Surety Countrywide (Preliminary)”
Top 15 Writers of All U.S. Surety
Surety & Fidelity Association of AmericaTop 15 Surety Writers
1994 vs 2010
1994 2010
Surety($millions) Premium Surety
1 Reliance Travelers 147.1 1 Travelers Bond 857.32 USF&G St. Paul Travelers 144.1 2 Liberty Mutual Insurance Group 743.03 F&D Zurich 142.5 3 Zurich Insurance Group 498.94 St Paul Group Travelers 140.9 4 CNA Insurance Group 398.65 AIG AIU Holdings Chartis 111.5 5 Chubb & Son Inc. Group 251.66 Aetna Travelers 106.6 6 Hartford Fire & Casualty Group 177.17 Continental CNA 100.7 7 HCC Surety Group 176.18 Fireman's Fund Out of surety 97.3 8 International Fidelity Insurance Co. 142.79 CNA Insurance Companies 92.8 9 ACE Ltd. Group 106.7
10 Safeco Liberty Mutual 88.9 10 NAS Surety Group 104.211 Chubb 77.7 11 Great American Insurance Companies 98.112 Hartford 74.0 12 The Hanover Insurance Group 92.913 Amwest Gone 70.2 13 Lexon/BondSafeguard Insurance Cos. 80.414 Capsure CNA 55.3 14 RLI Insurance Group 77.515 CIGNA Group ACE 49.7 15 Arch Capital Group 63.3
($millions) Premium
Companies that are gone in REDCompanies that merged or were sold are in BLUECompanies that merger or were sold a second time are in GREEN
Construction ActivityAll Construction Public Private
Total Construction -8.0% -2.9% -10.7%
Nonresidential -15.2% -3.7% -24.8%
Lodging -62.1% - -63.6%
Manufacturing -31.4% - -31.8%
Public Safety -14.4% -13.4% -
Power -5.7% -24.2% -2.7%
Educational -18.6% -17.4% -24.7%
Transportation +13.8% +21.9% -10.9%
Amusement/Rec -17.7% -11.2% -26.4%
Office -33.8% -11.1% -41.9%
Highway/Street +5.6% +5.5% -
Health care -14.6% -7.0% -14.6%
Commercial -31.8% -37.4% -31.4%
www.census.gov/const/www/c30index.html
U.S. Census Gains May 2009-May 2010
Outlook for 2010 & Beyond Increased risk for owners, contractors &
sureties caused by current economy Continued disciplined underwriting,
exposure management & project analysis
Stabilized capacity & restored profitability
Growth in nonresidential construction expected in late 2010, early 2011
Outlook for 2010 & Beyond Optimism about surety capacity &
demand Small, mega markets may remain tight Surety available for best contractors Marginal contractors difficulty obtaining
bonding More competition, fewer projects Tightened operations for contractors Increase in contractor failures
UnderwritingThe 3 Cs: Capital Capacity Character
4 and 5: Continuity Contracts
Underwriting Capital
Financial statements Indemnity Working capital Work-in-progress
Underwriting Capacity
Resumes Contingency plan Business plan Equipment
Underwriting Character
Reputation Relationships References
Bond Premiums
Type of Construction
Geographic Area
Contractor Size
Still a Bargain
Pennies on the dollar
Premium
CapacitySmall
( < $50 M)
SBAProgram
Medium($100 M)
CompetitiveSurety Market
Jumbo( > $500 M)
Multiple sureties
Joint ventures
Partial bonds
CapacityMedium($100 M)
CompetitiveSurety Market
Jumbo( > $500 M)
Multiple sureties
Joint ventures
Partial bonds
Small( < $50 M)
SBAProgram
Claims
Severity&
Frequencyof Claims
Advice for Today’s Contractors Know rights & responsibilities Stay within capabilities Manage growth & overhead Learn why contractors fail
Advice for Today’s Contractors Communicate Prepare for economic recovery
Advice for Today’s Contractors Contract terms Bond forms Construction CPA Adjust overhead Bank line of credit Conserve capital Bond subcontractors Qualify the surety
Advice for Today’s Contractors
Underwriter
Producer
Contractor
Advice for Today’s Contractors
Underwriter
Producer
Contractor
For More Information
Surety Information Office (SIO)www.sio.org | [email protected]
SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond
Producers (NASBP).