contract surety bonds: understanding today’s market 2013
TRANSCRIPT
CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET
2013
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 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 - 2012
Source: The Surety & Fidelity Association of America
A
Surety Losses & Profitability
50.0%
70.0%
90.0%
110.0%
130.0%
150.0%
170.0%
Calendar Year
Contract Surety Industry Combined RatiosCY 1962 - 2012
A
AverageCombined Ratio=105%
Surety in the 2000s
Source: BizMiner
Building, heavy/highway, and specialty trade contractors
In Business Survivors Failure Rate
853,372 (2002) 610,357 (2004) 28.5%
850,029 (2004) 649,602 (2006) 23.6%
1,155,245 (2006) 919,848(2008)
20.4%
897,602 (2009) 702,618 (2011) 21.7%
918,483 (2010) 696,441 (2012) 24.2%
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 2012
Billio
ns
of Dolla
rs
Direct Premiums Written
Direct Losses Incurred
Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (200`-2012) Surety Countrywide (Preliminary)”
Top 15 Writers of All U.S. Surety
Surety & Fidelity Association of AmericaTop 15 Surety Writers
1994 vs 2012
1994 2012
Surety
($millions)
Premium Surety
1 Reliance Travelers 147.1 1 TRAVELERS BOND 754.22 USF&G St. Paul Travelers 144.1 2 LIBERTY MUTUAL GRP 725.73 F&D Zurich 142.5 3 ZURICH INSURANCE GRP 462.54 St Paul Group Travelers 140.9 4 CNA INSURANCE GRP 411.25 AIG AIU Holdings Chartis AIG 111.5 5 CHUBB & SON INC GRP 198.66 Aetna Travelers 106.6 6 INTERNATIONAL FIDELITY INS CO 161.47 Continental CNA 100.7 7 HCC SURETY GRP 160.68 Fireman's Fund Out of surety 97.3 8 HARTFORD FIRE & CASUALTY GRP 159.79 CNA Insurance Companies 92.8 9 ACE LTD GROUP 129.1
10 Safeco Liberty Mutual 88.9 10 RLI INSURANCE GRP 110.611 Chubb 77.7 11 GREAT AMERICAN 104.212 Hartford 74.0 12 LEXON/BONDSAFEGUARD 100.913 Amwest Gone 70.2 13 THE HANOVER INSURANCE GRP 85.714 Capsure CNA 55.3 14 NAS SURETY GRP 78.215 CIGNA Group ACE 49.7 15 MERCHANTS BONDING GROUP 72.8
($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 Activity
All Construction Public Private
Total Construction +4.3% -5.1% +9.0%
Nonresidential -2.1% -5.2% +0.6%
Lodging +16.6% - +20.7%
Manufacturing +2.1% - +2.2%
Public Safety -6.1% -6.5% -
Power -1.6% 10.8% -2.8%
Educational -10.7% -12.7% -2.7%
Transportation +11.4% +16.1% +0.8%
Amusement/Rec -10.5% -12.2% -8.2%
Office +1.6% -30.7% +16.5%
Highway/Street -3.5% -3.4% -
Health care -3.3% +0.3% -4.5%
Commercial +1.9% -12.9% +3.0%
www.census.gov/const/www/c30index.html
U.S. Census Gains April 2012 – April 2013
Outlook for 2013 & Beyond
Increased risk for owners, contractors & sureties caused by current economy
Continued disciplined underwriting, exposure management & project analysis
Stabilized capacity & restored profitability
Construction investments—public or private—are unpredictable.
Outlook for 2013 & Beyond
Optimism about surety capacity & demand
Small, mega markets may remain tight Surety available for best contractors Marginal contractors have difficulty
obtaining bonding More competition, fewer projects Tightened operations for contractors Increase in contractor failures
Underwriting
The 3 “C”s: 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
Capacity
Small( < $10 M*)
Some sureties
SBAProgram
Large($100 M - $250 M)
CompetitiveSurety Market
Mega( > $250 M)
Top 5-6 sureties
Joint ventures
Partial bonds
Medium($10 M - $100 M)
CompetitiveSurety Market
*These figures represent the amount of contractors’ annual revenue
CapacityCapacity
Small( < $10 M)
Some sureties
SBAProgram
Large($100 M - $250 M)
CompetitiveSurety Market
Mega( > $250 M)
Top 5-6 sureties
Joint ventures
Partial bonds
Medium($10 M - $100 M)
CompetitiveSurety Market
*These figures represent the amount of contractors’ annual revenue
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).