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Contract Surety Bonds: Understanding Today’s Market. 2010. Surety Losses & Profitability. Surety Losses & Profitability. Surety in the Early 1990s. Strong economy Excess capacity in surety market Low premiums Relaxed underwriting Commercial surety expansion. Surety in the Early 2000s.

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Surety in the early 1990s
Surety in the Early 1990s

  • Strong economy

  • Excess capacity in surety market

  • Low premiums

  • Relaxed underwriting

  • Commercial surety expansion


Surety in the early 2000s
Surety in the Early 2000s

  • Sagging economy

  • Significant commercial losses

  • Heavy contract surety losses

  • Increased failure rates


Surety in the 2000s
Surety in the 2000s

Source: BizMiner


Contract surety premiums losses
Contract Surety Premiums & Losses

Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (1999-2010) Surety Countrywide (Preliminary)”



Construction activity
Construction Activity

U.S. Census Gains May 2009-May 2010

www.census.gov/const/www/c30index.html


Outlook for 2010 beyond
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 beyond1
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


Underwriting
Underwriting

The 3 Cs:

  • Capital

  • Capacity

  • Character

    4 and 5:

  • Continuity

  • Contracts


Underwriting1
Underwriting

  • Capital

    • Financial statements

    • Indemnity

    • Working capital

    • Work-in-progress


Underwriting2
Underwriting

  • Capacity

    • Resumes

    • Contingency plan

    • Business plan

    • Equipment


Underwriting3
Underwriting

  • Character

    • Reputation

    • Relationships

    • References


Bond premiums
Bond Premiums

Geographic

Area

Contractor

Size

Type of

Construction

Premium

Still a Bargain

Pennies on the dollar


Capacity
Capacity

Small

( < $50 M)

SBA

Program

Medium

($100 M)

Competitive

Surety Market

Jumbo

( > $500 M)

Multiple sureties

Joint ventures

Partial bonds


Capacity1
Capacity

Small

( < $50 M)

SBA

Program

Medium

($100 M)

Competitive

Surety Market

Jumbo

( > $500 M)

Multiple sureties

Joint ventures

Partial bonds


Claims
Claims

Severity&Frequencyof Claims


Advice for today s contractors
Advice for Today’s Contractors

  • Know rights & responsibilities

  • Stay within capabilities

  • Manage growth & overhead

  • Learn why contractors fail


Advice for today s contractors1
Advice for Today’s Contractors

  • Communicate

  • Prepare for economic recovery


Advice for today s contractors2
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 contractors3
Advice for Today’s Contractors

Producer

Contractor

Underwriter


Advice for today s contractors4
Advice for Today’s Contractors

Producer

Contractor

Underwriter


For more information
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).


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