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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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Presentation Transcript
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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