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Contract Surety Bonds: Understanding Today’s Market

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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Contract Surety Bonds: Understanding Today’s Market

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  1. Contract Surety Bonds: Understanding Today’s Market 2010

  2. Surety Losses & Profitability

  3. Surety Losses & Profitability

  4. Surety in the Early 1990s • Strong economy • Excess capacity in surety market • Low premiums • Relaxed underwriting • Commercial surety expansion

  5. Surety in the Early 2000s • Sagging economy • Significant commercial losses • Heavy contract surety losses • Increased failure rates

  6. Surety in the 2000s Source: BizMiner

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

  8. Top 15 Writers of All U.S. Surety

  9. Construction Activity U.S. Census Gains May 2009-May 2010 www.census.gov/const/www/c30index.html

  10. 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

  11. 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

  12. Underwriting The 3 Cs: • Capital • Capacity • Character 4 and 5: • Continuity • Contracts

  13. Underwriting • Capital • Financial statements • Indemnity • Working capital • Work-in-progress

  14. Underwriting • Capacity • Resumes • Contingency plan • Business plan • Equipment

  15. Underwriting • Character • Reputation • Relationships • References

  16. Bond Premiums Geographic Area Contractor Size Type of Construction Premium Still a Bargain Pennies on the dollar

  17. Capacity Small ( < $50 M) SBA Program Medium ($100 M) Competitive Surety Market Jumbo ( > $500 M) Multiple sureties Joint ventures Partial bonds

  18. Capacity Small ( < $50 M) SBA Program Medium ($100 M) Competitive Surety Market Jumbo ( > $500 M) Multiple sureties Joint ventures Partial bonds

  19. Claims Severity&Frequencyof Claims

  20. Advice for Today’s Contractors • Know rights & responsibilities • Stay within capabilities • Manage growth & overhead • Learn why contractors fail

  21. Advice for Today’s Contractors • Communicate • Prepare for economic recovery

  22. Advice for Today’s Contractors • Contract terms • Bond forms • Construction CPA • Adjust overhead • Bank line of credit • Conserve capital • Bond subcontractors • Qualify the surety

  23. Advice for Today’s Contractors Producer Contractor Underwriter

  24. Advice for Today’s Contractors Producer Contractor Underwriter

  25. For More Information Surety Information Office (SIO) www.sio.org | sio@sio.org 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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