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CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2013.

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Presentation on theme: "CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2013."— Presentation transcript:

1 CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2013

2 Surety in the Early 1990s  Strong economy  Excess capacity in surety market  Low premiums  Relaxed underwriting  Commercial surety expansion

3 Surety in the Early 2000s  Sagging economy  Significant commercial losses  Heavy contract surety losses  Increased failure rates

4 Surety Losses & Profitability

5

6 Surety in the 2000s Source: BizMiner Building, heavy/highway, and specialty trade contractors In BusinessSurvivorsFailure 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%

7 Contract Surety Premiums & Losses Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (200`-2012) Surety Countrywide (Preliminary)”

8 Top 15 Writers of All U.S. Surety

9 Construction Activity All ConstructionPublicPrivate 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% U.S. Census Gains April 2012 – April 2013

10 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.

11 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

12 Underwriting The 3 “C”s:  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 Type of Construction Geographic Area Contractor Size Still a Bargain Pennies on the dollar Premium

17 Capacity Small ( < $10 M*) Some sureties SBA Program Large ($100 M - $250 M) Competitive Surety Market Mega ( > $250 M) Top 5-6 sureties Joint ventures Partial bonds Medium ($10 M - $100 M) Competitive Surety Market *These figures represent the amount of contractors’ annual revenue

18 Capacity Small ( < $10 M) Some sureties SBA Program Large ($100 M - $250 M) Competitive Surety Market Mega ( > $250 M) Top 5-6 sureties Joint ventures Partial bonds Medium ($10 M - $100 M) Competitive Surety Market *These figures represent the amount of contractors’ annual revenue

19 Claims Severity & Frequency of 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 Underwriter Producer Contractor

24 Advice for Today’s Contractors Underwriter Producer Contractor

25 For More Information Surety Information Office (SIO) | 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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