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Surety Bonding Clint Diers & Hunter Bendall February 12, 2015.

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Presentation on theme: "Surety Bonding Clint Diers & Hunter Bendall February 12, 2015."— Presentation transcript:

1 Surety Bonding Clint Diers & Hunter Bendall February 12, 2015

2 Overview Surety 101 State of the Industry Subcontractor Default Insurance Surety Bond vs Letter of Credit

3 Surety Bonds 101 The Basics of Bonding

4 What is Surety Bonding? Surety ObligeePrincipal

5 Types of Surety Bonds Bid Bond Performance Bond Payment Bond

6 Types of Surety Bonds Bid Bond Performance Bond Payment Bond

7 Types of Surety Bonds Bid Bond Performance Bond Payment Bond

8 Capacity Financial Strength Company History Organization Continuation Plans References Prequalification Work In progress

9 Surety Company Checklist Good character Experience matching contract requirements Financial strength Excellent credit history Banking relationship Line of credit Necessary equipment

10 Benefits of Bonds Financial Security Construction Assurance

11 Functions of Bonds No liens Smooth transition from construction to permanent financing Provide support to contractor Project completion Surety Bonds

12 Cost of Surety Bonds Bid BondNo charge Performance Bond ½ - 2% of contract price Payment Bond Price included with performance bond

13 For More Information Surety Information Office 1828 L St. NW, Suite 720 Washington, DC | Fax |

14 State of the Industry

15 Surety Results

16 15 State of the Industry Surety Results $$ in millions Direct Written Premiums Direct Earned Premiums Direct Losses Incurred Direct Loss Ratio 1995$2,472$2,147$ % 1996$2,626$2,262$ % 1997$2,769$2,384$ % 1998$2,919$2,528$ % 1999$3,401$2,832$ % 2000$3,490$3,411$1, % 2001$3,473$3,330$2, % 2002$3,756$3,514$2, % 2003$3,727$3,708$1, % 2004$4,205$4,006$2, % 2005$4,410$4,270$1, % 2006$4,975$4,696$ % 2007$5,433$5,183$ % 2008$5,520$5,426$ % 2009$5,103$5,236$ % 2010$5,180$5,273$ % 2011$5,172$5,188$ % 2012$5,035$5,137$1, % 2013$5,245$5,175$ % Total Direct Losses $12,768

17 16 Surety Comparison Data 2003 SAA Results2013 SAA Results* 1Travelers$581,645,877Travelers$778,689,161 2St Paul$391,742,859Liberty$738,271,612 3C N A$341,835,008Zurich$492,737,467 4Zurich$275,289,480C N A$408,605,990 5Safeco$212,456,655Chubb$210,242,628 6Chubb$197,422,175IFIC$167,316,158 7Liberty$151,492,862HCC$166,419,402 8Hartford$142,900,460Hartford$160,693,912 9AIG$84,458,207ACE$143,061,872 10IFIC$73,307,108RLI$110,594,591 *Notes In 2013 the top 10 writers accounted for 64% of the Industry revenue. The top 20 accounted for 79% of revenue.

18 Subcontractor Default Insurance

19 What is Subcontractor Default Insurance ? An insurance policy which indemnifies the Project Owner and General Contractor for costs associated with Subcontractor default and adds value to the project as a risk mitigation method. Typically these are rolling programs and cover multiple contract. High limits and High deductibles. Why was SDI created ? Large General Contractors expressed concern with increasing risks of Subcontractor default, and their dissatisfaction with the structure and process involved with making claims against Subcontractor Surety Bonds. The idea is that the sophisticated GC can do a better job of prequalifying, selecting, and mitigating subcontractor risk and SDI aligns the incentive to do so with the lower cost of insurance coverage. 18

20 Subcontractor Default Insurance - Continued Objectives of SDI : -Control: puts control back in the hands of the GC project team. -Coverage: provides consistent and efficient coverage. -Cost: a cost-effective solution. -Profit: by utilizing the GC’s ability to prequalify, select, and mitigate subcontractor risk. Why Would a Project Owner or Lender be Interested in SDI ? -Subcontractors will typically perform more than 75% or more of the work on a project. -Subcontractors fail at a rate of over 90,000 firms per year. -During the course of your project, including the maintenance period, the GC can anticipate that as many as 25% of their Subcontractors will experience financial or operational difficulties leading to potential default. -SDI generally carries a longer term tail coverage for default. 19

21 Subcontractor Default Insurance - Continued How can SDI help a GC? SDI provides protection against DIRECT LOSS including but not limited to costs: -Supplement sub’s work to stay on schedule. -Terminate and replace defaulting sub. -Replace any non-conforming work. -Pay for any unpaid suppliers or sub/subs. -Any expenses or defense of disputes with subs (attorney’s, consultants, etc.). SDI provides protection against INDIRECT LOSS including but not limited to costs: -Accelerate the work (extra payments to other subs to catch up after delay by defaulting sub). -Extended overhead of GC to oversee additional workforces. -GC of any liquidated damages directly related to a defaulted sub. - A well managed program with a low loss ratio can give the GC an opportunity to earn additional profits over time.

22 Subcontractor Default Insurance - Continued Other Value To the Project Owner and GC: SDI provides expert consultant at the jobsite to assist in evaluation and resolution of default. (Insurance Company Risk Engineer) Enhanced schedule security - helps ensure on-time project. More capability to use MBE/DBE/WBE. Reduces potential litigation and property liens. Provides long tail years of completed operations coverage 21

23 Subcontractor Default Insurance - Continued Project Cost Comparison – This is influenced by several factors Is the GC bonded? What is the GC’s policy on requiring sub bonds? Bonding both would typically cost 1.5% to 2.5% of the contact value. SDI can help project contingency funds. SDI, on average, is 50% - 75% the cost of sub bonds. SDI covers all subs, not just the largest. Coverage: Surety bond will pay up to the penal sum of the bond SDI covers all subs and union benefits funds. Bond provides limited or no coverage for Indirect Loss. In the event of loss SDI can provide cash flow to the project if needed to keep on schedule. SDI provides a long tail to report claims after project completion. SDI can have a more efficient claims Process: When your GC notifies a Surety of a problem with a sub, an investigation occurs. The investigation uses valuable time and prevents the project from moving forward. The Surety will pay for the resolution the Surety decides is correct, sometimes this is not the best resolution for the GC or the owner’s project.

24 Subcontractor Insurance Procedures the GC Implements to Prevent and Mitigate Risk of Subcontractor Default: Pre-Qualification of Subs - financial, credit, performance, quality, safety, experience, personnel. Selects Qualified Low Bid Subs who add value to your project. Aggressive management / monitoring of subs: scrutinize schedules of values with pay submittals; 1st and 2nd tier partial and final lien releases; periodic supplier validations of payment; quality checks. SDI procedures are reviewed by the insurance company Risk Engineers. What are the procedures when defaults do occur? SDI allows the GC to take immediate action to remedy the default: - Hire a replacement subcontractor. - Supplement defaulting subcontractor’s workforce. - Assist the subcontractor with financial/payroll or other means to help complete the work. -Complete the work ourselves. SDI provides the GC with coverage to: - Replace non-conforming work. - Fund additional costs to hire replacement subcontractors. - Indemnify 2nd tier subs, suppliers or employees who may not have been paid. - Accelerate the schedule if default results in delay. - Fund costs of any necessary litigation or legal fees associated with subcontractor default.

25 Surety Bond vs. Letter of Credit

26 Apartment Project: 126 Units Surety Bond: 1% of construction value Total Development Cost w/ 1% Bond: $17,500,000 Construction Costs: $15,000,000 Term/Rate: 40 years; 3.5% Bond Cost: $150,000 Monthly Payment, less taxes and insurance: $67,793 LOC 10% of construction value LOC Cost (50 Basis Points for 2 years) $15,000 Warranty Period 2.5% for 1 year LOC Cost (50 Basis Points 1 year) $1,875 Total LOC Hard Costs: $16,875 Cash Set Aside: $1,500,000 Interest Not Received on Escrowed Funds: (2.5% APR) $75,937 Real Cost of LOC w/ Opportunity Cost: $92,812 Total Hard Development Costs w/ LOC: $17,366,875 Monthly Payment, less taxes and insurance: $67,277* Monthly Payment Delta (Bonds vs LOC): $516 or.007%

27 Clint Diers Hunter Bendall

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