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SURETY OUTLOOK FOR 2007 – 2008

The cyclical nature of the surety industry adds another reason for Contractors to keep their focus on success. In 2005, surety emerged from years of record losses with a surge of profitability. That welcome event resulted in a loss ration of 16.2% overall for 2006. According to statistics provided by The Surety & Fidelity Association of America, 2007 will be another very strong year for the surety industry – 08 should be as well.

Strong construction spending and larger profitable contractor backlogs joined with responsible underwriting to achieve these positive results. In addition, contract values grew substantially due to material inflation on core construction materials. We predict that the surety industry will continue to exercise responsible underwriting and management in order to break even for this decade. Despite the improved performance, there have not been any major new surety providers entering the market in more than five years. Underwriters are trying to maintain a balance of serving clients’ needs while remaining on guard for the risk posed by expanded contractor backlogs. Businesses need to be prepared to address these risks when meeting with their surety..

Small Market
There are plenty of surety competitors in the small market with the capacity to meet contractors bonding needs under $1 million. However, underwriting can be fairly stringent with collateral requirements. This may create somewhat of a barrier to entry level contractors. The more sophisticated small contractors are, the more attractive they will be to the surety. This means using computer software systems, construction management systems, externally produced financials, having bank credit, demonstrating longevity of management and having continuity of programs.

Mid-Sized Market
The mid-sized construction market (around $50 million to $100mm) remains the most competitive arena in the surety market. We expect there to be adequate surety availability and capacity. There does appear to be some loosening of underwriting standards in some isolated markets as capacity has increased from the existing surety sources. However, you should expect your financial performance and subcontractor risk management practices to experience continued scrutiny..

As your Surety Professional we can be vital to the overall success of your business. We will provide you with recommendations on how to best deal with the challenges of the surety Bond industry.

Philip E.Vega, President
Contractors & Developers Bonding

Surety bonding not only confirms the contractor’s credibility and ability to complete jobs, it may also provide a competitive adge when it comes to acquiring new jobs. As the facilitator of your bonding capabilities, your broker can enable you to increase your bonding limits by providing assistance in a number of important areas.

Financial Performance
Surety underwriters closely compare the actual execution of a contractor’s business planto the projections on which it was based. Overhead levels and the adequacy of present and future cash flows are reviewed, including an analysis of individual project cash flow needs and performance. Project pricing and estimated margins will be benchmarked against sector performance for a given contracting firm. Your tangible equity, its operating liquidity and access to outside sources of liquidity are all carefully assessed. Understanding how your surety analyzes the information you provide can increase your chances of obtaining or expanding surety support.

Risk Management
Surety underwriters are also placing increased scrutiny on subcontractor selection controls and performance risk management. For firms that employ subcontractor default insurance as a risk transfer mechanism, some sureties are requiring endorsements granting them coverage, and in some instances, dedicated limits of coverage on bonded projects. For those using subcontractor surety bonds, the credit rating and perceived stability of the subcontractor’s surety may be evaluated.

Market Conditions
Your broker must be knowledgeable regarding current market conditions as well as those on the horizon. The surety industry has recovered from devastating losses and will continue to move toward traditional underwriting. Seeking knowledgeable counsel and input on prospective business planning will also reduce the chances of unforeseen events negatively impacting your surety facility. Your relationship with the right surety partner is key to consistent bonding capabilities and future growth.

For more information on how an experienced surety professional can help you best deal with the challenges of this industry, contact:
Philip E.Vega, President,
Contractors & Developers Bonding