CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET

2016

Surety Losses & Profitability

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

LossRatio

Calendar Year

Contract Surety Industry Direct Loss RatiosCY 1958 - 2015

Source: The Surety & Fidelity Association of America

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

Sagging economy Significant commercial losses Heavy contract surety losses Increased failure rates

Surety in the 2000s

Source: BizMiner

Contract Surety Premiums & Losses

0

0.5

1

1.5

2

2.5

3

3.5

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Billio

ns

of Dolla

rs

Direct Premiums WrittenDirect Losses Incurred

Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (2002-2013) Surety Countrywide (Preliminary)”

Top 15 Writers of All U.S. Surety

1994 2015

Surety

($millions)

Premium Surety

1 Reliance Travelers 147.1 1 TRAVELERS BOND2 USF&G St. Paul Travelers 144.1 2 LIBERTY MUTUAL GROUP3 F&D Zurich 142.5 3 ZURICH INSURANCE GROUP4 St Paul Group Travelers 140.9 4 CNA INSURANCE GROUP5 AIG AIU Holdings Chartis AIG 111.5 5 CHUBB & SON INC GROUP6 Aetna Travelers 106.6 6 HARTFORD FIRE & CAS GROUP7 Continental CNA 100.7 7 HCC SURETY GROUP8 Fireman's Fund Allianz 97.3 8 IFIC SURETY GROUP9 CNA Insurance Companies 92.8 9 GREAT AMERICAN INS COS

10 Safeco Liberty Mutual 88.9 10 RLI INSURANCE GROUP11 Chubb (Merged with ACE) 77.7 11 LEXON/BONDSAFEGUARD INS COS12 Hartford 74.0 12 NAS SURETY GROUP13 Amwest Gone 70.2 13 ARCH INSURANCE GROUP14 Capsure CNA 55.3 14 MERCHANTS BONDING CO GROUP15 CIGNA ACE Chubb 49.7 15 THE HANOVER INS GROUP

179.8161.1160.8

($millions)

Premium

781.8751.4478.3427.7401.4

83.3

131.7121.6109.5102.888.683.6

Companies that are gone in REDCompanies that merged or were sold are in BLUE

Construction Activity

All Construction Public Private

Total Construction +4.9% -1.3% +7.0%

Nonresidential +4.0% -1.3% +7.8%

Lodging +25.6% - +27.1%

Manufacturing -2.9% - -3.0%

Public Safety -7.7% -5.8% -

Power +4.7% -17.2% +7.7%

Educational +5.2% +4.2% +9.0%

Transportation -4.0% -3.2% -6.0%

Amusement/Rec +8.7% -3.5% +22.2%

Office +21.9% -6.1% +26.9%

Highway/Street 0.0% +0.1% -

Health care +1.0% -1.3% +1.7%

Commercial +9.6% +31.4% +8.8%

www.census.gov/construction/c30/c30index.html

U.S. Census Gains August 2015 - August 2016

Outlook for 2016 & Beyond

Optimism about surety capacity & demand Increase in contractor failures and losses

as economy recovers Continued disciplined underwriting,

exposure management & project analysis Surety available for best contractors Marginal contractors have difficulty

obtaining bonding Public private partnerships (P3s)

Underwriting

The 3 “C”s: Capital Capacity Character

4 and 5: Continuity Contracts

Underwriting

Capital Financial statements Indemnity Working capital Work-in-progress

Underwriting

Capacity Resumes Contingency plan Business plan Equipment

Underwriting

Character Reputation Relationships References

Bond Premiums

Type of Construction

Geographic Area

Contractor Size

Still a Bargain

Pennies on the dollar

Premium

Capacity

Small( < $50 M)

SBAProgram

Medium($100 M)

CompetitiveSurety Market

Jumbo( > $500 M)

Multiple sureties

Joint ventures

Partial bonds

Capacity

Medium($100 M)

CompetitiveSurety Market

Jumbo( > $500 M)

Multiple sureties

Joint ventures

Partial bonds

Small( < $50 M)

SBAProgram

Claims

Severity&

Frequencyof Claims

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

Advice for Today’s Contractors Communicate Prepare for economic recovery

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 Contractors

Underwriter

Producer

Contractor

Advice for Today’s Contractors

Underwriter

Producer

Contractor

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).