CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2014

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 Building, heavy/highway, and specialty trade contractors In BusinessSurvivorsFailure Rate ,372610, % ,029649, % ,155,245919, % ,602702, % ,057735, %

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

Top 15 Writers of All U.S. Surety

Construction Activity All ConstructionPublicPrivate Total Construction+8.2%+2.1%+10.9% Nonresidential+8.6%+2.5%+14.1% Lodging+16.0%-+16.2% Manufacturing+23.9%-+24.7% Public Safety+9.6%+8.8%- Power+25.7%+4.4%+29.3% Educational-1.2%+0.6%-8.0% Transportation+2.2%+2.7%+0.8% Amusement/Rec+12.0%+21.2%+2.2% Office+20.0%+8.3%+23.0% Highway/Street+2.7%+3.0%- Health care-6.0%-13.5%-3.1% Commercial6.9%-27.3%+6.9% U.S. Census Gains July 2013 – July 2014

Outlook for 2014 & 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 investment in infrastructure unlikely; potential uptick in private investment

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) SBA Program Medium ($100 M) Competitive Surety Market Jumbo ( > $500 M) Multiple sureties Joint ventures Partial bonds

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

Claims Severity & Frequency of 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) | SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).