1. The State of Suretyship and US Economic Issues
September 26th, 2013
Bob Bubnick
Senior Account Executive
Zurich Surety, Credit and Political Risk

2. Presentation Overview
The 3 C’s of Surety
Market Trends
Current Economic Issues
Conclusions

3. The State of Suretyship
The 3 C’s of Suretyship
Capital
Capacity
Character

4. Capital
Status of Accounts Receivable
Collection issues derived from overall economy
Owners are having issues therefore slow to pay
Verification of financing becomes critical
Other receivables being evaluated so as to determine collectability and intent.
Shareholder Receivables…..are they equity or an item that should have been expensed?

5. Asset quality being scrutinized more than ever.
Capital
Asset quality being scrutinized more than ever.
Underbillings
What is the cause of the underbilling?
Timing issues?
Unapproved change orders?
Have the underbillings caught up?
Billed yet?
Collected?

6. Capacity
Capacity is the Art of Suretyship
The underwriter’s ability to illustrate a contractor’s ability, experience and expertise.
Construction Reform in Ohio
Paper GC vs Mainline GC vs CM
Multiprime vs Single Prime
Design, Bid & Build vs Design/Build
The true effects on Ohio domiciled small to medium sized general contractors regardless of discipline.

7. Capacity
Sophistication level of the Contractor
Internal accounting capabilities
Reliability of the statements and supporting schedules.
Stretching job size and program. 2X’s rule.
Contingency plans
Bank letter’s of credit
Subordinated Debt
Funded Buy/Sell Agreement

8. Communication
The 4th Communication
Give credit to Stan Kucinski, Westfield field manager for 25 years.
Annual meetings with clients to develop rapport
Interim financial data to compare projections and develop forecast going forward.
Agency calls to follow up and push needed items
Think 3 steps ahead

9. Top 15 Surety Carriers Written Premium Market Share Loss Ratio
Marketplace Trends
Top 15 Surety Carriers
Written Premium
Market Share
Loss Ratio

10. Top 15 Surety Writers and Written Premium 1990 SFAA as Source
F&D of Maryland (Now Zurich) $137,737,707
USF&G (Now Travelers) $122,339,387
Reliance (Now Travelers) $121,028,201
Aetna Life and Casualty (Now Travelers) $115,421,781
Fireman’s Fund (Now Kemper) $ 96,630,511
Seaboard Surety (Now Travelers) $ 96,022,192
Continental Corporation (Now CNA) $ 96,004,836
CNA Insurance Group $ 83,827,080
AIG (Now Chartis) $ 74,836,632
Safeco Insurance Group (Now Liberty) $ 74,612,101
Hartford Group $ 70,647,159
Chubb Group $ 62,406,525
St. Paul Group (Now Travelers) $ 58,475,045
Cigna Group (Now ACE) $ 55,883,212
Amwest Insurance Group (Out of Business) $ 54,280,637

11. Top 15 Surety Writers and Written Premium 2012 SFAA as Source
Travelers $754,242,281
Liberty Mutual Group $725,674,403
Zurich $462,515,514
CNA Insurance Group $411,159,984
Chubb Group $198,597,507
International Fidelity $161,354,957
HCC Surety Group $160,568,163
Hartford Fire and Casualty Group $159,703,913
ACE Ltd $129,113,588
RLI Insurance Group $110,619,407
Great American Insurance Companies $104,178,304
Lexon Safeguard Insurance Companies $100,935,483
Hanover Insurance group $ 85,681,214
North American Specialty Surety Group (NAS) $ 78,159,662
Merchants Bonding Company $ 72,803,822

12. Top Surety Writers In 1990: Market Share Loss Ratio
The top 5 writers: % %
The top 10 writers: % %
The top 15 writers: % %
Top 100 Loss Ratio %
In 2012: Market Share Loss Ratio
The top 5 writers: % %
The top 10 writers: % %
The top 15 writers % %
Top 100 Loss Ratio %

13. Current Economic Issues
Profit Margins By Market Sector
Gasoline Prices
New Home Starts
GDP
Debt Levels
Federal Funds Rate
100 Year Stock market Trends
Unemployment Rates

14. Current Economic Issues Yahoo.com business as source
Net Profit Margins
Industry
2004
2005
2006
2007
2008
2009
2010
2011
2012
General Contractors
-.03%
1.7%
1.5%
3.2%
3.0%
2.0%
3.1%
1.6%
3.8%
Heavy Highway
1.2%
2.5%
4.2%
4.5%
3.3%
2.2%
Residential
8.0%
8.8%
9.3%
-.01%
-18.1%
-24.5%
-3.8%
-4.2%
6.4%
Engineering
3.7%
1.9%
3.6%
2.7%
3.4%
4.0%
4.1%
P&C Carriers
2.1%
7.2%
12.5%
8.2%
-16.5%
7.0%
8.7%
9.1%
Surety
-26.9%
-.05%
4.8%

15. Gasoline Prices
zFacts as Source

16. Drill, Baby, Drill!!
Drilling quadruples, Exports triple

17. New Home Starts
Calculated Risk as Source

18. US GDP Growth
Tradingeconomics.com as source

19. GDP to Total Debt
Macrotrends.net as Source

20. Historical US Federal Funds Rate
Source: federalreserve.gov

21. Dow Jones 100 Year Trend
Rydex/SGI as source

22. Dow Jones 100 Year Trend
Rydex/SGI as source

23. 20 Year Unemployment Rate
Macrotrends.net as source

24. Conclusions Surety
The National sureties hold a larger market share and have enjoyed better loss experience.
The top 15 sureties are poised to capture even more when the market turns.
Public funding is still decreasing and new project starts are down by 5% year over year.
Those contractors that are still standing today are leaner and more efficient.
Credit cases have thinned out due to economic downturn.
Many small to medium contractors will face the dilemma of having cash flow stress when programs pick up; They have the capacity to do the work but not the capital.
Sureties will have to make smart bets.

25. Conclusions Economy
Economic recovery is ongoing and sluggish at best as evidenced by GDP and unemployment rates.
Gross margin for market sectors has returned, but confidence is weak.
Still a large inventory of homes remaining from 2008 recession effecting new home starts.
Gas prices remain high relative to a recovery period.
Prolonged Bear Market continues in spite of Quantitative Easing/Digitizing by the FED and historically low interest rates.
Unemployment continues to be at record highs following a recovery period.
Overall, small to medium sized entrepreneurs continue to sit on the side lines because of poor business climate and uncertainty.