Transcript The State of Suretyship and Emerging Economic Issues

The State of Suretyship and US Economic Issues
September 26th, 2013
Bob Bubnick
Senior Account Executive
Zurich Surety, Credit and Political Risk
[email protected]
330.241.7150
INTERNAL USE ONLY
Presentation Overview
The 3 C’s of Surety
Market Trends
Current Economic Issues
Conclusions
INTERNAL USE ONLY
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The State of Suretyship
The 3 C’s of Suretyship
– Capital
– Capacity
– Character
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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?
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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?
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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.
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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
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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
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Marketplace Trends
Top 15 Surety Carriers
–Written Premium
–Market Share
–Loss Ratio
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Top 15 Surety Writers and Written Premium 1990
SFAA as Source
1. F&D of Maryland (Now Zurich)
2. USF&G (Now Travelers)
3. Reliance (Now Travelers)
4. Aetna Life and Casualty (Now Travelers)
5. Fireman’s Fund (Now Kemper)
6. Seaboard Surety (Now Travelers)
7. Continental Corporation (Now CNA)
8. CNA Insurance Group
9. AIG (Now Chartis)
10. Safeco Insurance Group (Now Liberty)
11. Hartford Group
12. Chubb Group
13. St. Paul Group (Now Travelers)
14. Cigna Group (Now ACE)
15. Amwest Insurance Group (Out of Business)
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$137,737,707
$122,339,387
$121,028,201
$115,421,781
$ 96,630,511
$ 96,022,192
$ 96,004,836
$ 83,827,080
$ 74,836,632
$ 74,612,101
$ 70,647,159
$ 62,406,525
$ 58,475,045
$ 55,883,212
$ 54,280,637
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Top 15 Surety Writers and Written Premium 2012
SFAA as Source
1. Travelers
2. Liberty Mutual Group
3. Zurich
4. CNA Insurance Group
5. Chubb Group
6. International Fidelity
7. HCC Surety Group
8. Hartford Fire and Casualty Group
9. ACE Ltd.
10. RLI Insurance Group
11. Great American Insurance Companies
12. Lexon Safeguard Insurance Companies
13. Hanover Insurance group
14. North American Specialty Surety Group (NAS)
15. Merchants Bonding Company
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$754,242,281
$725,674,403
$462,515,514
$411,159,984
$198,597,507
$161,354,957
$160,568,163
$159,703,913
$129,113,588
$110,619,407
$104,178,304
$100,935,483
$ 85,681,214
$ 78,159,662
$ 72,803,822
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Top Surety Writers
 In 1990:
– The top 5 writers:
– The top 10 writers:
– The top 15 writers:
 In 2012:
– The top 5 writers:
– The top 10 writers:
– The top 15 writers
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Market Share
27%
46%
60%
Top 100 Loss Ratio
Market Share
51%
65%
74%
Top 100 Loss Ratio
Loss Ratio
5.8%
7.3%
9.1%
14.5%
Loss Ratio
16.3%
16.9%
19.5%
19.0%
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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
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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%
1.5%
2.5%
4.2%
4.5%
3.3%
3.1%
2.0%
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%
3.0%
3.1%
3.6%
2.7%
3.4%
4.0%
4.1%
P&C Carriers
2.1%
6.4%
7.2%
12.5%
8.2%
-16.5%
7.0%
8.7%
9.1%
-26.9%
-.05%
4.8%
7.2%
Surety
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Gasoline Prices
zFacts as Source
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Drill, Baby, Drill!!
Drilling quadruples, Exports triple
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New Home Starts
Calculated Risk as Source
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US GDP Growth
Tradingeconomics.com as source
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GDP to Total Debt
Macrotrends.net as Source
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2013-08
2011-08
2009-08
2007-08
2005-08
2003-08
2001-08
1999-08
1997-08
1995-08
1993-08
1991-08
1989-08
1987-08
1985-08
1983-08
1981-08
1979-08
1977-08
1975-08
1973-08
1971-08
1969-08
1967-08
1965-08
1963-08
1961-08
1959-08
1957-08
1955-08
Historical US Federal Funds Rate
Source: federalreserve.gov
Federal Funds Effective Rate (%)
25
20
15
10
5
0
Date
20
Dow Jones 100 Year Trend
Rydex/SGI as source
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Dow Jones 100 Year Trend
Rydex/SGI as source
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20 Year Unemployment Rate
Macrotrends.net as source
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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.
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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.
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