Surety Outlook
Willis Construction Risk Management Conference
April 19-21, 2011
Dallas, TX
Overview
• Historical Results – 12 year history
• Current Market Conditions
• Surety Carriers
• Surety Reinsurance
• Construction trends and surety impact
• Globalization
• The next three years
• What does this mean to your business?
• Willis Surety Solutions
12 YEAR HISTORY
Billions
$8
$7
$1.17T
$6
$831B
$5
$788B
$4
$3
$2
$1
1999
2000
2001
2002
2003
2004
2005
2006
2007
Written Surety Premium
Surety Losses (Contract & Commercial)
Value Of Construction Put In Place
2008
2009
2010
What a difference a decade makes!
Top 10 Sureties & Written Premium (2000)
Top 10 Sureties & Written Premium (2010)
Travelers
$388,872,000
Travelers
$867,822,000
St. Paul
$387,649,000
Liberty
$751,166,000
CNA
$285,528,000
Zurich
$512,317,000
Zurich
$206,922,000
CNA
$406,463,000
AIG
$160,025,000
Chubb
$256,920,000
Liberty
$141,603,000
Hartford
$177,157,000
ACE
$125,781,000
HCC
$176,126,000
Safeco
$124,739,000
IFIC
$143,273,000
Chubb
$120,138,000
ACE
$109,531,000
Fireman’s Fund
$106,144,000
NAS
$104,845,000
Total:
$2,047,401,000*
Total:
$3,505,620,000*
*Approx. 59% of all surety premium
*Approx. 67% of all surety premium
Today’s Surety Market
• 5th consecutive year with loss ratio less than 20%.
• Capacity more than doubled!
• Returns attracting capital – e.g. XL for contract and
Aspen, Arch and HCC in commercial.
• Co-surety compatibility – more inter party acceptance
vs. mid 2000’s – e.g. CNA
• Procurement shifts – P3, RFP, gap, etc – legal review.
• Rates – the inverted pricing curve flattens (see chart).
Underwriting Trends
2006
2011 & Beyond
• Managing Capacity
• Subcontractor risks
• Managing Work
• Contract Terms
• Finding Quality People to Perform
• Expanding “strike zone”
• Over-extended subcontractors
• Margin Compression
• Project/owner financing
• Credit Relationships
EXTENDED SURETY CAPACITY (IN MILLIONS)
3500
2002
2010
3000
$10.8B
2500
2000
$5.5B
1500
1000
500
0
CNA
Chubb
Chartis
(formerly
AIG)
Zurich
Travelers
Liberty
XL
Hartford
Arch
PRICE CURVE
# OF SURETIES
2007
2010
25
25
23
20
2007
15
16
2010
12
10
11
10
8
7
4
0
$10M
$10M-$100M
$100M-$500M
$500M-$1B
CONTRACTORS - AGGREGATE SURETY CAPACITY
$1B
Surety Reinsurance
• Significantly more capacity today than early 2000’s which is
reflected in growth in capacity.
• Largely an XOL business today versus quota share –
reinsurers are further removed from frequency exposure.
• Highly profitable following fortunes of surety market the last
five years.
• Larger retentions taken by surety companies based on their
reserves, profitability and spread of risk from their
consolidation – reinsurers competing for smaller risk transfer
opportunity.
Reinsurance Program
Quota Share
Excess of Loss
XOL
Q
RET
1/3
2/3
2/3
RET
1/3
Construction Industry
Trends and Surety Impact
• Reduced levels of construction spending and a
projected slow recovery.
• Pendulum shift towards owners for contract
procurement, and terms and conditions.
• Margin compression.
• Subcontractor default risk has increased.
• Procurement longer cycles – P3, RFP, Gap, funding
delays, politics.
• Acquisitions – consolidations.
• Commodity escalation.
Globalization
• Non U.S. contractors looking to expand into US markets –
primarily via acquisitions – Spanish firms such as ACS, OHL
and Ferrovial have been the most obvious examples.
• U.S. viewed as a stable market with long term potential and
a short term buying opportunity, based on economic
slowdown.
• U.S. contractors are expanding their strike zone to find work
and we are receiving more inquiries from U.S. firms looking
to expand outside of North America.
• Surety requirements for non U.S. companies require a
meaningful U.S. asset base, parent guarantee and often LC’s.
Non U.S. firms often find U.S. surety requirements inefficient.
The next three years
• Slow growth – ENR survey – “improving” moves from
16% to 71% over three years.
• Persistent margin pressure
• Acquisitions – global and domestic
• Surety loss development – 2012 and 2013
• Global competition
• Joint Ventures – new markets, new skills, bigger
• Good people – team upgrade opportunities
• Reinvention – dealing with the new normal
• Strong survive and prosper
What does it mean to
your business
• No opportunity to “wait it out” - adjust to a prolonged
and different market.
• Expense strategies have been highly effective in short
term but revenue strategies needed for the longer term,
e.g. new markets, differentiation, acquisitions.
• Accept it is difficult, not hopeless.
• From a surety perspective, anticipate deterioration of
results, but not a market change as dramatic as the early
2000’s.
• There will be adequate surety capacity in terms of limits,
but patience and support for new strategies will be tested.
Willis Solutions
• Networking for JV partners, subcontractor pre-qualification,
acquisitions, surety work-outs, etc.
• Broad surety market relationships at the local and headquarter
level to help you stay close to changes in people, appetite, loss
development, co-surety compatibility, reinsurance, etc.
• Professional surety brokers - locally and nationally linked
together.
• Close to emerging trends in project financing such as P3, last
years Gap financing and next year’s solution TBD.
• Our partnership with you – our clients to invest in the business
at the trade association level, local and national committees, this
Risk Conference and our Construction Practice.