Willis Urges Caution After Record '07 Surety Results

Willis Group brokerage is warning that while the surety line in 2007 had what its experts believe may have been the best year ever, conditions could change suddenly given the current economic climate.

Surety performance bonds were just one of several market segments highlighted in the Spring 2008 edition of "Marketplace Realities and Risk Management," a report released by the firm today.

Surety buyers, generally contractors, "should position themselves to take advantage of the easing conditions that exist today in most sectors of the surety business, while preparing themselves for sudden changes that could emerge out of today's unsettled business and credit environment," the report said, noting volatile swings in loss ratios and overall returns for sureties historically.

Early data, Willis said, points to a third consecutive year of profitability for surety in 2007, with overall loss ratios expected in the 18-to-20 range, marking a significant turnaround from 2000 and 2001, when the ratio was up around 100.

Premium volume for 2007 is expected to top $5.1 billion, Willis also reported.

Based on long-term trends indicated by data compiled from the Surety & Fidelity Association of America, Willis noted that increased surety loss activity has traditionally trailed the growth trends in construction activity by 18-to-24 months.

If this holds, the slowdown in construction activity today will yield volatility in future returns for the surety industry, Willis said.

At this point, Willis said capacity continues to ease outside of the residential sector but that surety rates are not materially below levels of a year ago. Policy terms, the broker reported, are becoming more competitive in the middle market sector.

To date, increased capacity has come from the willingness of existing carriers to support clients in the midst of what had been a very vibrant construction market over the past five years. But larger contractors face limited market choices and "no significant new capital has entered the business since 2002."

Underwriters are beginning to focus on the flexibility of a contractor's financial plan for dealing with potential drops in business volume and margins in late 2008 and 2009, Willis noted, urging contractors to communicate any enhancements they have made in controlling credit risks going forward.

Highlighting trends in the residential market, Willis said that while subdivision bonds historically have been one of the industry's most profitable segments, sureties have begun to experience losses and underwriters are restricting capacity and significantly tightening terms, even for preferred credits.

According to the Washington-based Surety Information Office, subdivision bonds are bonds that guarantee to a city, county, or state that the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewers and drainage systems.

In addition to the surety line, Willis' Marketplace Realities report highlights developments in environmental, aviation, and umbrella and excess lines of insurance.

With respect to environmental, the firm urges risk managers to focus on increased climate change exposures as they evaluate their property and their directors and officers' liability insurance programs.