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Surety bond sector strengthens on rebounding construction industry

Private building, public projects add to premiums

Surety bond sector strengthens on rebounding construction industry

The surety bond sector looks to register its second consecutive year of growth, led by the private construction sector as the economy slowly improves.

“We certainly are seeing an increase in activity,” said Michael Herrod, Houston-based executive vice president of surety with Aon Risk Solutions' construction services group. “I do believe that premiums for 2014 will be up, at least for the top 10” surety insurers, he said.

Overall U.S. construction spending grew at a seasonally adjusted annual rate of $950.15 billion in June, according to the U.S. Census Bureau. In 2013, construction spending totaled $910.76 billion — a year in which private construction spending was more than double that of public construction. But while 2013 gained on 2012, it was below 2008's $1.068 trillion.

Surety bond sales have had a similar path. In 2013, surety bond sales totaled $5.15 billion in direct written premiums, according to the Surety & Fidelity Association of America. While breaking a four-year slide, it was off the peak of $5.5 billion of premiums in 2008.

This year looks to be better than last year, underwriters say.

“I would say, yes, 2014 without a doubt is definitely improved over 2013,” said Wes Dasher, Columbia, South Carolina-based president of BB&T Insurance Services Inc. “In fact, our new business is up about 38%.”

Private and public construction projects are driving the rebound in construction and surety bond sales. Activity is the greatest in California, New York, Texas and Florida, experts say. They also cite the $3.9 billion replacement of New York's Tappan Zee bridge and $2.3 billion Interstate 4 highway project in central Florida as examples of the types of public megaprojects that also are helping boost growth of surety bonds.

Five insurers accounted for half of the surety bonds underwritten in 2012, according to Business Insurance's latest ranking: The Travelers Cos. Inc.; Liberty Mutual Holding Co. Inc.; Zurich Insurance Co. Inc.; CNA Financial Corp.; and Chubb Corp.

Other surety providers say they also are seeing growth in surety bond sales and construction projects in general.

“The trend is we're going to see bigger projects generally,” said Drew Brach, Grand Rapids, Michigan-based surety practice leader at Marsh L.L.C. “We're seeing the projects that are bigger, longer and more complicated, and many of these are done by joint ventures or groups of up to three or four different firms.”

He said the default rate for such multiparty ventures is much lower than single-contractor projects.

“When these projects get to the $1 billion-plus size, companies from a prudent risk management point of view enter into joint ventures to share risk — not only to bring different capabilities to the table, but also to share risk,” said Michael Bond, Owings Mills, Maryland-based executive vice president and head of surety at Zurich North America.

As the project size grows, “the size of the (bonding) obligation is getting larger,” said Daniel Desjardins, senior director of global risk management and insurance at Bombardier Inc., a Montreal-based rail and aerospace manufacturer.

The bonding obligation of such larger projects can exceed $500 million, he said.

“That creates the issue of finding the proper number of sureties to match that obligation — a single carrier doesn't suffice anymore. So, we have to basically segregate our risk and put a club deal together,” Mr. Desjardins said.

“We are seeing what I would describe as a very modest improvement in the demand for bonding from our client base, but a lot of the improvement in the construction economy is heavily weighted to the private sector,” said Bob Raney, Hartford, Connecticut-based senior vice president of construction services at Travelers' bond and financial products unit.

Private construction is “growing fairly robustly,” Mr. Bond said. “What you're seeing is the mix of business is changing, so you're seeing more of that surety premium coming from private work rather than public work.”

“So far, the trend in 2014 .... is favorable,” said Steve Anderson, Schaumberg, Illinois-based head of NAS Surety, part of Swiss Re Ltd.'s corporate solutions unit. “NAS Surety is seeing contract surety revenue trending upward. This is part of a trend in the overall surety sector.”

“Last year, we were up an amazing 19% on contract surety revenue,” said Mr. Brach of Marsh, which had about $700 million of surety premiums worldwide in 2013.

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