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Surety Corner: 2020 surety results review

Surety Corner: 2020 surety results review

When 2020 began, the surety industry was coming off a record year in terms of gross written premiums. Only a couple of months later all of that momentum had been replaced with great concerns for our industry as the realities of COVID-19 settled in. March and April specifically were very worrisome months when construction was initially shut down. The surety industry was bracing for a wave of claims and potential bankruptcies. Thankfully, the majority of construction was reopened quickly and has remained that way ever since. As such, the construction sector performed much better than initially expected at the beginning of the pandemic.

As Steve Ness, president of the Surety Association of Canada recently noted, “We’re pleased, or perhaps ‘relieved’ is a better word, that the 2020 results reflect what our members have been telling us over the course of the last year. Our industry for the most part held its own on the premium revenue side. Loss ratios did show some deterioration over the 12-month period as several members experienced difficult years. Still, considering the COVID-induced social, economic and business upheaval that made 2020 a year most of us would like to forget, total industry loss ratios were better than anticipated and tracked with the anecdotal information provided by our members.”

Direct Written Premium for all surety written in Canada during year was $653MM, representing a drop of 5.7 per cent from the 2019 writings of $693MM. Note that construction premiums roughly make up about 70 per cent of these premiums. From a claims perspective, total direct claims reported totalled $264M, for a loss ratio of 40.5 per cent, which is a nine per cent increase over 2019. While not catastrophic and certainly not as bad as 2018 when the surety industry experienced a very significant contractor failure, the results still are concerning and has some surety executives concerned about what is coming down the pipeline.

Steve Ness continued, “While loss ratios in the low 40s don’t represent a disaster of 2018 proportions, there can be no denying that the numbers are trending in the wrong direction. This of course begs the (multi) million-dollar question of what we can expect for the current year and beyond. The simple truth is that no one can provide a definitive answer.

“Conventional surety wisdom suggests that as contractor clients continue to work off their pre-pandemic backlogs and government assistance programs expire, the COVID-imposed issues will find their way to balance sheets, leading to a further steepening of the loss ratio curve. This of course is consistent with our experience from years gone by; that surety results tend to lag behind trends in the construction economy and that defaults will typically follow a recession by one or two years.”

While we certainly understand this outlook, it cannot be overstated that this economic slowdown is unlike any we have faced before and economists are broadly expecting a significant rebound in the economy once COVID is comfortably in the rearview mirror.

We are seeing and hearing from across the industry, that contractors have, for the most part, seemingly performed quite well this past year despite the pandemic. While this is in part thanks to government programs such as the Canadian Emergency Wage Subsidy, some credit must be given to resilience and scalability of construction companies. Many have had to completely rework business plans on the fly, which is not an easy task.

The outlook for 2021 and the next few years will depend on the levels of stimulus infrastructure spending moving forward. Will we start to see funding cuts due to the heavily overstretched budgeting burdens of this past year? Or will the government follow the path of 2008 and announce significant new infrastructure spending as a way to reignite economy as we make our way out of the pandemic (hopefully sooner than later)?

As Matt Baynton, regional vice-president of Trisura Guarantee commented, “2020 proved to be an uneven year for the surety industry in Canada. Industry premiums declined for the first time in a number of years, while claims costs increased. That said, many sureties had decent results as the broader construction marketplace weathered the pandemic relatively well. It’s hopeful that stimulus infrastructure spending will allow for a stronger 2021 for the construction industry and by extension the Canadian surety market.”

For now, what we all want to see more than ever is an increase is the amount of work being tendered. We continue to hear about significant amounts of funding available for shovel ready projects. It is time for the municipalities across Canada to step up and get these projects out the door.

Jamie Collum is the vice-president of construction for FCA Insurance. He has delivered numerous seminars and presentations on construction bonding and general industry updates in Ontario to various construction associations over the years. Andrew Cartwright is the vice-president of surety for FCA Insurance. With over 10 years of experience as an RVP of a large national surety company, Cartwright uses his expertise to help FCAs clients manage and build their surety capacity.

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