Is there a locomotive pounding down the tracks and heading straight for you?

When one company is writing $1 billion to $2 billion dollars or so of annual surety premiums, providing guarantees for as much as a couple hundred billion dollars worth of construction, is that a problem?

Only if that company decides to shrink its book of contract surety business by 10% or 20%, sources tell me. At least one of my sources believes such a change is likely. That could throw the surety bond component of construction into chaos again or spark a smaller wave of painful adjustments like the ones we saw starting around 2000.

Since the 2004 merger deal that created the colossus insurer St. Paul Travelers, that one company has written bonds for about three out of every ten dollars worth of big construction projects. Our sources in the industry say it’s no problem—unless St. Paul Travelers decides to cut back a bit to focus on more profitable contractors with less risk. The next tier of sureties may not be able to pick up all that business.

That could lead to a repeat of the scramble we saw starting around 2000, when major reinsurers got out of contract surety and the sureties set strict new limits on who they would provide bonds for and how much in guarantees they would provide for specific companies and projects. Things have stabilized since then and contract surety is on track for overall profitability after years of losses. Their tough new approach based on underwriting fundamentals has triggered significant changes in our industry. One example: Webcor Builders, which is selling 70% of itself to Obayashi, said it is glad to be escaping the cautious surety underwriting limits it worked under and can replace surety bonds with a parent company guarantee now.

I’ll be exploring more of the changes sparked by the new surety environment with our sources and correspondents in the first couple of weeks after New Year’s Day. I’d love to hear from you about that and anything else I say here.

But I also wanted to let you know about this worry about another possible painful adjustment and the trouble it could cause in case St. Paul Travelers adjusts its policies. Not to spoil your New Year’s; just to make sure we’re all losing sleep about the right things. It’s a college football coach, appropriately enough, who expressed the idea behind why I’m telling you this now:

Sometimes that light at the end of the tunnel is a train coming at you.