Post on 13-Aug-2020
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
2019 State of the Industry Report
AGC’s 2019 ConferenceSurety Bonding & Construction Risk Management
January 28, 2019 - 4:30 PM to 6:00 PMWilliam McConnell, PE JD CDT, The Vertex Companies, Inc.
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PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Part 1. State of the U.S. Economy
Part 2. State of the U.S. Construction Industry
Part 3. State of the U.S. Surety Industry
Presentation Overview
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PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Volatile Equities Markets
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Source: https://markets.businessinsider.com/news/stocks/stock-market-news-on-track-worst-december-since-great-depression-2018-12-1027837251
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Equities Markets are Volatile
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Source: https://fred.stlouisfed.org/series/DJIA#0
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
S&P 500 P/E Ratio as of 1/14/19 (trailing earnings)
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http://www.multpl.com/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
A bear market is a condition in which securities prices fall 20
percent or more from recent highs amid widespread pessimism and
negative investor sentiment.
What is a Bear Market?
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Source: https://www.investopedia.com/terms/b/bullmarket.asp
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
The Bull of Bull Runs – as of 8/22/18
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Source: https://www.cnbc.com/2018/08/22/longest-bull-market-since-world-war-ii-likely-to-go-on-because-us-is-best-game-in-town.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Volatile Equities Markets
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Source: https://www.cnbc.com/2018/12/05/big-money-investors-see-the-bull-market-ending-in-2019.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Record Corporate Profits
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Source: https://fred.stlouisfed.org/series/CPATAX
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consumer Confidence Remains High
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Source: https://tradingeconomics.com/united-states/consumer-confidence
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Business Optimism is Pulling Back
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Source: https://tradingeconomics.com/united-states/business-confidence
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
GDP Growth is Strong (Quarterly)
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Source: https://tradingeconomics.com/united-states/gdp-growth
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
GDP Growth is Strong (Annual)
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Source: https://tradingeconomics.com/united-states/gdp-growth-annual
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Unemployment is Remarkably Low
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Source: https://fred.stlouisfed.org/series/UNRATE
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Corporate Capex is Surging
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Source: https://www.marketwatch.com/story/capex-is-starting-to-ramp-up-but-will-it-make-a-difference-for-stocks-2018-06-25
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Corporate Capex is Surging
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Source: https://www.cnbc.com/2018/09/17/companies-are-using-the-tax-cut-both-to-buy-back-their-own-shares-and-to-invest-in-the-future.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Household Debt Service is in Good Shape
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Source: https://fred.stlouisfed.org/series/TDSP
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
M&A Activity is Surging
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Source: http://dmi.thomsonreuters.com/Content/Files/3Q2018_MA_Legal_Advisor_Review.pdf
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Wages are on the Rise
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Source: https://fred.stlouisfed.org/series/ECIALLCIV#0
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Federal Funds Rate is on the Rise (2.25 – 2.5%)
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Source: https://fred.stlouisfed.org/series/FEDFUNDS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inflation Continues to be Low to Moderate
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Source: https://www.bls.gov/news.release/pdf/cpi.pdf
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inflation is Moderate
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Source: https://www.bls.gov/news.release/pdf/cpi.pdf
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inflation v. Federal Funds Rate
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Source: https://fred.stlouisfed.org/series/MEDCPIM158SFRBCLE
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inverted Yield Curve, Explained
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Source: https://www.money-zine.com/definitions/investing-dictionary/inverted-yield-curve/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inverted Yield Curves - Historical
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Source: https://fred.stlouisfed.org/series/T10Y2Y
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
The Yield Curve Inverted on 12/3/18
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Source: https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-yield-curve-just-inverted-that-s-huge
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tariff Review
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Source: https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Corporate Growth is Outpacing GDP Growth
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Source: https://fred.stlouisfed.org/series/GDP#0
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Deficit is Large Despite the Surging Economy
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Source: https://fred.stlouisfed.org/series/FYFSD
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Deficit is Large Despite the Surging Economy
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Source: https://www.usatoday.com/story/money/economy/2018/11/04/federal-budget-deficit-2018-us-government/38319775/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Deficit is Large Despite the Surging Economy
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Source: https://www.forbes.com/sites/chuckjones/2018/11/30/trumps-economy-the-federal-budget-deficit-is-on-a-path-to-1-trillion/#548e5b36231c
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Debt is…Scary
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Source: https://fred.stlouisfed.org/series/GFDEGDQ188S
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Debt is…Scary
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Source: https://en.wikipedia.org/wiki/National_debt_of_the_United_States#/media/File:US_Federal_Debt_as_Percent_of_GDP_by_President_(1940_to_2015).png
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Debt is…Scary
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Source: https://fred.stlouisfed.org/series/A091RC1Q027SBEA
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Debt is…Scary
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Source: https://www.gao.gov/assets/700/692666.pdf
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Part 1. State of the U.S. Economy
Part 2. State of the U.S. Construction Industry
Part 3. State of the U.S. Surety Industry
Presentation Overview
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PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Building & Construction ETF (Yahoo Finance)
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Source: Yahoo Finance
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
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Source: https://www.census.gov/construction/c30/c30index.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
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Source: https://www.census.gov/construction/c30/c30index.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
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Source: https://fred.stlouisfed.org/series/TTLCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is Forecasted to Level Off
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Source: http://digital.bnpmedia.com/publication/?i=546193#{%22issue_id%22:546193,%22page%22:0}
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
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Source: https://www.census.gov/construction/c30/c30index.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Flip on Growth
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Source: https://www.census.gov/construction/c30/c30index.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Flip on Growth
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Source: https://www.census.gov/construction/c30/c30index.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction is Outpacing the US Economy
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Source: https://fred.stlouisfed.org/series/TTLCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Starts are Leveling Off
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Source: https://www.construction.com/news/new-construction-starts-november-slip-7-percent-dec-2018
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Residential Sector is Strong but not Disproportional
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Source: https://fred.stlouisfed.org/series/PRRESCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Is Residential Real Estate Overvalued?
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Source: https://www.zillow.com/home-values/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Office Construction is Rebounding
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Lodging has Leveled Off
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Commercial is Leveling Off
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Manufacturing is Volatile
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
US Dollar Index
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Source: https://fred.stlouisfed.org/series/TWEXB
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Health Care Remains Flat
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Source: https://fred.stlouisfed.org/series/TLHLTHCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Health Care Remains Flat
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Source: https://www2.deloitte.com/us/en/pages/life-sciences-and-health-care/articles/great-consolidation-health-systems.html
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Power Remains Flat
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Source: https://fred.stlouisfed.org/series/PRPWRCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Power Remains Flat
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Source: https://fred.stlouisfed.org/series/IPN22112MS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Public Spending Is Rebounding
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Pent Up Demand for Infrastructure Spending
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Source: https://www.infrastructurereportcard.org/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Public Spending as a % of GDP is Historically Low
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Workforce
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Source: https://fred.stlouisfed.org/series/USCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Average Hours Per Week
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Source: https://fred.stlouisfed.org/series/AWHAECON#0
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Unemployment Rate
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Source: https://fred.stlouisfed.org/series/LNU04032231#0
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Establishments
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Reduction of 120k companies
Source: https://data.bls.gov/timeseries/ENUUS00020523?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Labor Shortage
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Source: https://www.wsj.com/articles/young-people-dont-want-construction-jobs-thats-a-problem-for-the-housing-market-1533029401
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Labor Shortage
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Source: https://www.usnews.com/news/the-report/articles/2018-06-15/the-us-construction-industry-is-booming-but-where-are-the-builders
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
AE Firms Entering Construction
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Source: https://www.enr.com/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consolidation of AE Firms
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Source: https://www.enr.com/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consolidation of Large Contractors
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Market Share of the Top 100 Contractors:
2004: 18%
2009: 26%
2016: 30%
The market share of the Top 100 contractors in the US has nearly doubled in the past two decades. This trend will likely continue as AE firms enter the construction space.
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
ENR Material Price Index (% Change YOY)
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Source: https://www.enr.com/economics/historical_indices/material_price_index_history
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
ENR Common Labor Index (% Change YOY)
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Source: https://www.enr.com/economics/historical_indices/Common_Labor_Index_History
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tipping Point for Efficiency Gains
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Source: https://www.economist.com/business/2017/08/17/efficiency-eludes-the-construction-industry
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tipping Point for Efficiency Gains
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Source: http://ozarch.com/2018/02/platte-fifteen-construction-begin-soon-denver/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tipping Point for Efficiency Gains
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Source: https://www.constructconnect.com/blog/construction-technology/entering-age-self-driving-construction-equipment/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tech Revolution
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Source: https://www.autodesk.com/autodesk-university/class/Revit-4D-World-How-Create-4D-Ready-Model-Within-Revit-2017
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
IOT Revolution
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Source: https://internetofthingsagenda.techtarget.com/
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Part 1. State of the U.S. Economy
Part 2. State of the U.S. Construction Industry
Part 3. State of the U.S. Surety Industry
Presentation Overview
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PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Contract Surety Industry Review – 1995 to 2006 (SFAA)
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Source: SFAA
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Contract Surety Industry Review – 2006 to 2017 (SFAA)
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Source: SFAA
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Peak Surety Losses Lag Recessionary Cycles
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Source: SFAA
Recession Peak Contract Surety Loss Ratios1981 – 1982: 90% to 100% from 1984-19851990 – 1991: 30% to 44% from 1995-19962001 - 2001: 67% to 73% from 2002-20042007 - 2009: 25% to 37% from 2011-2014
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Peak Surety Losses Lag Recessionary Cycles
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Right Size or Dive for Work?
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Modest M&A Activity
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M&A Activity in the Surety Industry:
• Berkshire Hathaway (#29) enters surety market (Jun 12, 2014)• ACE acquires Chubb (#5) (Jan. 14, 2016)• XL exits surety marketplace (Mar 7, 2016)• Markel acquires SureTec (#19) (May 1, 2017)• Intact acquires OneBeacon (#21) (May 2, 2017)
Surety consolidation has slowed and several insurance companies have entered the surety marketplace due to remarkable industry performance over the past decade.
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Market Share Reversal
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Market Share of the Top 10 Surety Providers:
1980: 21%1990: 42%2004: 67%2008: 68%2014: 63%2016: 62%2017: 61% (through Q3)
The market share of the Top 10 surety providers has not been this low for approximately 20 years.
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Public Construction – 1995: $129.9M
Public Construction – 2006: $280.9M
Public Construction – 2017: $290.0M
Public Construction – 2018: $310.1M
Public Construction
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Source: https://fred.stlouisfed.org/series/TLOFCONS
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Contract Surety Industry Risks in 2018
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1. Labor Shortage = Safety/Quality/Schedule Issues2. Lack of Growth in Public Construction = Low
Margins for Heavy Contractors3. Inflationary Pressures lead to Surety Losses Over
Time4. Soft Market Conditions = Potential Reduction in
Underwriting Standards
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
End
vertexeng.com
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