2019 State of the Industry Report - Surety Bonding …...PRELIMINARY WORK PRODUCT – PRIVILEGED &...

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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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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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


Equities Markets are Volatile

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Source: https://fred.stlouisfed.org/series/DJIA#0


S&P 500 P/E Ratio as of 1/14/19 (trailing earnings)

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http://www.multpl.com/


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


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

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


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


Record Corporate Profits

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Source: https://fred.stlouisfed.org/series/CPATAX


Consumer Confidence Remains High

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Source: https://tradingeconomics.com/united-states/consumer-confidence


Business Optimism is Pulling Back

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Source: https://tradingeconomics.com/united-states/business-confidence


GDP Growth is Strong (Quarterly)

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Source: https://tradingeconomics.com/united-states/gdp-growth


GDP Growth is Strong (Annual)

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Source: https://tradingeconomics.com/united-states/gdp-growth-annual


Unemployment is Remarkably Low

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Source: https://fred.stlouisfed.org/series/UNRATE


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


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


Household Debt Service is in Good Shape

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Source: https://fred.stlouisfed.org/series/TDSP


M&A Activity is Surging

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Source: http://dmi.thomsonreuters.com/Content/Files/3Q2018_MA_Legal_Advisor_Review.pdf


Wages are on the Rise

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Source: https://fred.stlouisfed.org/series/ECIALLCIV#0


Federal Funds Rate is on the Rise (2.25 – 2.5%)

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Source: https://fred.stlouisfed.org/series/FEDFUNDS


Inflation Continues to be Low to Moderate

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Source: https://www.bls.gov/news.release/pdf/cpi.pdf


Inflation is Moderate

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Source: https://www.bls.gov/news.release/pdf/cpi.pdf


Inflation v. Federal Funds Rate

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Source: https://fred.stlouisfed.org/series/MEDCPIM158SFRBCLE


Inverted Yield Curve, Explained

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Source: https://www.money-zine.com/definitions/investing-dictionary/inverted-yield-curve/


Inverted Yield Curves - Historical

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Source: https://fred.stlouisfed.org/series/T10Y2Y


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


Tariff Review

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Source: https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm


Corporate Growth is Outpacing GDP Growth

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Source: https://fred.stlouisfed.org/series/GDP#0


Fed Deficit is Large Despite the Surging Economy

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Source: https://fred.stlouisfed.org/series/FYFSD



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Source: https://www.usatoday.com/story/money/economy/2018/11/04/federal-budget-deficit-2018-us-government/38319775/



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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


Fed Debt is…Scary

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Source: https://fred.stlouisfed.org/series/GFDEGDQ188S


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


Fed Debt is…Scary

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Source: https://fred.stlouisfed.org/series/A091RC1Q027SBEA


Fed Debt is…Scary

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Source: https://www.gao.gov/assets/700/692666.pdf






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Building & Construction ETF (Yahoo Finance)

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Source: Yahoo Finance


Construction Spending is at a Record High

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Source: https://www.census.gov/construction/c30/c30index.html



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Source: https://fred.stlouisfed.org/series/TTLCONS


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}



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Flip on Growth

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Flip on Growth

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Construction is Outpacing the US Economy

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Source: https://fred.stlouisfed.org/series/TTLCONS


Construction Starts are Leveling Off

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Source: https://www.construction.com/news/new-construction-starts-november-slip-7-percent-dec-2018


Residential Sector is Strong but not Disproportional

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Source: https://fred.stlouisfed.org/series/PRRESCONS


Is Residential Real Estate Overvalued?

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Source: https://www.zillow.com/home-values/


Office Construction is Rebounding

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Source: https://fred.stlouisfed.org/series/TLOFCONS


Lodging has Leveled Off

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Commercial is Leveling Off

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Manufacturing is Volatile

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US Dollar Index

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Source: https://fred.stlouisfed.org/series/TWEXB


Health Care Remains Flat

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Source: https://fred.stlouisfed.org/series/TLHLTHCONS


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


Power Remains Flat

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Source: https://fred.stlouisfed.org/series/PRPWRCONS


Power Remains Flat

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Source: https://fred.stlouisfed.org/series/IPN22112MS


Public Spending Is Rebounding

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Pent Up Demand for Infrastructure Spending

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Source: https://www.infrastructurereportcard.org/


Public Spending as a % of GDP is Historically Low

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Construction Workforce

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Source: https://fred.stlouisfed.org/series/USCONS


Average Hours Per Week

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Source: https://fred.stlouisfed.org/series/AWHAECON#0


Construction Unemployment Rate

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Source: https://fred.stlouisfed.org/series/LNU04032231#0


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


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


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


AE Firms Entering Construction

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Source: https://www.enr.com/


Consolidation of AE Firms

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Source: https://www.enr.com/


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.


ENR Material Price Index (% Change YOY)

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Source: https://www.enr.com/economics/historical_indices/material_price_index_history


ENR Common Labor Index (% Change YOY)

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Source: https://www.enr.com/economics/historical_indices/Common_Labor_Index_History


Tipping Point for Efficiency Gains

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Source: https://www.economist.com/business/2017/08/17/efficiency-eludes-the-construction-industry



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Source: http://ozarch.com/2018/02/platte-fifteen-construction-begin-soon-denver/



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Source: https://www.constructconnect.com/blog/construction-technology/entering-age-self-driving-construction-equipment/


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


IOT Revolution

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Source: https://internetofthingsagenda.techtarget.com/






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Contract Surety Industry Review – 1995 to 2006 (SFAA)

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Source: SFAA


Contract Surety Industry Review – 2006 to 2017 (SFAA)

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Source: SFAA


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


Peak Surety Losses Lag Recessionary Cycles

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Right Size or Dive for Work?


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.


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.


Public Construction – 1995: $129.9M




Public Construction

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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


End

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2019 State of the Industry Report - Surety Bonding …...PRELIMINARY WORK PRODUCT – PRIVILEGED &...

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