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PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
State of the Industry Report
Q4 of 2018
National Bond Claims Association Annual Meeting
Friday, October 12, 2018 - 10:10 AM to 11:10 AM
William McConnell, PE JD CDT, The Vertex Companies, Inc.
1
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
2
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
The Bull of Bull Runs – as of 8/22/18
3
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
Record Corporate Profits
4
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consumer Confidence is Surging
5
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Business Optimism is Surging
6
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Equities Markets are Surging
7
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
GDP Growth is Steady if not Strong
8
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Unemployment is Remarkably Low
9
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Corporate Capex is Surging
10
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Household Debt is Rising
11
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
S&P 500 P/E Ratio is High
12
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
M&A Activity is Surging
13
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Wages are on the Rise
14
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Federal Funds Rate is on the Rise
15
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inflation is Moderate
16
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inflation is Moderate
17
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Market Volatility
18
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Recent News
19
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Recent News
20
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inverted Yield Curve, Explained
21
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Inverted Yield Curves - Historical
22
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tariff Review
23
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Corporate Growth is Outpacing GDP Growth
24
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Deficit is Large Despite the Surging Economy
25
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Fed Debt is…Scary
26
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
27
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
28
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
29
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Spending is at a Record High
30
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Flip on Growth
31
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction is Outpacing the US Economy
32
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Starts are Leveling Off
33
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Residential Sector is Strong but not Disproportional
34
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Is Residential Real Estate Overvalued?
35
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Office Construction is Rebounding
36
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Lodging has Leveled Off
37
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Commercial is Leveling Off
38
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Manufacturing is Volitile
39
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
US Dollar Index
40
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Health Care Remains Flat
41
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Health Care Remains Flat
42
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Power Remains Flat
43
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Power Remains Flat
44
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Public Spending Is Rebounding
45
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Pent Up Demand for Infrastructure Spending
46
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Public Spending as a % of GDP is Historically Low
47
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Workforce
48
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Average Hours Per Week
49
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Unemployment Rate
50
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Construction Establishments
51
Reduction of
120k
companies
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Labor Shortage
52
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Labor Shortage
53
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
AE Firms Entering Construction
54
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consolidation of AE Firms
55
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Consolidation of Large Contractors
56
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
Construction Inflation
57
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tipping Point for Efficiency Gains
58
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tipping Point for Efficiency Gains
59
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Tech Revolution
60
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
IOT Revolution
61
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
62
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Contract Surety Industry Review – 1995 to 2006 (SFAA)
63
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Contract Surety Industry Review – 2006 to 2017 (SFAA)
64
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
65
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Surety Loss Ratio
66
2006 - 2017
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Loss Ratio v. Premium
67
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
Modest M&A Activity
68
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
69
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
Contract Surety Industry Risks in 2018
70
1. Labor Shortage = Safety/Quality/Schedule Issues
2. Lack of Growth in Public Construction = Low
Margins for Heavy Contractors
3. Inflationary Pressures lead to Surety Losses Over
Time
4. Soft Market Conditions = Potential Reduction in
Underwriting Standards
PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION
End
vertexeng.com
71

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State of the Industry Report Q4 of 2018

  • 1. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION State of the Industry Report Q4 of 2018 National Bond Claims Association Annual Meeting Friday, October 12, 2018 - 10:10 AM to 11:10 AM William McConnell, PE JD CDT, The Vertex Companies, Inc. 1
  • 2. 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 2
  • 3. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION The Bull of Bull Runs – as of 8/22/18 3 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
  • 4. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Record Corporate Profits 4
  • 5. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Consumer Confidence is Surging 5
  • 6. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Business Optimism is Surging 6
  • 7. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Equities Markets are Surging 7
  • 8. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION GDP Growth is Steady if not Strong 8
  • 9. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Unemployment is Remarkably Low 9
  • 10. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Corporate Capex is Surging 10
  • 11. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Household Debt is Rising 11
  • 12. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION S&P 500 P/E Ratio is High 12
  • 13. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION M&A Activity is Surging 13
  • 14. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Wages are on the Rise 14
  • 15. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Federal Funds Rate is on the Rise 15
  • 16. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Inflation is Moderate 16
  • 17. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Inflation is Moderate 17
  • 18. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Market Volatility 18
  • 19. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Recent News 19
  • 20. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Recent News 20
  • 21. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Inverted Yield Curve, Explained 21
  • 22. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Inverted Yield Curves - Historical 22
  • 23. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Tariff Review 23
  • 24. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Corporate Growth is Outpacing GDP Growth 24
  • 25. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Fed Deficit is Large Despite the Surging Economy 25
  • 26. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Fed Debt is…Scary 26
  • 27. 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 27
  • 28. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Spending is at a Record High 28
  • 29. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Spending is at a Record High 29
  • 30. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Spending is at a Record High 30
  • 31. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Flip on Growth 31
  • 32. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction is Outpacing the US Economy 32
  • 33. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Starts are Leveling Off 33
  • 34. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Residential Sector is Strong but not Disproportional 34
  • 35. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Is Residential Real Estate Overvalued? 35
  • 36. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Office Construction is Rebounding 36
  • 37. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Lodging has Leveled Off 37
  • 38. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Commercial is Leveling Off 38
  • 39. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Manufacturing is Volitile 39
  • 40. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION US Dollar Index 40
  • 41. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Health Care Remains Flat 41
  • 42. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Health Care Remains Flat 42
  • 43. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Power Remains Flat 43
  • 44. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Power Remains Flat 44
  • 45. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Public Spending Is Rebounding 45
  • 46. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Pent Up Demand for Infrastructure Spending 46
  • 47. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Public Spending as a % of GDP is Historically Low 47
  • 48. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Workforce 48
  • 49. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Average Hours Per Week 49
  • 50. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Unemployment Rate 50
  • 51. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Establishments 51 Reduction of 120k companies
  • 52. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Labor Shortage 52
  • 53. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Labor Shortage 53
  • 54. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION AE Firms Entering Construction 54
  • 55. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Consolidation of AE Firms 55
  • 56. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Consolidation of Large Contractors 56 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.
  • 57. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Construction Inflation 57
  • 58. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Tipping Point for Efficiency Gains 58
  • 59. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Tipping Point for Efficiency Gains 59
  • 60. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Tech Revolution 60
  • 61. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION IOT Revolution 61
  • 62. 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 62
  • 63. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Contract Surety Industry Review – 1995 to 2006 (SFAA) 63
  • 64. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Contract Surety Industry Review – 2006 to 2017 (SFAA) 64
  • 65. 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 65
  • 66. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Surety Loss Ratio 66 2006 - 2017
  • 67. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Loss Ratio v. Premium 67
  • 68. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Modest M&A Activity 68 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.
  • 69. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Market Share Reversal 69 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.
  • 70. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION Contract Surety Industry Risks in 2018 70 1. Labor Shortage = Safety/Quality/Schedule Issues 2. Lack of Growth in Public Construction = Low Margins for Heavy Contractors 3. Inflationary Pressures lead to Surety Losses Over Time 4. Soft Market Conditions = Potential Reduction in Underwriting Standards
  • 71. PRELIMINARY WORK PRODUCT – PRIVILEGED & CONFIDENTIAL – ATTORNEY CLIENT COMMUNICATION End vertexeng.com 71