Surety

Surety as a Solution For Billion-Dollar Construction Projects

Disaster recovery plus infrastructure projects stretch builders; sureties could be next.
By: | May 1, 2018 • 6 min read

Building is booming in the United States. Billion-dollar projects are no longer unusual. The trend toward larger projects is mostly a boon to contractors and to the surety-bond underwriters who back the developments, but the volume and size of the work is becoming a matter for concern for some underwriters.

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“It is a very different thing for a general contractor to do $800 million in revenue from two $400 million projects or from 10 $80 million projects,” said Geoff Delisio, senior vice president of surety, Berkshire Hathaway Specialty Insurance.

In another example, Delisio noted that typically the electrical work is 20 to 25 percent of a project. On a billion-dollar project, that is a $250 million subcontract.

“Risk managers [at owners and contractors] are dealing with this daily,” said Delisio. “We have similar thoughts: How much risk do we want to take on a single project? As we look ahead, we don’t see anything but larger projects. Are $5 billion or $10 billion projects too far in the future?”

“Ten years ago, I could count the number of billion-plus-dollar projects on one hand,” said Peter Quinn, head of bonding/surety, Euler Hermes Americas. “That has increased four or five times.”

Questions Around Capacity

The regulatory requirements for surety in the U.S. have resulted in higher barriers to entry for new surety underwriters than in some other lines of insurance. The regulatory regime also means offshore markets are generally not open.

Delisio said capacity could become a concern depending on the size of the project and where a surety underwriter attaches: “We may see the first push on tightening this year or next.”

“Ten years ago, I could count the number of billion-plus-dollar projects on one hand. That has increased four or five times.” – Peter Quinn, head of bonding/surety, Euler Hermes Americas

For now, most remain confident that capacity is adequate but, as Delisio advised, there are contributing factors to keep an eye on.

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Susan Hecker, national director of contract surety, Gallagher, said, “At a project size of $2 billion or more, it might become an issue, but many of those projects are joint ventures and have a co-surety structure.

“There are always underwriting questions around large public-private partnership projects as well as when mega-contractors secure multiple large contracts,” she said. “However, those situations could also be a credit case … more individual contractor capacity issues rather than an indication of a restriction of overall surety capacity.”

“We have not seen overall tightening in the surety market,” said Joanne Brooks, vice president and counsel, The Surety & Fidelity Association of America. “But as an industry, we should be prepared to tighten, or we are going to be called upon under the bonds to finish some of these projects and ensure subcontractors and suppliers are protected and paid.”

Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety

Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety, said the issue is currently more of a capability crunch than a capacity crunch.

“There has been plenty of surety capacity since the recession and the lag in construction. The building surety businesses have been waiting for this recovery. But it can be a challenge when it all comes at once.”

The volume of work is of increasing concern, said Brooks. “The issue is not really capacity in the surety sector, even for large projects. It is more a matter of a given contractor’s capacity. There are a limited number of contractors at the top end who are capable of performing billion-dollar projects.”

Not only is there a greater demand for builders, but projects are also lasting longer, Fogle added.

“When projects last five or eight years, rather than two or three, capital and commitments are tied up for longer. That also increases risk. Owners understand this.”

Brooks has observed that sureties could consider reining in capacity because of several trends in the construction sector. Subcontractors are already getting a great deal of work and new tariffs may raise the price of construction materials, notably steel and aluminum.

“There is also the number and scale of natural disasters, hurricanes, mudslides and fires,” she added.

Delisio noted, “There is a whole generation of experienced individuals moving to or are already in retirement. Here we are 10 years on from the recession, and there is a bit of a gap now that the business is revving back. The 10- to 20-year people are few and far between.”

Phasing Projects

One possible response to the burgeoning size of projects is to subdivide them: “Sometimes an owner will float a long-duration project and there are only a limited number of underwriters that can bond a billion-dollar project,” Fogle explained.

“But there are more who can bond a series of four $250 million projects. There are more contractors who can handle that size project as well. Contractors like to phase their work and resources as well.”

Phasing a project gives owners more capability to bring in more contractors and more underwriters, he said.

Phases also extend bonding capacity, but Fogle said that is not as much of a concern. “We’ve got a huge Treasury listing, and we can write billion-dollar projects, but we like to diversify our risk. We have some projects we write on a sole basis, but most of our larger accounts we write on a co-surety basis.”

“Sometimes an owner will float a long-duration project and there are only a limited number of underwriters that can bond a billion-dollar project.” – Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety

He noted that “co-sureties are liable joint and severally, so we have to be careful. We underwrite our co-sureties just as we underwrite our clients.”

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Quinn concurred that co-surety is a common solution for large projects. He also noted “there are opportunities for owners to accept something less than 100 percent, down to as low as 50 percent. That means they are accepting a lower bond amount.

“The reality is that there are 130 sureties in the U.S., but only about eight that can participate in bonds of the largest size. That does increase costs [for the projects] some, but that is not holding projects back.”

“We do have underwriting capacity for large projects, especially those performed in joint venture or consortium,” said Brooks. “There might be limits imposed for a given contractor that has reached the top of its aggregate capacity.”

Adapting to Scale

Quinn expressed confidence the industry will get itself sorted in time.

“There are newer players, and as project size has grown, the industry needs to respond, even though there may be fewer people participating at the highest levels.” The scale and scope of the business may be changing, but the fundamentals have not, he said. “It still comes down to underwriting and individual risk.”

At the other end of the market, there are no concerns for underwriting or the capacity of contractors to handle and complete projects.

“We play at the smaller-project level, $100 million or less,” said David Layman, vice president and chief underwriting officer, Argo Surety. “There is plenty of capacity for us and for our clients.”

Given the nature of the construction business, that ample capacity on the part of contractors for smaller projects is not a resource that can easily be aggregated for the larger projects where there is a capability crunch.

“Our clients are general builders themselves,” Layman explained. “They are not going to sub-contract to other [larger] general builders.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]