Construction Insurance Brokers Say Building Backlog is Saving Commercial Sector… For Now

Commercial construction insurance brokers from the northeast to the west coast, from Texas all the way to North Carolina, say the market and their business right now are not as bad as might be expected from reading daily news reports.

But 2009 could bring a different story, so some are pinning their hopes on a federal stimulus package to boost construction.

Henry Lombardi, president and CEO of New York-based Allied North America, follows the construction and insurance industries very closely. Since 1979, Allied has served only the construction industry.

“We focus all of our energies, innovations and technology on helping contractors meet their needs and deal with the risks that are inherent to their business, be it insurance, safety, or loss control,” says Lombardi. Even with some heavy economic pressure on both the insurance market and Allied’s core client base, the company expects to exceed $100 million in commissions for 2008.

Lombardi has concerns about what will happen to the construction industry in 2009. “It’s going to be a tough year,” he said. “Not that any year is easy,” he added, but 2009 in particular will be challenging.

“Contractors in general are going through some tough times,” he said. “Contractors are concerned what revenue will be, how the state and local governments will get the funding to build the infrastructure.”

For now, Lombardi says, commercial contractors have enough “work in process” to keep them up and running for another six to nine months. As that works runs off, contractors will have to bid for new work, but the financial crisis threatens the dollars available to fund such projects, Lombardi said. Many of Allied’s civil works contractors are taking a wait-and-see approach, he said. Those contractors are hopeful President-elect Barack Obama will fulfill a promise to shell out funds to states for infrastructure projects.

“The new president has stated he will put forth a tremendous amount of money, $600 billion to $700 billion of infrastructure work, to stimulate the economy,” Lombardi noted. Such funding will help contractors continue to work and generate new revenues, depending on when those funds become available, he added.

Lombardi says regardless, Allied will continue to stay focused on its business model, continue to operate prudently and will continue to use technology to ensure it is there to help its contractor clientele with insurance, loss control, even financing. But given the uncertainty in the market, he anticipates somewhat of a flat year in 2009.

“We recognize there will be challenges,” he said. “It’s going to be a tough year but I think any company that has prudent managers and people who understand that you have to change … I think they’ll be OK.”

From the Golden State

Construction Practice Leader Paul Heidemann of San Diego-based Barney & Barney has seen the California housing market tumble, but says commercial construction is still fairly good, at least for now.

Barney & Barney’s construction practice — which consists of 25 insurance professionals and generates about $5 million in construction revenue for the agency — grew in 2008 as well. But like Allied, Heidemann expects the firm will see a slow down in 2009 on construction-related revenues.

“We primarily insure commercial contractors and some developers. We do have some residential contractors as well but most of the book is focused on the commercial infrastructure side,” Heidemann explained.

“We are not expecting any growth, however, we do expect to pick up and add a few clients.” Even so, he says “we expect to be relatively flat on the construction side.”

Commercial construction is beginning to be affected by the credit crunch but the impact won’t be as great as on residential construction. “There are still a lot of projects out there and there’s still some financing available.”

However, competition for projects for commercial contractors in public works is a lot fiercer, Heidemann said. “Some of the residential contractors have moved into public works so there’s a lot more bidders, more competition for that work. So we are seeing a shrinkage for most clients on what their projections are for 2009.”

California’s budget woes could also impact future work for commercial contractors. “If the state doesn’t resolve its budget crisis that would certainly impact the public works projects in place,” Heidemann said. “So it’s hard to predict what the end of ’09 will look like. A lot of our clients still have a substantial backlog and that will take them toward the end of ’09, and then it remains to be seen what the future will hold.”

Heidemann says he hears talk about the possible hardening of the market, but that’s not something he has seen yet. “We’ve seen some flat renewals and in some cases, some reductions, and in some cases a few slight increases because of loss history,” he said. He’s confident the market will harden, but is not sure when. “Whether it will happen in 2009 remains to be seen,” he said.

Down South

For Dallas-based regional broker McQueary, Henry, Bowles & Troy (MHBT), the commercial construction industry is still going strong.

“We are fortunate; the Dallas-Fort Worth area is still a little isolated from it all. The construction industry is still going strong,” said Jeremy Sandusky, an MHBT agent in the firm’s construction unit. “However, in the last couple of weeks we have started to hear our clients are slowing down.” MHBT’s target construction market is typically heavy commercial construction projects and large commercial contractors and subcontractors.

The MBHT construction unit has begun beefing up its prospecting to address a potential downturn in business “We are qualifying more prospects a little better; we are working a little smarter, keeping the pipeline full with prospects; and we are watching collections and audits,” Sandusky said. “You don’t want to get caught with a construction company that is having some hard times and they are not able to pay their audits or their premiums. That’s something we are watching pretty closely, making sure people don’t get too far behind which is very important.” While MBHT watches over financials all the time, it’s more important in today’s tough economy, Sandusky said. “It’s something we always watch but we are even watching it closer now.”

As a way to generate additional revenue for its construction unit, MBHT also offers construction-related value-added services on a fee basis. “That’s something we are moving more towards, being more of a risk management consultant,” Sandusky said. “If we don’t write their insurance but they want our services then that’s something we are looking more at … attaching a fee to our value-added services.”

Given its success, MHBT has no plans to branch out into other sectors of the construction insurance industry. “We are pretty happy where we are at,” Sandusky said. “We have been very successful … We are big on what works and sticking to your core competencies; if that works, there’s no reason for our unit to go after stuff that we’re not used to going after.”

Southeast Looks Good

In the southeastern states, commercial construction companies still have some business on their books, at least for the next couple of years, says Joey Huckaby, vice president of Columbia, S.C.-based Huckaby & Associates.

“Commercial construction in the southeast — with the exception of areas that are already really developed like Atlanta — all through South Carolina, North Carolina and Georgia — you have a lot of open space and the population is growing in those states. So you still have the need for building the Wal-Marts, the Targets and shopping centers,” Huckaby said. “The projects that you are seeing going away very fast are the high rise condos on the coast of South Carolina and North Carolina.”

Even if commercial construction begins slowing, Huckaby has an option: the changing labor force has opened the door to selling other coverages, including employment practices liability insurance, to construction firms, Huckaby added.

“You’ll find more construction firms, amazingly, willing to hear you talk about employment practices liability,” he said. “We’ve new laws in every state and federal laws with regard to immigration that put a lot of the onus back on the business owner to actually comply.” In addition, downsizing a work force leads to exposures as well, he added.

“Say you had 100 guys on drywall and now you have to cut it back to 50, well that’s 50 potential lawsuits. They didn’t see that before when we were in the construction boom,” Huckaby said.

“There’s a lot of fear with force reduction and immigration laws right now that you find construction accounts, even though times are tough with their revenue, you find they are finding time to hear about or even add EPLI coverage that maybe they weren’t as interested in before,” he said. “The change in immigration laws and force reductions over the next few years really brings EPLI to the front.”

When it comes to pricing for commercial contractors in the southeast, Huckaby says he sees no sign of a hardening market. “No signs whatsoever in the states we operate in,” he said. “There’s a lot of talk … but not one sign that it’s about to start hardening.”