Stormy weather
Hurricanes shouldn't hurt insurance, bonding for contractors

By Martin W. Schwartz

It was supposed to be the best year for the insurance industry since the turn of the century, but then came the hurricanes.

Financial results for the first half of 2004 were among the best in 50 years, according to the Insurance Information Institute, a New York-based information and analysis organization, but four hurricanes all but assured that the second half of the year would be one of the worst on record.

That will mean surprisingly little to contractors in the south central region, said Randy Irvin, vice president of insurance agent Ramsey, Krug, Farrell and Lensing of Little Rock. Except for a few problem areas, the insurance market is expected to soften in 2005, resulting in lower premiums and a stable deductible rate.

advertisement

"(The hurricanes) might impact property coverage, making property pricing slightly higher," Irvin added. "I think Florida has its owner property coverages, so the storms won't affect the major companies in the area much."

In Florida, approximately one in five homes was damaged, bringing an estimated 15,000 insurance company claims adjusters from across the United States and Canada to cover 30,000 sq. mi. in the state.

"The number of claims insurance companies are paying is equivalent to the entire population of the Tampa-St. Petersburg metropolitan area," said William E. Bailey, director of the Hurricane Insurance Information Center in Punta Gorda, Fla.

The Insurance Information Institute estimates that insurance claims payments from the four storms combined will total from $22 billion to $23 billion, surpassing the $15.5 billion record set by Hurricane Andrew in 1992. Insured losses from Hurricane Andrew total $20 billion in today's dollars.

For contractors, 2005 will likely hold some pleasant surprises as far as premiums are concerned and some harsh realities for those seeking surety bonding.

"I thought that in 2004 (premiums) would start to decline a little bit, but I haven't seen that yet," said Jason Orear of Nesbitt & Associates in Birmingham. "I know they haven't gone up as much as they did in '02 and '03 and we have seen some companies starting to decrease a little bit."

Michael Henry, president of Great South Corp. in Memphis, agreed that there is a subtle recovery going on, with the industry recouping losses it suffered in previous years. And while he expects premiums to decrease in 2005, he cautions that there are still difficult times ahead.

"One of the problems you're faced with, particularly in areas where the insurance companies are heavily reinsured, is that reinsurance costs are still very high," he said. "That means the cost has to be passed on."

Also, contractors and subs working with exterior insulation and finish systems (EIFS) may find themselves unable to obtain insurance because of past difficulties in its application that allowed moisture intrusion.

"While the insurance company may recognize that the application of the EIFS product has gotten better, we just choose not to insure it because of the long-term approach," Henry said. "So you have a lot of plastering contractors and drywall contractors that do EIFS work, but they are very limited. Most don't have insurance or, if they do, their policy will have a specific EIFS exclusion."

Surety bonds. The south central region's surety bond market continues to be tight, which will likely get worse in 2005. Part of the problem is that there are fewer surety bond companies in business.

"The last eight years, we've seen more mergers, acquisitions and departures from the industry than in the last 30 years," said Billy Painter, producer at Barksdale Bonding & Insurance of Jackson, Miss. "We already know one surety company that is coming out with a third rate hike on bond premiums in the first quarter."

St. Paul's and Traveler's merged in April and Painter said the rate hike represents the company moving to the Traveler's rate structure.

"You're going to see some fallout because of that," he said.

Good financial records should help contractors compete for a bonding company, but the main thing companies are looking for is working capital, Painter said.

"Working capital is king, always has been, always will be, but it is now more so than ever," he added.

Irwin said receivables are a very big question right now.

"We're seeing a trend toward owners paying generals and generals paying subs slightly slower than what they have in the past," he added. "Therefore, the banks are starting to get nervous. I think banks are going to require more bonding on private work."

Henry suggested upgrading accounting systems.

"A lot of these bonding companies are requiring three years of financial statements," he said. "They're requiring a CPA prepared statement. And (contractors) have to have a good working relationship with their bank in the form of lines of credit available to them."

Safety and communication continue to be important.

"There are two key words that we talk to clients about: participation and involvement," Henry added. "They have to educate their staff and employees to be safe. Insurance companies will reward those people."

Irvin said maintaining communication with an insurance agent, bond agent or surety company will minimize the severity of any crisis.

"If you've got a strong relationship with them, you're very honest and sit down with them at least once a year to tell them what they're looking at and what you're doing, they can work through the tough times," he said. "However, if they get hit at the last minute with the surprise of big losses or problem receivables, that scares them."

Painter agreed that communication is important.

"If the people at the insurance company who are rating the risk understand how the insured is looking at it, and the insured understands how the insurance company is looking at it, you create a win-win," he said.