Consolidation ... What's A Contractor Or Owner To Do?
Or What Does It All Mean To You?

By Mike Dougherty

Consolidation has been a major factor in almost every industry from construction to financial services. Although the potential benefits of consolidation including broader product and services, increased capacity, improved efficiency, and greater systems capability are real, the integration of offices, people, management and business philosophies, underwriting appetite, and egos often create an environment of confusion and chaos. This article addresses the changes occurring in
the surety industry today including mergers, acquisitions, and the turnover of top management and outlines what you, as a construction company executive or owner, should know about these dynamics.

To understand what is driving the consolidation process, it is important to understand the dynamics affecting the surety industry today. The domestic surety and fidelity market is fairly small, approximately $3 billion dollars, and fragmented. The Surety Association of America membership includes more than 125 groups of insurance companies writing surety business in the United States. Only two of these members are separately traded public companies. Most are generally divisions or departments of a broader multi-line insurance operation or at the very least a writer of property, casualty, or specialty business. Accordingly, the surety industry is being affected by the convergence of the entire financial services industry. Banks, insurance companies and securities firms are all challenged by the need for scale in terms of revenue growth, product breadth, and distribution.

... the surety industry is being affected by the convergence of the entire financial services industry.

As an executive of a company involved in two major acquisitions in the last five years, I have experienced the positive aspects of mergers as well as potential pitfalls. From this viewpoint, I'll offer a fairly short overview of key items that construction company executives as well as public and private owners should focus on in the event that a contractor's surety provider is involved in a merger or acquisition.

From a private and public owner's perspective, don't worry. It is important to know that no matter what changes take place within the surety company, any existing contract bonds remain in full force and effect. Keeping informed of changes that are happening within your contractor's surety provider will help you to under-stand issues that may affect your contractor. You will want to know if there are changes in claims paying philosophies, personnel, or procedures.

If you are a construction company executive, you should consider ad-dressing the following key questions when your surety provider is involved in a merger or acquisition.

What's driving the merger?
If the merger is being driven by the property and casualty insurance operation, a contractor or construction company will want to know if there is an existing surety operation and what resources the company is willing to commit to the surety operation. To be successful in the surety industry long-term, a company must be prepared to allocate the capital and human resources necessary to be competitive.

Who will manage the combined surety operation? As with any industry, the executive group of a surety operation is responsible for setting the underwriting direction and operating philosophy of the company. Whether a company will pursue general contractors or subcontractors, emphasize working capital and/or net worth, or consider non-traditional approaches are all a function of the executive team. Determining how the construction company fits in with the underwriting philosophy of the combined surety operation is critical.

Check to see if business philosophies are compatible. Is the new company truly interested in getting to know the businesses of its construction company customers? How willing are the key representatives to look at the unusual or out of the ordinary business opportunity?

Will the combined entity be an industry survivor? For better or worse, the surety industry is, and will continue to experience a quickening pace of consolidation. Five of the top 10 sureties for the calendar year 1990 have merged with other companies or exited the business. Statistics from the Surety Association of America indicate that the top five writers of surety in 1999 controlled approximately 38% of the written premium compared to only 28% in 1990. As you evaluate your surety relationship, or contemplate a new one, the long-term survivorship of the surety should be considered.

How stable is the executive management team? In the past three years, there has been turnover at CEO or Chief Underwriting positions at 12 of the top 15 surety writers as ranked by 1999 calendar year Surety Association figures. How long has the exe- cutive team been in place? What is the company's track record of management stability? What is the company vision and what is the company's commitment to the industry?

Do they understand your market? The majority of construction companies operate in a fairly defined geographic territory. Each region has its own specific attributes that can affect how a construction company does business. Does the newly combined surety operation understand the dynamics of your local or regional market? Do they have a large network of branch offices, or do they take a more regional or national approach? This becomes more important as a construction company desires to increase the level of communication and interaction it has with surety company representatives.

At the heart any successful relationship is the need for timely information exchange.

In addition to asking these key questions, it is essential for contractors to treat their surety relationships with the same level of importance as they would treat their relationships with their bankers. Both sureties and banks are credit providers, require similar types of information, and should be afforded the same level of access. If the construction firm is a large user of surety credit, or if surety credit is critical to the company's success, it is important to take the time to meet with the key leaders of the surety company. The time spent investing in the relationship will be time and money well spent.

The construction business is difficult enough, without the need to become an expert in supporting industries such as surety bonding. With all of the changes occurring, construction company executives need to utilize both inside and outside resources to keep apprised of surety industry developments. In this regard, a contractor should develop a strong consultative relationship with a professional surety agent or broker. A professional agent or broker is invaluable to the contractor in the process of meeting and getting to know the combined surety company representatives. Generally, he or she will have a least some knowledge of the company and therefore, can assist in answering the key questions outlined above, and provide valuable advice on the newly combined oper-ation and its capabilities.

In the end, a construction company's success will be determined by its ability to manage relationships with owners, other contractors or subcontractors, bankers, suppliers, and credit providers. At the heart any successful relationship is the need for timely information exchange, pro-active communication, and a clear understanding of each party's expectations. During times of change, whether the change is related to the surety company's management team or ownership structure, these guiding principals will stand true. Take the time to develop a strong relationship with your agent, broker, and surety company representatives. In times of uncertainty, these relationships will be worth exactly the time and effort you spent building them.

Recent Mergers and Combinations

CNA Surety and Capture Holdings (Western Surety and Universal Surety Company of America)

Liberty Mutual & Employers of Wausau & Peerless

Zurich North American & F&D

Amwest exiting the business

Reliance Surety and Travelers

SAFECO & American States

St. Paul & USF&G

Gulf & Frontier

XL and CGU Surety

F&D & Mountbatten

Mike Dougherty is Executive Vice President and Chief Marketing Officer of CNA Surety, Chicago, IL.

Consolidation ... What's A Contractor Or Owner To Do? Or What Does It All Mean To You?

Consolidation ... What's A Contractor Or Owner To Do?
Or What Does It All Mean To You?