Posted on 04 Apr 2012
Last month we spoke with John Tutera, Senior Vice President – Construction & Completed Civil Works, at Hiscox USA. Formed over 100 years ago, Hiscox is a Bermuda-based Lloyd’s syndicate with operations all over the world. Hiscox USA was established in 2006, and offers a range of specialty insurance products through brokers. Headquartered in New York, Hiscox USA also has offices in Atlanta, Chicago, Los Angeles, and San Francisco.
In 2008, Hiscox USA was looking to establish a construction property group and hired John to do so because of his extensive experience and knowledge of this niche. In fact, John began his career as a civil engineer working for a subsidiary of the construction firm Starrett Housing Corporation in New York, which was responsible for building the Empire State Building. After the construction market crashed in the 1970s, John shifted his career into the insurance underwriting business for contractors and project developers. He worked for Insurance Company of North America (now ACE), Reliance National, Zurich North America, and Lexington (Chartis) before joining Hiscox.
John’s primary focus with Hiscox USA and this division is to address the first-party insurance needs of builders, developers, architects, and engineering firms. Hiscox’s predominant product is Builder’s Risk with seven or eight different products that address everything from homebuilders, a master builders risk program, completed civil works (bridges, tunnels, etc.), and a property package for contractors. Hiscox is involved with homebuilders for track developments in addition to high-end homebuilders that build $10 million-plus homes.
Hiscox operates throughout the United States and also works with U.S. based clients that conduct business internationally. The firm does a great deal of business with clients that perform work on military business, such as in Afghanistan, Haiti, Virgin Islands, Bahamas, and Guantanamo Bay. Products and programs are open to all brokers and wholesalers licensed with Hiscox.
We spoke to John about the construction property industry and the effect economic factors have had on this sector.
Annie George (AG): How has the economy affected this sector?
John Tutera (JT): “The adverse economy between 2007 and 2010 affected the construction industry much worse than any other. This sector experienced a 15-20% unemployment rate. As Hiscox began in this niche in 2009, we were right in the middle of the ups and downs taking place. Needless to say, it was a difficult time getting started at that time.
“Even today with the economy trending more positively and an improvement in financial closings on projects, it’s difficult in terms of expectation. You’re still seeing projects coming through the door that can sometimes take two to three years to close before moving forward. The good news is that we have a lot of backlog sitting there.”
As bank lending became more difficult, John explains that within the industry you began to see some consolidation among construction firms in addition to significant diversification in their portfolio of projects.
“The homebuilding market has suffered terribly,” says John. “As a result, I know of homebuilders that are not only doing home construction but are also in commercial construction. In addition, you have contractors performing operations in difficult industries…moving away from strict construction projects. For example, we have clients that do fabrication of offshore platforms, barges, and tanks. Another client conducts open strip mining operations; some do operations for small hydroelectric plants. You have many more construction firms learning to diversify not only in the business segments with which they’ve been involved but also the industries they’ve been in.”
AG: Are there specific regional areas where you are seeing movement?
JT: “There is a lot of public housing taking place in the Southeast, rebuilding in New Orleans after Hurricanes Katrina and Rita. California is seeing an increase in rental property construction, as more people are looking to rent. This past year, we’ve also seen movement in infrastructure building in Hawaii, California, and New York. The governor in New York has about $5 billion for infrastructure with the Tappan Zee Bridge being a part of it.
“We’re starting to see more activity in power plant construction as well. This area was quiet during five to eight years. Now that there are signs that the economy is improving (although not as strong as in the 2000s), we’re seeing more movement.”
John also explains that many acquisitions have taken place during the last five to seven years. European and South American markets looking for development projects are purchasing U.S. corporations. “Many of them are not only looking to buy companies but are also looking to establish public-private partnerships,” says John. “They’re basically putting together the financing to design and build an operation for the construction of toll roads, prison systems, etc., for example. You have private enterprises now tackling what was once considered government entity projects. They’re looking to capitalize on opportunities to move forward on projects. Again this goes back to the need for more diversification … a contactor is now also considered a designer, builder, and financier, and operator.”
John also explains that U.S. companies are hoping to see more military-based operations.
AG: How are insurance rates doing in this sector?
JT: “Right after Katrina and Rita, rates went up dramatically because of the cat exposure. In the last couple of years, the U.S. has been fairly calm, but the world market has suffered a great deal by global events. You’re seeing ‘CAT’-catastrophe rates and prices beginning to go up now because of the impact on the world market for reinsurance. Clients will buy less ‘CAT’ capacity and take higher deductibles so they can balance expenses to continue operating.
“You’re also seeing classes of businesses with considerable losses seeing rate increases. And revisions in the ‘CAT’ modeling have had an impact on the Gulf States and Eastern seaboard and their pricing.”
For more information about Hiscox USA and its construction specialty division, please contact John at 646.452.2379, or via email at firstname.lastname@example.org.