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At Metropolitan Risk, we treat bonds as what they are: guarantees. If you're a business or contractor, we can help bond your project to ensure that it's completed, no matter what situations may arise.

April 2nd, 2011

The 10 Leading Surety Bonding Underwriters

These are the top ten leading bond underwriters as of end of 2009 according to The Surety & Fidelity Association of America .  This list is compiled purely on a total premium written basis in aggregate across the whole country. What this list doesn’t tell you is who is the hot surety market in which state or metropolitan area which can differ dramatically from market to market, surety line to surety line. Travelers might be the hot market in Atlanta for Performance Bonds & Payments Bonds, however in New York it could be a company called Allegany who didn’t make the top ten list but may be writing NY Performance & NY Payment Bonds like crazy.

To find out who the hot surety market is in the New York Metropolitan Area contact a Risk Advisor @ Metropolitan Risk Advisory.

Surety

Companies

Direct Written

Premium

(Millions $)
Travelers $924.2
Liberty Mutual $723.2
Zurich Insurance Group $486.8
C.N.A. Insurance Group $406.1
Chubb & Sons Inc Group $277.0
Hartford Fire & Casualty $181.0
HCC Surety Group $165.2
International & Fidelity Insurance Co $147.1
Ace Ltd Group $109.0
The Hanover Insurance Group $100.2
April 1st, 2011

Understanding How To Read Your Profit & Loss Statement Can Give Your Company A Competitive Edge

Distributing your own company financial data  is a sensitive subject for many business owners.  If you want to obtain a critical bond line or bonding capacity  it’s an absolute necessity.  The two basic choices for a firm are to use their accounting software such as Quickbooks or hire a CPA to put together a formal financial statement.  Many will go unread unfortunately.  After all, it is everyone’s goal to increase sales more than last year and if you did that, you’re doing well, right?  Not necessarily – Gross sales alone cannot tell you everything you need to know and often could mean your actually losing more money than ever. Consider that in their first few years of business Amazon.com had billions in sales but were drowning in red ink, losing more money each quarter.   Understanding and learning to use the basic information found in a Profit & Loss Statement (also known as an Income Statement) can give you that extra edge not only in your industry but with NY Surety  or NY Bonding Companies as well.

What is a Profit & Loss Statement?

In order to understand what a P&L Statement is we will compare it to the more common Balance Sheet.

The Balance sheet is a report on your company’s worth & debts at a specific point in time.  The P&L Statement is a report on your firm’s cash flow over a specific length of time – it could be a week, quarter, year or any other period that makes sense to you.  The P&L statement will not only help you identify key expenditures that require attention but time periods as well; thereby helping you predict future performance.

Key Components of the Profit & Loss Statement

Now that we know what a P&L Statement can do for you, the next step is identifying the major interest points so we can then use the data in a constructive method.

  • Revenue or Sales – is what you receive for your services.  This is the first entry in the income statement. All expenses are deducted from this amount.  The remainder is profit.
  • Cost of Sales – This is generally your cost of goods, direct labor (including subcontractors).  This is the first item deducted from your Sales.
  • Gross Margin – Is the balance deducting the Cost of Sales from Net Sales.
  • Selling Expenses – Direct & Indirect costs you sustain from making the sales – advertising, salespeople salaries/commissions.
  • General & Administrative Expenses (G&A) – all other costs not tied directly to the services you provide – administrative staff payroll, rent, communications and other overhead expenses.
  • Profit from Operations – deducting Selling and G&A expenses from Gross Margin.
  • Net Profit Before Taxes – Considers any other expenses or income that don’t apply to any of the above categories.  If there are no other items, then Net Profit Before Taxes = Profit from Operations.
  • Net Profit After Income Tax – This is the balance after deducting income taxes from your Net Profit Before Taxes – this is your “Bottom Line”

Turning the Data into More Useful and Relevant Terms

We know what the P&L is, we know the key data points – How do we make it work for us?  Below are five tools for analyzing your firm’s profits and performance:

 

  1. Gross Profit Margin Ratio – Calculate your Gross Profit Margin by subtracting the Cost of Services from the Net Sales.  Divide this figure by the Net Sales.

What does it do for you? By comparing your GPM Ratio to that of a previous operating period you can see how efficiently your firm is operating.  If your ratio is lower today than previously it indicates your costs (as a percentage of sales) have risen thus suggesting a less efficient operation.  If your ratio is now higher than a previous period, you are now operating on a more efficient level.   The ratios can be taken for any period of choice – so while you may not see much fluctuation on a year to year basis you may discover seasonal changes of which you may not have been previously aware.

  1. Operating Profit Margin Ratio – Subtract your Cost of Sales, Selling Expenses AND G&M Expenses from your Net Sales then divide this sum by your Net Sales.

What does it do for you? Operating Profit Margin is typically your key source of cash flow.  By comparing your ratio to previous periods you can obtain a good idea of your firm’s health.  An increasing ratio shows an increase in cash flow as a percentage of sales.  *Note* If your Gross Profit Margin Ratio is increasing but your Operating Profit Margin Ratio is not this means your Selling or General Administrative Expenses are increasing faster than your sales.

  1. Net Profit Margin Ratio – Deduct all expenses including income tax then divide this sub by your total revenue.

What does it do for you? By comparing periods (yearly, quarterly etc) you can see if your tax situation has changed.  Additionally since “other income” is included in the net profit, variations may indicate non-recurrent expenditures.

  1. Common-Size Ratios – Every company, even  Home Depot, has a P&L Statement –showing the same basic information.

What do they do for you? By viewing at your P&L as a series of ratios rather than dollars you can easily compare your operations not only to your own prior periods but to other companies as well – even those several times larger (or smaller) than your own.  Every company has a P&L Statement – all showing the same basic information.  By comparing your firm to others, especially those in the same industry segment, you will be able to more readily identify the areas of your operations that are doing well  But more importantly you may be able to zero in on the areas that are not operating as profitably as they could.

  1. Break Even Analysis – Take your Fixed Costs (those that do not fluctuate on sales volume – such as rent, admin salaries, overhead etc..) and your Variable Expenses (those that fluctuate on volume of work (materials, field labor etc..) and subtract them both from your Total Sales.

What does it do for you? If after deducting your Fixed & Variable Costs from your Total Sales your answer is $0 – this means you are not losing money but you’re not making any profit either.  If your number is less than $0 then your firm is losing money and you should begin a detailed examination of where changes can be made to bring you back into the black.  Even if you are turning a profit, keeping an eye on your Break Even Analysis can show you your “cushion” and can alert you to make adjustments before you’re in the red.

A Surety underwriter not only looks to see if a construction firm knows how to do a job but also how profitably the firm is run as well.  By becoming familiar with your Profit & Loss Statement as well as the tools outlined above you not only take control of your business practices but position yourself as a more attractive prospect in the NY Surety marketplace.

Contact a Risk Advisor by calling (877) 874-2155 or by clicking Metropolitan Risk Advisory .  Let us position your company to compete stronger in your native marketplace.

 

April 1st, 2011

List of Bond Companies Issuing Liquor Liability Bonds In New York State

Please keep in mind this is a partial list as of April 1st, 2011 of Bonding Companies that issue  New York State Liquor Liability Bonds that are ACCEPTED by the New York State Liquor Authority. If you need to purchase a  NY State Liquor Liability Bond you may contact one of our experience surety underwriters @ ( 877) 874-2155 or click our link Metropolitan Risk Advisory.

 

Acadia Insurance Company
Acstar Insurance Company
Aetna Casualty & Surety Co
Aetna Insurance Company
Aegis Security Insurance Company
Agricultural Insurance Company
Allianz Insurance Company
Allstate Insurance Company
American Bankers Ins Co Of Fl
American Casualty Of Reading
American Employers Ins Co
American Guar & Liab Ins Co
American Home Assurance Co
American Insurance Company
American Manufacturers Mut Ins
American Motorists Ins Co
American National Fire Ins Co
Atlantic Mutual Ins Co
Bankers & ShipperS Ins Co
Boston Old Colony Insurance
Carolina Casualty Insurance Co
Central Mutual Insurance Co
Centennial Insurance Company
Cgu Insurance Company
Chatham Reinsurance Corp
Cincinnati Insurance Company
Colonial Surety Company
Commercial Union Insurance Co
Continental Casualty Company
Continental Insurance Company
Contractors Bonding & Insurance Co
Contractors Casualty & Surety Co
Covenant Mutual Ins Co
Employers Ins Of Wausau
Erie Insurance Company
Excise Bond Underwriters
Federal Insurance Company
Fidelity & Casualty Co Of Ny
Fidelity & Deposit Co Of Md
Firemans Fund Ins Company
Firemans Ins Co Of Newark Nj
Frontier Insurance Co
General Accident Ins Co Of Am
General Ins Co Of America
Globe Indemnity Company
Granite State Insurance Co
Great American Insurance Co
Gulf Insurance Co
Hanover Insurance Co The
Harleysville Worcester Ins Company
Hartford Accid & Indemnity Co
Hartford Casualty Ins Co
Hartford Fire Insurance Co
Home Indemnity Company The
Houston General Insurance Co
Ideal Mutual Insurance Co
Indemnity Ins Co Of N America
Insurance Co Of North America
Insurance Co Of Pennsylvania
Intercargo Ins Co
International Fidelity Ins Co
Investors Ins Co Of America
Liberty Mutual Insurance Co
London Guarantee & Accid Co		 Lumbermens Mutual Casualty Co
Maryland Casualty Company
Merchants Mutual Insurance Co
National Grange Mutual Ins Co
National Surety Corp
National Union Fire Ins Co
Natl Fire Ins Co Of Hartford
Netherlands Insurance Co The
Newark Insurance Co
New Hampshire Insurance Co
New York Surety Company
Nobel InSurance Company
North River Insurance Co The
Northwestern National Ins Co
Nova Casualty Co
Ohio Casualty Insurance Co
Ohio Farmers Ins Co
Old Republic Insurance Co
Oriska Insurance Company
Pacific Employers Insurance Company
Pacific Insurance Co Of Ny
Peerless Insurance Company
Phoenix Assurance Co Of Ny
Phoenix Insurance Company The
Progressive Casualty Ins Co
Protective Insurance Company
Providence Washington Ins Co
Public Service Mutual Ins
Reliance Ins Co Of Ny
Reliance Insurance Company
Rli Insurance COmpany
Royal Ins Co Of America
Royal Indemnity Company
Safeco Insurance Co Of America
Safeguard Insurance Company
Seaboard Surety Company
Security Ins Co Of Hartford
Selective Insurance Co
Selective Ins Co Of America
Sentry Insurance & Mutual Co
South Carolina Insurance Co
St Paul Fire & Marine Ins Co
Star Insurance Co
State Farm Fire & Casualty Co
Surety Bonding Co Of America
Titan Indemnity Co
Transamerica Insurance Co
Traverlers Cas & Sur Co Of Amer
Travelers Property Casualty
Travelers Indemnity Co Of COnnecticut
Underwriters Insurance Company
United Casualty & Surety Insurance Co
United Pacific Insurance Co
United Pacific Ins Co Of Ny
United States Fid & Guar Co
U S Fire Insurance Co
Utica Mutual Insurance Co
Washington International Ins
Wausau Underwriters Ins Co
Westchester Fire Insurance Co
Western Surety Company
Worldwide Underwriters Ins Co
Xl Specialty Insurance Company

 

March 15th, 2011

What NY Surety Underwriters Look When Evaluating a NY Bonding or NY Surety Line of Credit:

Overseeing Risk :

The surety analyst concentrates on an applicant’s financial and functional historical records to predict future losses or succes. They also like to look at your  business plans and ability to successfully achieve the plan,. What’s the track record been? They also like to look at existence of the buyout plans as well as the  members included. What they are really looking for here is your historical track record. Past performance is an indicator of future results. If that being the case what does your historical record financial and otherwise say about your organization. Remember , a NY Surety Underwriter for all intentive purposes becomes your silent partner. If you can’t walk the walk they must step in at great cost and effort. Thus they really, really , really want to make sure you are worthy of a Bonding line, how much, and for waht type of work?

Changing Possession of Insurance Risk :

You can be financially affected because risks can’t be transferred. Contractors and businesses buy insurance to transfer the risk of loss to an insurance company, the third party. The surety underwriter requires information such as you insurance carrier, policies, coverage terms e.t.c. to make sure risk is properly transferred as it should be.
Protecting the Balance Sheet :

The surety underwriter will focus on your insurance program and make sure that you are gaining proof that others have enough insurance to support their defense and payment commitment to you. Your balance sheet is protected by your insurance on your own company and others who carry insurance. Making sure you have proper risk transfer with your subs is a very critical piece to the puzzle. The surety underwriter will review your master sub contract agreements to make sure they are tight and restrictive while inuring to your benefit. Remember if a loss occurs both the NY Surety Underwriter and your NY Construction General Liability Carrier should be last in line. The subs insurance carrier, by virtue of your master sub contract agreement should be the first pool of capital that responds to most all job site losses. To this end we wholly recommend hiring an outsider vendor to vet the insurance for each and every sub contractor that. They have professional staff that speak the language of insurance , not an assistan Project Manager that knows so very little about insurance  thus getting double talked by the subs insurance broker into accepting a Certificate of Insurance rather than confirming the coverage contained in the sub contractors insurance policy is in congruent with the Master Sub Agreement signed by the sub obligating them to carry the correct insurance coverage. We recommend either the SubShield , orThe Risk Rocket
Financial Assurance
Surety underwriters affirms a bond depending on specific representations in addition to the financial circumstances of the principal. As soon as the bond is released, it can’t be taken back if the principal experiences an uninsured loss. If a surety experiences a loss, it has the right to be reimbursed by the principal and guarantors/ business owners. Uninsured losses financially affect both the principal and guarantors.

Tools to Manage Risks
Risk management tools can help you protect your business financially and create stability in-case of an unpredicted event.

Restricting Compensation
Compensate a party for the events that are able to be manipulated. You can’t control the actions of  compensated party and must try to avoid compensating for the party’s carelessness. Try not to be ambiguous by assuming responsibility for everything and anything. Liability policy acknowledges property damage and injury caused by negligence.

Get Real
Insurance conditions pertaining to your business or those that you appoint to others subsist to defend the compensation plan in the contract. Your liability insurance will respond to stated insured contracts. You have to be rational in your insurance agreements.

Evaluate the Risk
A misconception is believing that only significant value contracts result in great losses. It is in your best interest to evaluate the possible risks and seek appropriate liability limits.

Other Risks
Many contracting companies have many risks and choose to neglect them and don’t evaluate the possible financial effects. Many usual coverages do not include specific coverages.

What to Protect
You must insure what you can’t financially manage to loose. The number of loss costs more than the severity of the loss and the higher your experience mod.

If you suffer with high experience modification and want to find a solution to mitigate your losses, contact Metropolitan Risk Advisory

February 25th, 2011

The Significant Advantage of Bid Bonds

The days of a contractor being able to simply bid a job without solid surety bonding in New York are on their way out.  The economy has burned all of us to some degree.  Everyone has had to tighten their belts – from the banks lending money for projects all the way down to the NY Construction firms and NY Trade contractors.  No one has been immune.  In fact, many have had to close up shop entirely.  According to BizMiner, of the1,155,245 contractor firms in operation in 2006 – 20.37%  had gone out of business by 2008.  Now, in 2011, that number has steadily risen.

The work that is available is becoming harder to get. A contracting firm can no longer rely on their reputation to win contracts.  More firms are bidding the same job including ones that do not have the proper experience with the work involved.  Many are stepping out of their comfort zones and taking on projects they probably shouldn’t just to stay alive.  This has not gone unnoticed by project owners and their lenders.  Both want a return on their investments and have taken steps to tighten requirements for the contractors bidding the jobs.

One increasingly popular method is taking a page out the playbooks of local, state and federal agencies – Surety bonds.  Obtaining a NY Surety line, or NY Bonding line is quickly becoming a necessity to stay competitive.   A viable NY Bonding line tells the job owner two very important things: Firstly, if you have the financial security and experience to obtain the bonding line you are more likely to be able to complete the project without much issue.  Secondly, and arguably more importantly, if something should happen and your firm is unable to complete the work or pay your suppliers and/or subcontractors, the Surety Company will step in to make sure the project is completed.  At the end of the day both the project owner and lenders have a lot to lose if the job isn’t finished.

Contacting a NY Surety Bonding Agent to establish new line or increase your current bonding line is an important first step before bidding that next job.  Many projects now require bid security , or reatianage – typically 10% of the contract amount bid.  This can either be provided as a check in that amount , , or as a bid bond.  While it may seem easier and quicker to put up your own funds as collateral for the bid security, it is not the most prudent option.  You are tying up your own funds that may be needed elsewhere and while 10% may not seem like much, if you’re bidding on, or working on six, seven or eight figure project – that security can suddenly become a harder nut to swallow.  If have several bids out at once, you can have a substantial amount of your available funds and/or credit tied up that have been applied to reinvestment into your firm or set aside for emergencies.

Having a Surety Bond line set up prior to bidding a job allows you the financial flexibility of using bid bonds.  Once a line is established, a bid bond can be approved in about 24-48 hours, and in some cases that same day.  Bid Bonds are issued at little to no initial cost to you thereby keeping your own funds available to you.

Another important factor in setting up your surety line with your NY Bonding Agent prior to bidding is that it could greatly reduce the time you need before you are able to begin the work.  Once approved by the Surety Company, a bid bond becomes a guarantee that payment & performance bonds will be issued should the contract be awarded.  The Payment & Performance bonds must be in the owner’s hands before any work can be started.

Conversely, just as job owners & lenders have tightened their requirements, so too have Surety Companies.  The time, amount and viability of information needed to establish (or increase) a bonding line has increased substantially. As such putting up your own funds as collateral for a bid affords no guarantee that a bonding line can be established and payment & performance bonds obtained prior to the scheduled start date.   If this should happen, the job could be defaulted to the next highest bidder or re-bid entirely and your security retained by the owner for their trouble.  You lose your cash, your reputation is soiled and it all but ensures that you will not be allowed to bid another project for that owner again.

Establishing a NY Surety Line, or a NY Bonding Line can give your NY Construction Company a significant competitive advantage against your competition. Further it allows Best Practice NY Construction firms to better and more efficiently deploy their critical cash resources. We welcome your phone calls, and inquiries as it relates to obtaining or increasing a NY Surety or NY Bonding line . We encourage you to  contact a Risk Advisory at Metropolitan Risk Advisory for all of your NY Surety or NY Bonding needs.

February 22nd, 2011

NY BONDING ALTERNATIVES

Below is a list that breaks down the advantages & disadvantages for : Completion Guaranty , Letter of Credit, Sub Contractor Bonding , Sub Contractor Default Insurance, Contractor Payment & Performance Bonds. Hopefully you will find this useful. For more information contact Metropolitan Risk Advisory for a free consultation on obtaining or increasing your surety line. To better view the write up, click on the actual image to blow it up.

 

NY Bonding Alternatives

February 20th, 2011

How To Better Position Your Company Financials To Improve Your Bonding Capacity

Many NY Construction Companies , and the Accountants that advise them have overlooked a very powerful tool in securing or augmenting bonding capacity. The tool I speak of is Subordinated debt to help secure surety credit. Readers of this article will get a better understanding Subordinated debt, and how it may be a useful tool as you look to get an initial bonding line , or raise an existing one .

If you have been in the bonding market for even a short period of time you have seen NY Surety Underwriting tighten, bonds rates have increased, and bonding capacity has diminished considerably since the financial market meltdown. The good news is that there is some capacity coming back into the market in the form of surplus insurance company capacity, however their appetite for risk in deploying that capital has tighten which is why properly positioning your companies financials is so critical.

Focus On Relationship

In a previous article title THE BASICS OF SURETY CREDIT , I spent a lot of time talking about how important the relationship is between the Surety & Obligee (You). I espoused that the relationship should be viewed like any banking relationship, a silent partnership if you will. A NY Surety , like a  bank has the ability to really help propel a well run company by providing the financial fuel necessary for growth. Beyond the numbers, transparency, timely and detailed communication builds trust, which can be critical when your company runs into a tough period.

Increase Your Equity Investment

Let’s assume we have nailed the relationship component of the program , and are on solid footing, however your companies financials aren’t as robust as you would like to support your NY Bonding Line, or NY Surety Line. One option is to infuse the business with additional paid in capital or increasing your equity investment basis in the company by depositing additional funds  to give your balance sheet financial muscularity.

Before you do this please consider the following: If you increase your paid in capital through outside investors , you will have in all probability have diluted your current ownership position which may be less than ideal. Additionally if you company is a “C-Corp”, the additional paid in capital will be subject to the double taxation rule, as ‘C  Corp’” are taxed at both the corporate level , AND the personal level if capital is paid out in the form of a dividend. Before you pull the trigger and jump to the quick, please consult with your accountant or financial advisor.

Using Subordinated Debt As a Tool To Increase Your NY Bonding Capacity

Thanks for staying with me so far and not jumping over to Utube , so here comes the good stuff. Instead of paying in additional capital to the company to increase the balance sheet, LOAN the company the funds. Don’t stop there as we are not finished; most NY Sureties will treat shareholder loans to the company as both a long term liability, and as a capital investment IF THE LOANS ARE SUBORDINATED TO THE SURETY. Translation if anything goes amiss the Surety has dibs on that “SUBORDINATED LOAN” before you do, which means you lose the “investment”.

By using this financial mechanism you accomplish two goals in short order;

  1. You increase your balance sheet to a position consistent with your goal of increasing your bonding line.
  2. You avoid the double taxation if you are a C Corp, diluting your investment.

Preparing The Agreements For A Subordinated Loan

Referencing the Surety Association of America there are 2 standard types of Agreements that may be used to properly execute the transaction. The difference between the two contracts, the “Special” form applies to bonds for a single contract, whereas the “general form” applies to all bonds before and after the effective date of the agreement. It’s been our experience that most sureties prefer the general form as it’s broader applicability contractually makes it a more efficient financial instrument from the NY Surety Underwriting, and NY Surety Claims handling perspective.

Critical Contractual Provisions

  • The Creditor ( typically the business owner / person who loaned the money to the NY Construction Company) , subordinates or sits in the 2nd position to the NY Bonding Company, or NY Surety Company. In effect they sign away all primary rights to the loan or capital infusion against the construction company for losses the NY Surety Company may experience as a result of providing the bonding line.
  • The Assets of the NY Construction Company are paid out to the NY Surety Company before they are paid to the creditor/ business owner.
  • The Contractor & Creditor agree that the debt will not be extinguished until the bonded obligations have been satisfied and released.
  • The Creditor assigns to the NY Surety Company it’s rights and claims upon the debt should a bankruptcy or insolvency occur on the part of the NY Construction Company.
  • Lastly the creditor agrees that any breach of the subordination agreement all property, cash and cash equivalents received by the creditor will be held in separate trust on behalf of the NY Surety Company.

Surety Decision Points

By no means is this a done deal. Just because it can be done, it’s critical that the Obligee ( NY Construction Company ) , Creditor ( NY Construction Company Owner) , and the NY Surety ( NY Bonding Company) providing the line come to an agreement that IF the Obligee & Creditor take the aforementioned steps , prepare the provisions and agreements that are acceptable to the NY Surety Company , that the goals of the Construction Company are attained, which is either a higher NY Bonding line, or obtaining an initial bonding line in the first place.Additionally the NY Surety Company will also look at the following as critical decision points in determining that Subordination of Debt is an acceptable mechanism.

  • Historical Performance of Construction Company - In analyzing the financials of the construction firm it’s revealed that the construction company has not derived a profit from several of the last construction projects they worked on, then the potential solve is not depositing more capital in the company, thus the surety may take a hard view on this and not approve the bond line or additional line.
  • Unique Considerations – The NY Surety Company is more likely to look favorably upon the subordinated debt as a means to strengthen the balance sheet where some unique considerations are in play such as a temporary issues like a large backlog of work, investments into equipment which may have eroded the companies financials , stock repurchase, large bonus payouts or expansion of company personnel , or perhaps acquisition.
  • Capital Source : Typically loans from banks, or other debt is not looked upon favorably, however excess cash from the Owner Obligee may be. It’s also common that contribution of salary, bonus, profit distributions, sale of assets , or dividends is used to support the subordinated debt position. The NY Surety may also used in their analysis promissory notes , however they don’t love this due to the administrative burden it presents to the NY Surety.

In Summary :

One of the most important variables in the NY Surety underwriting process is that the construction firm have adequate capital At Risk consistent or relative to the scope of work or project specs. Each NY Surety Company defines this ratio differently, some are more aggressive and will allow a larger spread, others are more strict and want to see a much smaller spread in the ratio.

Using subordinate debt as a tool to augment your NY Construction Companies financial position is just one technique. Refer back to this blog periodically for more NY Bonding tips and intuitive ideas to achieve your Surety goals. We also encourage you to speak to a Metropolitan Risk Advisor to assist you in achieving your company’s business goals. To contact a Metropolitan Risk Advisory PLEASE CLICK HERE.

A special thank you to R. Neuschaefer who I met years ago at a NY Bonding conference who shared this idea with me. It made perfect sense. He was happy to share it with me, and I with you, which is what’s it’s all about in the long run.

February 13th, 2011

The Basics of Surety Credit

Why has the NY surety marketplace changed  and have become so tight ? With significantly higher loss ratios for the surety industry in the last several years and prospects for still worse results ahead growing in large part out of the Banking Crisis, there is a move by both reinsurers and primary surety writers to return to more consistent and fundamental underwriting standards. Surety premiums are a very minor share of the revenue base for most insurers. The business, however, holds significant exposure for large losses as defaults like Enron  and others have  underscored.

The insurance companies who are the “parents” of most surety operations were already suffering from effects of a prolonged soft market and the affects of the banking crisis. Therefore, if you are an insurance executive managing risk, you may view the surety business as a low revenue business with a potential for big losses. Your choices appear quite clear: exit the line entirely; restrict your writings of this line; and/or implement sound underwriting standards. That is what is happening and it very likely will affect your current bonding arrangements.

The days of easy underwriting are gone:

Even without the financial melt down, their was an apathy as it related to the underwriting of the surety industry. In years past it’s  almost as if anyone could obtain a bond regardless of experience, character, or financial acumen. Such an environment may have generated additional surety premiums for cash starved  insurers, but it was also a disservice to the many surety principals who earned their surety credit,

This project was made possible by a solid surety relationship

resulting in a dilution of the bond issuance itself. It was also a dilution to owners, general contractors, and other obligees that relied on the surety’s much touted “prequalification” process. Therefore, bonding  and surety programs that far surpassed the contractor’s financial base or experience, the unwarranted elimination of personal indemnity, or continually lower bond rates has  come to an end.

Self-Assessment :

How do we navigate this new surety environment when their has been such a tectonic shift? In our estimation we believe the first thing should be to perform a self-assessment litmus test. Has your bonding credit grown at a much faster rate than your financial base? Has the surety released the personal indemnity of the owners and or owner’s spouses?  Has your bond rates decreased several times in the last few years?

If the answer to one or more of these areas is “Yes,” then you may expect some change(s). To the extent that you earned each of these benefits, you should work with your NY Bonding Agent and be prepared to support your position. Surety insurers want to continue their business relationships based on solid fundamentals, and the burden will fall on you and your agent to demonstrate that you meet those new standards.

The Relationship

The perennial challenge is how to make your account more attractive to a surety underwriter.  To better help or clarify that challenge, it’s essential that you as the obligee understand what it is the bond underwriter does.

The surety becomes your partner and is guaranteeing your contractual performance on a particular project, or many projects. The surety is effectively becoming a silent business partner. When it approves your bond, it says to the world that it believes you have the capacity in every respect to complete the bonded contract as stipulated. Like any partnership the foundation must be  built on a mutual respect and transparency . If  you view the bonding relationship  as a partnership, then the responsibility to each  of the parties becomes quite clear.

Transparency :

What a surety looks for in their ideal client partner is full transparency as it relates to your past and present operations, including any affiliated business activities that may impact the operations and/or financial status of the obligee, (you). You have a pretty good idea of what events will impact the financial result of a given project, and you know in the context of your overall backlog how this may impact your company’s financial results.

The surety does not want or need a day-to-day accounting on each job, but if a major subcontractor defaults or there is a payment problem, it is probably a material event that should be shared with your agent and the bond underwriter. Bonding companies can deal with bad news, but what can really impair the relationship are surprises.

The surety’s approval of a particular contractor’s project and/or overall work program is made based on certain financial and operational parameters. If those conditions change for any reason, the rules of transparency and the surety partnership  require full and timely disclosure.

Recall that what really caused the downfall of many contractors, and financial institutions  was the  failure to provide full and timely disclosure of its activities and financial position. That resulted in a failure of confidence in a business that relied heavily on trust. Your surety relationship is also based on trust, and if either party breaches that by failure to fully and timely disclose relevant information, it destroys that relationship. Bottom line: don’t hide or manipulate the data. Neither party should ever surprise the other. Strong , timely, transparent  communication is essential.

Actionables:

With a tightening of the surety markets, what are the critical actionables  you could  do to improve both the  your bonding line and your business? Begin by retaining a professional  NY Surety Bonding Agent who will take the time to understand your business and help you to communicate your story with an appropriate surety market. You should retain a CPA who is active in the construction accounting arena.

You also should preferably secure an annual certified audit with adequate supporting schedules and footnotes that fully disclose and communicate your operations and financial picture. Review level financial statements may still be acceptable for smaller accounts, but my expectation is that sureties will increasingly demand fully audited financial reports. Compilations or in-house statements are of little or no value except perhaps for interim statements and then only if they reasonably “mirror” the format of the CPA prepared statements.

Personal Indemnity

The issue of personal indemnity may become a discussion point. Depending on the financial structure of your company relative to work program, how much money the owners regularly take out in the form of salary and bonuses, the amount of net worth outside the company, and/or the length and quality of your past surety relationship all will bear on whether personal indemnity is appropriate.

Some NY sureties will consider a homestead rider that would exclude the indemnitor’s primary residence. Some may be willing to exclude specific assets, such as monies inherited by the spouse. Some may consider a personal indemnity cap limiting the financial exposure of a personal indemnitor. In the case of Sub-S entities, the surety may consider a Net worth/Working Capital Maintenance agreement to maintain a specific level of NW/WC in the corporation or personal indemnity triggers.

Spousal indemnities are nearly an absolute requirement if the owners are married and have mingled assets. It’s important that this is communicated with your spouse. Many sureties won’t issue a bonding line without this.

Bank Line

It’s critically important to have a bank line of credit that supports your business plan. . While revolving bank lines create no working capital per se, they do provide a facility to obtain cash to meet anticipated or unforeseen shortfalls in cash flow. On a relative basis, contractors have always been considered more hazardous than most other borrowers. Bank of America announced awhile back that they were exiting all contractor bank lines of credit nationwide.

The number of banks willing to provide unsecured revolving line of credit is also growing more limited. Nonetheless, the surety views an unsecured revolving bank line as fundamentally  critical in risk management. Without a bank line, the surety may be one step closer to becoming your bank of last resort in the event of a cash flow problem. Having a bank line is important for your fiscal management and to enhance your relationship with the surety.

Cash Is King

Acknowledging the economy has become more difficult, the ability to acquire new profitable work has become   more difficult, and the financial condition of NY owners and NY subcontractors  more precarious, you would do well to manage your business to enhance your firm’s working capital position. A contractor with a strong net cash position may be able to fund problems without turning to third parties, e.g., the surety , banks, or others.

The adage “Cash is king” becomes more true during difficult times. Therefore, you may expect that with a tightening surety market, your working capital level and balance sheet composition will receive more scrutiny.

Conclusion

In summary the more salient points of this article I would say that the three most important fundamentals to a solid business partnership  with your surety are:

* Understand, appreciate, and support the surety partnership . Understand it truly is a partnership.

* Encourage transparent, timely, and accurate  communication with the surety.

* Effectively identify, allocate , and mitigate your business risks.

If you understand, and appreciate these points , you are well on your way to establishing a solid bond line, or even better increasing an existing one. To obtain a bond line, or make an inquiry on how you may get started on the process contact a Risk Advisor at Metropolitan Risk Advisory.

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