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Our Surety Agents Look Good

* Tuesday 6/19/18: We received an urgent submission.  A new client needed a $1 million final bond. We reviewed the file immediately and sent back our “road map to success.”

Complicating factors:

  • New file.  Short fuse.  All the basic analysis, credit reports, financial evaluation, indemnity agreement, etc. were needed.
  • Another surety had issued a bid bond, but because of unexpected developments, was unable to provide the final bond
  • There was a bid spread
  • The job specifications needed clarification regarding the surety obligation and possible requirement for a maintenance bond
  • Company year-end FS was a draft
  • Analysis regarding the collection of FYE Receivables was needed
  • Two other sureties reviewed this opportunity, causing the clock to run down for the client

* Wednesday 6/20: Agent provided additional info.

* Thursday 6/21: An engineering evaluation of the project was completed, including the adequacy of price.  Wednesday evening and Thursday, the underwriting review was completed. Bond is approved!

*Friday 6/22: Bond is issued and in the hands of the agent and contractor.

Actual agent comment: “Thanks so much!  Great job!”

Making our agents look good.  That’s what we do.

We are the national contract bond underwriting department for Great Midwest Insurance Company, a corporate surety with an A-8 rating.  We can help you solve your next contract surety need. KIS Surety   Call 856-304-7348

Secrets of Bonding: #163: Financial Statement Fraud!

You know the old adage, “Financial statements don’t kill people, people kill people.”

While it’s true there can be misrepresentation and deception in a financial statement (FS), the document is not inherently bad, it is the poor intentions of the preparer or company that is to blame.

As credit analysts, we always review and rely on FSs when underwriting surety bonds. We know there may be attempts to mislead our judgement or even downright deception. But the need to evaluate the financial report is unavoidable. It is considered a valuable “report card on the quality of management.”

There are three levels of financial presentation by Certified Public Accounts (CPAs):

Compilation – a properly organized report where the numbers have not been verified or evaluated by the CPA

Review – includes some checking “Review” of key elements

Audit – is the highest level and includes the CPA’s statement that they have checked and believe the numbers are correct

The reader of the FS is entitled to certain expectations: A candid and complete presentation that informs the reader. Are they entitled to more than that? Does the reader sometimes expect too much?

Let’s consider what the FS actually says, and what it doesn’t… 

The Balance Sheet

This shows assets and liabilities. It describes the dollars in the company (assets) and who owns them (liabilities and stockholder’s equity). You know many of the normal entries: Cash, accounts receivable, accounts payable, inventory, bank debt, the net worth / stockholder’s equity section, etc.

The balance sheet always has a date, such as 12/31/2017. It shows the status of these accounts on the one day. Credit analysts calculate the Working Capital aka Net Quick (NQ) which is considered a measure of short term financial strength. You find the NQ by subtracting current liabilities from current assets. When the bond underwriter has the NQ number, it can then be incorporated in the decision making.

“What size bonds will be approved for this applicant?”  “How much total capacity can they be allocated?” The NQ figure becomes a benchmark that is used for the remainder of the year.

For many analysts, this one number carries a huge importance for the following 12-15 months.

Let’s move forward one day in time, to 1/1/2018. “Happy New Year!” and let’s check the bank account. Some money has come in! The accounts receivable and cash have changed. Other elements are also different and so, if we calculate the NQ based on the 1/1 balance sheet, the NQ will probably be different from 12/31. Again, that’s because the balance sheet shows the state of these accounts on ONE DAY. It is always changing!

The reality is that the working capital number is only correct for one day, then it is subject to revision. This is not to say the number is not important or relevant. And certainly decision-makers must have annual benchmarks and a method for their determinations. It is very important, but so are other elements.

Financial Statement Fraud

The most common FS fraud is not committed against us by others. It is the self-deception we commit by over relying on these “one-day numbers.” To do so is to miss the big picture!

Underwriters love to see a big cash account sitting on that top line (of the balance sheet). But that’s a one-day number. Isn’t it even more important to determine the average funds on deposit for the prior six months or year? Many analysts fail to ask for this.

Accounts Receivable and Payable – here is another key area where the “one-day number” can easily be given a historical perspective. Aged schedules of A/R and A/P are easy to obtain and they give a view over more than one day. These documents are not automatically included in FSs, and underwriters may fail to ask for them.

Another example: A broader understanding of the banking relationship is accomplished by looking beyond the balance sheet bank debt.  A reference letter can reveal if the client has bounced checks, broken loan covenants or defaulted.

Conclusion

As readers of these documents and analysts, let’s not cheat ourselves by over relying on the balance sheet or thinking it is more than a one-day snapshot. It should be scrutinized and viewed in harmony with other key underwriting factors such as mid-year financial reports and supporting documents.

In this manner underwriters can make realistic, well-informed decisions.

Steve Golia is the National Surety Director for KIS Surety Bonds LLC, MGU for Great Midwest Insurance Company, an A-8 carrier specializing in contract surety.

The company provides Performance and Payment Bonds with speed and creativity, up to $10 million per bond.

Contact us today and let’s discuss how we can help – even if others have failed. Call 856-304-7348.

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Secrets of Bonding #159: Beware the False Asker

Surety Bond Producers have one main goal: produce the business and move on.

You know there is a process when submitting a surety bond for approval but hate that sick feeling when the underwriter comes back with a ton of questions.  Let’s face it, customers just want to complete the transaction and get on with their lives.  They have more important things to do than fill out forms, scan documents and complete applications.  You know you’ll get push back if you bug them.  

What’s more, the questions may result in a dead end, a declination!  Did the underwriter already form an opinion?  Did they already decide the account is not for them, but just want to complete the file… to have a complete file?

We will call such a person the “False Asker” – an underwriter who puts you through the paces, just to say no at the end.  They never really wanted to write the bond and are developing the file under false pretenses.  They send you on a fools mission.  It is 100% a waste of your time!

Or just maybe, questions are the opposite…  The bond underwriter thinks the account may be a fit, but just needs to check a few more points.  This could be the first step on a successful journey. Here’s more: There may be something wonderful about the questions good underwriters ask.  Let’s explore.

When reviewing the file, the analyst marks off elements of strength and weakness.  For example, the company is 10 years old, but current management has only been in place for a year (a plus and a minus).  Or maybe the net worth is strong, but debt is high resulting in too much leverage.  If there is more good than bad, an approval may be in order – after additional development. 

Now comes the gift: The key points, the underwriting questions, are an insight to the decision making process.  They are keys to the underwriter’s mind.  With favorable answers, authorization may ensue. The questions chart a course that the producer could imagine but not confirm.  In this manner, the underwriting questions are priceless, the keys to success.

Remember, there is room for frustration on the underwriter’s side, too.

Q. Which of the underwriting questions are optional? You know, the unimportant ones?

A. They are all important.

Sometimes we ask 5 Q’s and get back 3 A’s.  Then re-ask the 3 and get back only 2.  It’s like beating your head against the wall…

It all comes down to this:  Beware the False Asker.  You must avoid that person who churns the file and wastes your time.  Every producer has been through it.  You answer questions for two weeks and get a declination they could have figured on day one – and not wasted your time.

A good underwriter only develops an account they intend to support.  They like it and want to proceed, but must tidy up the file. Their Qs are a gift, the path forward, the key to your success if you follow through willingly and diligently.

Judge all of us by our performance:

  • Good underwriters are prompt. For example, our office provides a same day response on all submissions.
  • Are our responses concise and easy to understand?
  • Do we offer a prompt declination or clear path forward, defined by the underwriting questions that will get the deal done?

A good surety underwriter can be your important ally and business partner.  Choose us carefully based on performance, and always Beware the False Asker!

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000. 

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

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Secrets of Bonding #158: Booby Trap Bond

Booby Trap Performance Bond

“The Surety, for value received, hereby stipulates and agrees that if the Contractor has been declared in default by the Obligee, and there has been no uncontested failure, which has not been remedied or waived, of the Obligee to pay the Contractor as required under the Construction Contract: (i) The Surety shall promptly remedy the default…”

Waaaa?!  We read this over and over to understand the implications. Is this just another boring bond form, or is there a Booby Trap, an elaborate effort to gain an advantage over the surety?

Every bonding company has their own standard Performance and Payment Bond forms. We prefer to use the AIA A-312 unmodified P&P bond. It is a well balanced, widely accepted form. Whenever we receive a special bond form, we must review it carefully. Why did the obligee spend the time and money to devise it? There must be some advantage – for them.

Last week we received an obligee’s mandatory bond form on a private contract and a key phrase is stated above. Our client is the GC / prime contractor. Sometimes the unique bond forms are not too bad. Let’s pick this one apart. Maybe you’ll run into it some time.

This language is very important because it concerns the Obligee’s responsibility under the contract. In order for them to be entitled to make a performance bond claim, they must fulfill their end of the bargain, which is to PAY for the work. Is a bond claim for lack of performance reasonable if the Obligee has failed to pay the contractor? Of course not! The contractor can’t work for free. 

What are the implications of the wording in that special bond form? Let’s use the A-312 as a benchmark. (Owner means Obligee) It says:

“If there is no Owner Default under the Construction Contract, the Surety’s obligation under this bond shall arise after…” And in the definitions it goes on to say:

“Owner Default. Failure of the Owner, which has not been remedied or waived, to pay the Contractor as required under the Construction Contract or to perform and complete or comply with other material terms of the Construction Contract.”

Pretty simple. If the owner fails to pay for the work, and then makes a bond claim, the surety has an appropriate reason to deny the claim. So how does it work in the Booby Trap Bond? Instead of the convoluted lawyer talk, let’s turn it into plain English. It says…

The Obligee is not guilty of failing to pay unless:

  1. They neglect to declare the Contractor in default and,
  2. There is an unremedied or unwaived failure to pay the Contractor that the Obligee has not contested

Ugh… that last part! Assume that in every case, the Obligee will contest an allegation that they have failed. When they do, the surety has no claim defense even if the contractor has not been paid.

What a trap for the unwary bond underwriter! It would have been more fair if the bond just said “Obligee is entitled to make a bond claim even if they don’t pay for the work!” But then people would understand…

Special bond forms can be benign or Booby Trapped and our underwriters review every one.  Good underwriting protects the bonding company and the Contractor from such excessive risks!

Summary: We have a lot of underwriting talent over here. But what good is it if we don’t produce any bonds?  Well, we do!

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.  We are entertaining new agency appointments at this time!

If you have a contract surety case that needs talented underwriters, now you know where to find us 24 x 365!  Call: 856-304-7348

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Flat Tires and Surety Bonds

“It’s only flat on the bottom!”  When you heard that, did it make you feel any better?  No… a flat tire is a real PIA. Nothin’ good about it!

What about “Flat line?”  Heaven forbid!  That’s real bad.

When I was a kid we had an expression, a “Flat leaver.”  That was a person who left you flat. Don’t like that either.

You can probably think of other examples: Flat footed, flat broke, flat on your back…

BUT! When it comes to surety bonds, flat can be good. Look at how major sureties typically make their decisions.  There is the field person in the branch, plus a supervisor, and a bond manager.  Then there is a home office underwriter, maybe two.  Together this “committee” makes major decisions.  Problem is, they don’t actually work as a committee, they process the decision sequentially.  Each person looks at it, then sends it on to the next.  That’s a great system, unless you need an answer in this lifetime!

This is an example of a decision making structure that is not flat.  It is multi-layer, multi-person, each with an “in” box and other priorities.  Getting a decision will take a couple of weeks.

When it comes to surety bonds, you want flat.  You want a structure where decisions are made promptly and efficiently.  Then everyone wins.  You get the answer you need, when you need it.  Isn’t this how the system is supposed to work?

KIS Surety / Great Midwest Insurance Company (GMIC) is your large capacity, most flat market.  We process decisions fast.  All new submissions receive a same day response.  Productive, creative, expert underwriting that has produced superb results for years.

Do yourself a favor.  Take a step up to surety bonds the way they should be. KIS Surety Bonds, LLC is the exclusive underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.  We have in-house authority for Bid and Performance Bonds up to $10 million each.

Contact us for creative solutions and a same day response: 856-304-7348

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Secrets of Bonding #153: The Last Hurrah!

 

Birth and death.

Ebb and flow.

The world has a natural rhythm that affects all things, including the surety business.

So here it is, The Last Hurrah. We always knew it would come someday, and now it’s here. It is the annual cycle we experience in the world of Bonding.  The final big event of the year is approaching after which it’s all holidays, gift shopping, family visits, food and not too much business getting done.

The big day is just a couple of weeks off: September 30th.  It is the last day of the federal government’s fiscal year.

For government contracting officers, this day means “use it or lose it.” Federal funds that have been earmarked for certain projects must be used by 9/30, or the funds (heaven forbid!) go back to the treasury department.  Every year this results in a rush of contract awards on or about 9/30.  Some of our clients have received contract awards as late as 11:45 pm on the night of September 30. Crazy!

How does all this affect YOU? It could mean there will be an urgent need for performance bonds. There is always a deadline by which they must be filed.  Contractors and their surety agents must be prepared to respond.

Enter Great Midwest Insurance Company (part of Houston International Insurance Group.) We are an A-8 rated carrier (A.M. Best), licensed in all states and D.C.  Our surety department specializes in Bid and Performance Bonds for contractors.  This year we can help by providing Subcontract Bonds on federal projects. We support a wide range of construction trades, and a variety of underwriting situations with bonds up to $10 million each.

Don’t be depressed about the Last Hurrah.  It can be a great end to a successful year and besides, you’ll get another one next year!

KIS Surety Bonds, LLC is the exclusive underwriting department for Great Midwest Insurance Company.  Contact us for creative solutions and A-rated bonds.  Our underwriting experts guarantee a same day response.

For bonds from Great Midwest Insurance Company call: 856-304-7348.

Secrets of Bonding #150: Surety Bonds Are Exactly Like Insurance

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Surety Bonds are exactly the same as Insurance.  They are like… twins!

If you are a follower of the Secrets blog, this statement may surprise you.

Go all the way back, way back to article #1 in this series published in February 2014.  It was titled “Bonds Are Not Insurance.” OK, if you read it, so when did they start being like insurance?

Question: Does this sound familiar?

Your contractor client calls up and tells you they have just won a new contract and are ready to sign. “We need to provide an Insurance Certificate.”

What would be your very next comment? Would you say “I’ll transfer the call to Bertha who issues our certificates!” Or would you ask for a copy of the insurance specification and the new contract so you can review them?

You’d probably do the latter. You need this to determine if there are any special requirements, onerous clauses and to determine the coverage levels needed.  Before issuing the certificate, you may need to modify their program to be compliant.

Let’s compare this to Surety Bonds. When an agent colleague sends over a bond request form (or bond app), we always ask for the written bonding requirements, any mandatory bond forms and a copy of the contract if it is available.

We do this for exactly the same reason as with insurance. We want to understand what the customer needs, and be sure what we provide fulfills the requirements. It’s just good business.

Admittedly, bonds are still very different from insurance – except for this common underwriting step. You agree?

Now let’s go a step deeper.  If we will always review these supporting documents to accompany each bond request, what are we looking for when we get them?  What are the hot buttons?

Bond Forms

It is important to note if bond forms are included in the specification.  If they are, you must determine if they are mandatory to use, or if equivalent or standard forms may also be accepted.

In contract surety, all bid bonds are pretty much the same.  However, Performance and Payment bonds can vary great depending on the obligee (protected party).

For example, on all federal projects, the bond forms are the same, and using them is mandatory.

The American Institute of Architects (AIA) has developed a standard set of bond forms that are well accepted by all parties and commonly used in construction.  You may find these are stipulated.

When it comes to private contracts, such as a subcontractor working for a general contractor, the bond forms can be anything.  It might say AIA forms, or they might invent their own P&P bond form that is mandatory. You need to know!

Surety Credentials

The standard for the bonding company could be as simple as “the surety must be acceptable to the obligee.”

However, there can also be licensing and rating requirements that must be adhered to.  A license issued by the local state insurance department could be required “a bonding company authorized to do business in New Jersey.”

A minimum size and strength rating from a rating bureau like A.M. Best could be indicated.

Along similar lines, a surety listed on Circular 570 (a federal approval list) is not uncommon.

Conclusion

There is no way to assure your client has exactly what they need other than to review the requirements. Failure to provide exactly what a client needs can lead to embarrassment, loss of a contract and one disappointed “former” customer. 

Bonds are NOT the twin of insurance, but the underwriting has some common elements, namely the need for certainly when providing the correct coverage issued by an appropriate carrier.  Get the supporting documents and read them. Discussion with the client and underwriter may be appropriate. 

In both bonds and insurance, this procedure protects your E&O, assures your professional performance and leads to stronger client relations.

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

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