working capital

Secrets of Bonding #166: Meet the Weatherman

Tonight’s forecast: Dark!

We like to joke about the TV weather team: “I wish I had a job where I could be wrong 50% of the time!” *  But in reality, we still tune in and watch.

   Question: Is a surety bond underwriter just like a weatherperson?  How are they similar?

Both are paid to make predictions.  They gather and analyze information: “Crystal ball gazers.”  There is a hope / expectation that they will achieve some degree of accuracy.  Whether you are forecasting the POP, or the completion of a construction project, isn’t it just about the same?

You know forecasters use computer models.  They have the National Weather Service and there are Canadian and European Models.  They could just put that up on the TV screen!  We don’t really need the “local weather talent,” do we? 

What about bonding? Many sureties already use computer based programs.  These provide instant or quick answers on surety bonds that fall into certain categories.  Is that all we need?  Should we get rid of the Surety Underwriter / Weatherman entirely?  We say “No!”  Here’s why…

  • The Underwriter does more than predict the future. A good underwriter contributes to the outcome.  Their efforts positively affect many people. 
  • When bonds are approved, the bond agent makes money.  The construction company achieves new revenues. So do their suppliers and subcontractors.  Think of the ripple effect!
  • The bonding company and their reinsurers make money. 
  • Presumably something of value is built for the owner; a useful asset is created. 

Really good underwriters are more than “yes / no” decision makers, they are facilitators. The experienced underwriter sees a path forward that may not be obvious to others.  How can this deal (performance bond) be supported while protecting the interests of the surety, the guarantor of the project’s success?  Here’s where knowledge, experience and attitude come in. 

Does the underwriter want to make the deal happen, and have the know-how to do it?

These high level underwriters aren’t weathermen, they are Rain Makers!  They work actively to produce profits and success for all they touch. Without their expertise, projects would not be supported and built.  Doors get opened and companies reach new, higher levels of mutual success. 

This is a combination of science and art with a dash of experience.  And you don’t find it too often.  But when you do, grab an umbrella and watch good things happen.

KIS Surety is the exclusive national underwriting department for Great Midwest Insurance Company, an A-8 rated carrier.  Call us with your next bid or performance bond. 856-304-7348 

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

*  Actually, weather forecasters average more than 80% accuracy.  Good job guys!

Secrets of Bonding #164: The Phantom of the Underwriting Department

When it comes to surety bonds, you know your underwriter. You know the process.  There are questions and answers, then a decision.  Simple, right?

You rely on your rapport with the surety and know how to monitor the status of the underwriting.  Maybe you understand the underwriter you see.  But what about the invisible surety underwriter, a shadowy phantom who exists in every transaction, and whose opinion always affects the outcome. Call this mysterious one “The Phantom of the Underwriting Department.” 

For mood music, Click!

You cannot talk to the Phantom…

Invisible.

There are no emails, no Q. and A. 

And yet, the Phantom analyzes, reviews and influences every bonding decision.  Let’s pull back the curtain on this ethereal being.

Contractors Questionnaire

It all starts here.  Your underwriter looks at the basic info: How long in business?  Largest prior jobs? What do they do, what do they sub?

But the phantom yearns for more. What company ownership structure was chosen?  Is it a proprietorship, corporation or LLC?  Did the founders make prudent decisions? These choices affect taxes, profits and future liabilities.  They can help or hurt the company… and its surety.

If criminal history, litigation, tax problems or surety bond claims / losses are indicated, these may require further investigation.  The Phantom will make a deeper review.

Continuity of Ownership: Who succeeds the current stockholder in the event of death? Will the company maintain operations and complete its projects? These arrangements show that management has an eye toward the future.

The Work In Process Schedule

These are requested often.  They show the contracts in progress, their billing status and costs. The underwriter wants to know how much “work on hand.” Then, silently, the Phantom digs deeper.

The current expected profit is compared to the original estimate. What does this show? Is the profit expectation as predicted or better? Is the estimating department in sync with the field organization?  Is job site supervision highly efficient? Can an undeclared underbilling asset be added to Working Capital?

Is the expected profit sufficient to produce a net profit at year end?  The Phantom will compare the projected job profit percentage to the company Profit and Loss Statement. Based on historical expense trends, the likelihood of an upcoming profitable fiscal year-end can be verified.

Company Financial Statements

He loves these.  There is so much.  They talk to him. The Phantom takes full advantage of this document to determine more than just “the numbers.”

Beginning with the accountants cover letter, who has the contractor chosen for this important assignment? Are they using a construction expert? Did they pay for a quality presentation?  Is the best accounting method in use? Is the fiscal date at an advantageous point in their business cycle?

Obviously, underwriters look at working capital, net worth, ratios, profitability. But there is so much more.  The financial statements show how the stockholders / managers treat the company.  What does it mean to them? Do they nurture and respect it, growing the tiny acorn into a mighty oak?

Past borrowing practices are revealed.  Also, the relationship between financial performance and the ambitions of management.

Growth of the revenue stream is observed and management’s success in monitoring / controling expense levels.

The Phantom reviews financial statements and tax returns to appreciate the owner’s commitment to the bonded company.  This commitment is a cornerstone of the underwriter’s confidence.

Banking Relations

Very important! There are similarities between banking and surety bonds.  The banker’s opinions help reaffirm the underwriting position.

The banking history can reveal good cash flow and prudent business practices.  It can indicate stability, reliability and good management skills.

Credit Reports

The pay record is just the tip of the iceberg.

Now there is a historical review which indicates the adequacy of cash flow, the quality of money management, planning and the applicant’s good moral character.

The Phantom is always there, making this deeper analysis that may never be discussed, but can always make a difference.

Meet Our Phantom

Now, Remove the Mask!

Sorry, we don’t actually have any Phantoms.  All our underwriters are regular people, with real experience and know-how when it comes to bid and performance bonds. Our surety professionals review the facts promptly and efficiently. 

Their deep analysis enables us to support opportunities that may have been declined elsewhere – up to $10 million each.

KIS Surety is the exclusive national underwriting department for Great Midwest Insurance Company, an A-8 rated carrier.  

We hope you found this article entertaining, but more importantly, informative!  With us, the underwriting is deep and detailed, giving the applicant the highest likelihood of approval.

Call us with your next bid or performance bond, and speak to a real person. 856-304-7348 

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Bucket List: Update

Great news!!  Today you can check off one more item from your Bucket List!

Current Bucket List:

  1. Learn to bartend like Tom Cruise in “Cocktail”
  2. Visit Abbey Road in London and re-create The Beatles’ cover
  3. Hug Mickey Mouse
  4. Write my name in wet cement
  5. Bury a time capsule
  6. Ride a Vespa
  7. Find a Bonding Company as Good as I Want
  8. Make a tie dye shirt
  9. Be the house on the block with the most Christmas lights
  10. Try every cheesecake at The Cheesecake Factory

Today you can finally check off #7: “Find a Bonding Company as Good as I Want” There are two big questions and we will answer them now.

First Question

What do you want from a bonding company? They must have capacity.  If the company is too small, they can only write tiny bonds.  They are of little use to Surety Bond Agents and their Contractor clients.

Good credentials.  The bonds must be widely accepted so contractors can use them on various contracts, in any state.

Flexible underwriting.  The process of getting the bond approved must be willing and aggressive, like the underwriters actually want to write the bond.

Speed.  You can’t wait forever for an answer.  How long should it take the underwriter to respond?  Basically, your Bucket List surety will give you a same day response.

Second Question

Exactly who is this extra special, wonderful bonding company? #7 is Great Midwest Insurance Company! (GMIC) Never heard of us?  We are part of Houston International Insurance Group an “Excellent” rated company in the $250 million plus category.

GMIC is a provider of contract surety bonds (bid, performance, payment) that is licensed in every state.  This corporate surety uses a flexible underwriting style that may support clients that were declined under more traditional underwriting methods.

Bonds are provided up to $10 million each with surety programs up to $15 million.

What about speed? The GMIC surety program is available exclusively through an MGU provided by KIS Surety Bonds. Our underwriting expertise originated in the early 70’s!  We have lots of experience solving problems for our clients efficiently and with a same day response.

Hooray!  You nailed #7.  When you need the next bid or performance bond call us: 856-304-7348. KIS Surety, MGU.

Now, here is a link to help you with #1: Click!

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.

Visit us Click!

Secrets of Bonding #160: Deep in the Weeds with Set Aside Letters

In this article we will peel back the onion on Set Aside Letters (SAL) issued by banks in connection with construction loans.  What are they, when they are useful for bonding companies and when are they not?

Here is the essence of such documents:

“The agreement covering the project will provide that the funds in said impound account are … to be disbursed for payment of the (Name of Project) mentioned above and only after (Bank) has satisfied itself that the work paid for has actually been performed… In the event (Borrower) fails to complete the project described herein… all funds remaining in said impound account shall be immediately available to Surety to complete and pay the costs of said project, and in such event, (Borrower) waives any claim or interest in the remaining funds. Surety shall not in any way be obligated to repay said funds so used to (Bank).

This is an irrevocable commitment of funds which is not subject to recall or offset by (Bank).”

Pretty interesting!  This letter / agreement keeps the loan in play to fund the completion of the project  – even if the borrower (bank customer) fails / defaults.

When Are Set Aside Letters Used?

These documents are a common underwriting tool when a Site or Subdivision Bond is issued by a surety. If the bond applicant (who is also the developer and borrower) is relying on a construction loan to fund the bonded work, the SAL protects the surety by providing funds for the completion of the work in the event of a default.

What a great idea.  So why don’t we use these on everything?  Let’s look at another example.

Commercial Projects

The project owner hires a bonded contractor and a bank loan will fund the project.  The bank needs a guarantee that the asset / project (which backs the loan) will be built as intended.  A Performance and Payment Bond accomplishes this and assures there will be no Mechanics Liens against the property for unpaid bills.  These two aspects benefit the project owner and the lender.  Keep in mind, in a borrower default situation, the bank becomes the new owner of the property.

It is common for the bank to stipulate that a bonded contractor be used, and they may want to be a named beneficiary on the P&P bond – accomplished by issuing a Dual Obligee Rider.  In turn, should the underwriter require a SAL from the lender?

On Commercial projects, the normal practice is to NOT obtain a SAL from the lender.  Why not?  Why is this different?

Choose one:

a. The bank is a secured lender

b. The bank can subrogate against the borrower’s assets

c. The Dual Obligee Rider serves a purpose similar to the SAL

a. and b. are true, but the answer is c.

Welcome to the Weeds

We’re going in now. The Dual Obligee Rider adds the lender as a beneficiary with all the rights and obligations of the obligee named on the bond (the project owner).  And what are they?  Obviously they are entitled to make a performance claim and have the project delivered as indicated in the contract.

The named obligee also has obligations, one of the most primary is to PAY the builder. Important: The obligee is prohibited from making a performance claim if they have failed to pay the contractor.

Therefore, when the bank is included under a Dual Obligee Rider, they accept the benefits and obligations.  If the borrower defaults, the lender cannot make a bond claim unless they continue to pay the construction loan to the surety.  (Now the bank owns the project and the surety has become the contractor.)

Summary

Is this starting to make sense?  When a borrower defaults on a commercial project, a lender included by Dual Obligee Rider cannot make a claim unless they continue to pay the project funds to the surety.

Deeper Weeds

On Site and Subdivision there is a unique risk – the lender can take a free ride on the surety by having the bonding company pay out of pocket to complete the project.

Site and Sub-D bonds have the local municipality as obligee, not the bank.  The bank doesn’t want a Dual Obligee Rider because they automatically receive a financial benefit if the municipality makes a bond claim to demand completion of the project.  If the borrower has defaulted, the bank has the opportunity to withhold the balance of the loan (the borrower is gone), and watch the surety pay to complete a project they now own.  And they were not even the bond claimant…

This is the risk sureties avoid on Site and Subdivision Bonds by requiring the SAL that keeps the loan in play, even if the bond applicant / borrower has failed.

Admittedly, this is a pretty obscure subject, but also interesting to us “bond nerds.”  It never hurts to understand how things fit together.  These skills help us solve your complicated bond opportunities.  Take advantage of our expertise when the next one pops up.

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

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

 

SECRETS OF BONDING #157: Bid Bond Quiz

Is there anything less interesting than a bid bond?

They may not seem too exciting, but the lowly bid bond is an integral part of our surety business.  For contractors, they are often the key to acquiring new revenues.  If you don’t think they are important, watch what happens when a client is waiting for one that never arrives.

As surety underwriters, we spend a great deal of effort assuring these documents are accurate, delivered on time, and we track the outcome on each one.

Everybody knows about bid bonds, right?!  OK let’s see if you do…

True or False:

  1. If you decide to not use a bid bond you ordered, you have to send it back to the surety within 48 hours
  2. They have an expiration date
  3. A bid bond precedes every performance bond
  4. The surety can cancel the bid bond
  5. The dollar value of the bid bond equals the amount of the proposal it accompanies
  6. The surety must know the exact dollar value of the bid bond before they will issue it
  7. The premium for them must be paid in advance
  8. They remain active for up to six months
  9. It is better to use a check for security than a bid bond
  10. The same surety that issues the bid bond must issue the performance bond

OK team, how’d you do?  # of True______? # of False____?

They are all False!

  1. An unused bid bond has no value but it makes a great liner for your bird cage
  2. Never has an expiration date
  3. Some contracts are negotiated (no bid bond) or may require a surety capacity letter instead
  4. Like a performance bond, these surety instruments cannot be cancelled
  5. Most often the penal sum of the bid bond equals a percentage (10-20%) of the proposal amount
  6. Most bid bond amounts are expressed as a percentage of the proposal amount, not a dollar amount, to protect the confidentiality of the proposers bid. In such cases the exact dollar value is unknown in advance.
  7. Sureties are entitled to charge for them, but usually don’t
  8. Although not stated, most sureties consider them void after 90 days
  9. Wrong! If the performance bond is not produced, the check can be forfeited
  10. Nope! Two different sureties can be used, even if a “Consent of Surety” was issued with the bid bond.

Bonus Question: If the bid is rejected because the surety’s credentials are found to be inadequate, can this result in a bid bond claim?

Answer: Theoretically, it should not. If the bond is declared inadequate, how can it be sufficient for a claim?

When flexibility and aggressive underwriting are needed, give us a call. We have in-house authority for Bid and Performance Bonds up to $10 million each, and guarantee a same day response.  Find out what you missing when it comes to surety bonds.  

KIS Surety Bonds, LLC is the exclusive surety underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.  “steve@kisbonds.com” or call 856-304-7348.

Secrets of Bonding #154: Be A Bean Counter (The Importance of Bid Results)

It’s not sexy.  Nobody has it on their business cards.  It may not be in your “official” job description.  But this article is the start of your new vocation as an official Bean Counter!

A major area of surety bonding is “Contract Surety.”  This refers to bid and performance bonds for construction contracts.  When we set up a new account, an amount of bonding capacity is established and the individual bond requests are processed within that line.  It is possible for a client to use up the full capacity of their line, then our underwriting department could consider granting an exception to support additional work.

Efficient management of the line can minimize instances where an exception is needed.  Here’s where the bean counting comes in.

We manage bonding capacity the way a bank runs a credit line.  A series of individual transactions (bonds) can equal the full capacity amount (referred to as the “aggregate”).  Bank credit lines work the same way.  For the bond or bank customer, it is advantageous to maximize the available credit.  Prompt reporting of bid results helps accomplish this objective.

Advantages Of Reporting Bid Results Promptly

  • When a bid bond is approved / issued, the underwriter debits the amount against the aggregate capacity. However, the full contract amount is used, not the dollar value of the bid bond.  For example, a 10% bid bond for $100,000 actually uses $1 million of aggregate capacity.  Therefore, when it is known that the bid is not likely to result in a contract award (the client is not “apparent low bidder”), this fact should be reported so we can restore the capacity.
  • Detailed bid results are needed on low bids in order to process final bonds. Example: Our guy has a low bid for $5,000,000. The second bidder is at $5,400,000.  Third bidder submitted $5,550,000. Because our bid is less than 10% below the second bidder, the adequacy of the contract amount is supported.  If our client is more than 10% below the second bidder, there will be an additional evaluation before proceeding with the P&P bond.
  • Bid Spreads – in cases where the bid spread is excessive, it is important to have a prompt discussion with us. If there is a bid calculation error, and the contract price is inadequate, there is a limited amount of time to withdraw the bid without penalty (such as a bid bond default / claim).  Learn more about bid spreads:  Click!
  • Low bids may be for lesser amounts than the original bid approval. Example: We approve a bid for an estimated contract amount of $9 million, but the actual bid goes in at $8,500,000 due to last minute changes and reductions. Therefore, when the low bid results are reported, $500,000 in capacity is restored to the aggregate.
  • Postponements – sometimes bids are postponed at the last minute, with no immediate reschedule date. The bid approval may never be used. If it dies on the vine we will restore the capacity immediately.
  • Withdrawal – clients may decide not to bid a project after ordering the bid bond. They may have determined that the plans are unclear or unacceptable.  Advise us so capacity can be restored.

If you are now sufficiently impressed with the importance of minding these small details, you may don your green eye shade and declare yourself an Official Bean Counter.  It’s not glamorous, but it is necessary for proper management of the bond account.  (Actually, we think it is glamorous!)

~ ~ ~

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.

(Follow this blog.  Never miss an exciting article!  Top right.)