July 28, 2009 by Michael Weisbrot
The SBA has increased their maximum bond amount for a second time this year. In February, we wrote an article on the stimulus bill which spoke of an increase from $2 to $5 million.
Technically, the ceiling is still at $5 million (see: SBA FAQ). The changes allow up to $10 million only when “the contracting officer certifies that the guarantee is in the best interests of the government”. However, most news agencies are reporting it as a flat increase.
The SBA surety program is quite paper intensive as is. Certainly, there will be more paperwork to show the contracting officer agrees that it is in the best interests of the government.
One of the main differences in underwriting using the SBA program is how they calculate working capital. Under the SBA program a bank line of credit is considered working capital, which is not the case with normal surety underwriting. This allows contractors to qualify for bond lines that are larger than they could obtain through traditional avenues. Unfortunately, the credit crunch has caused banks to reduce or close line of credits previously available to contractors. Such changes to our financial system have had a direct impact on bond lines provided through the SBA program.
This leaves me to wonder, would there be more benefit in reviewing the current SBA procedures rather than increasing the maximum bond amount? Sure, it wouldn’t look as good in the news headlines, but it might have more of an impact with the contractors they are trying to assist.
Category: Contract Bonds, Surety NewsTags: Bid Bonds, legislation, performance bond, Performance Bonds, SBA, underwriting | Comments (0)
January 17, 2009 by Heidi Wolf
The surety underwriting procedure can often be viewed as being an agonizing ordeal for insurance agents as well as applicants needing to obtain bonds. Many times, the entire process can be very aggravating and stressful if an applicant is under a specific deadline or needs a bond very quickly. Here are some items that the surety company will most likely require. It is important to know what crucial information that a surety company or agency will require in order to be approved for any type of surety bond.
Like insurance, the surety industry is recurring. In the mid 90s, the surety industry was very pliable, and there was little underwriting being performed. A combination of the slowing economy and the poor underwriting practices from years prior caused the surety industry to suffer for the first five of five consecutive years in 2000. However, a booming economy led to more bond approvals and issuance, even for applicants that were less than qualified.
Fortunately, these losing years caused the market to fluctuate almost overnight underwriting standards were tightened and premiums increased substantially. Capacity quickly became an issue for contractors, particularly at both the small and large ends of the spectrum. Small, emerging contractors were finding it increasingly more difficult to obtain any bonding capacity and large contractors were also feeling the affects of the more stringent industry. The market has fluctuated over the past couple of years, and contract bonds and some commercial bonds can still be difficult to obtain. Some items that are crucial to obtaining prior to applying for a surety bond are:
A surety bond is a form of credit. The underwriter requiring financial information from an applicant is making a credit decision without ever meeting the contractor or applicant.. There may be a substantial amount of paperwork required; however, it may be the extra paperwork required that will get an applicant approved for a bond. An underwriter will most likely request the following:
Business financials It is beneficial and most often a requirement that these are prepared by a CPA. If it is a new company, submitting the most recent business financials will suffice.
Category: Auto Dealer Bonds, Bid Bonds, Commercial Bonds, Contract Bonds, Contractor License Bonds, Court Bonds, General Bonding, Misc. Commerical Bonds, Money Transmitter Bonds, Mortgage Banker Bonds, Mortgage Broker Bonds, Performance Bonds, Subdivision Bonds, Telephone Solicitor Bonds, Title Agency Bonds, Wage & Welfare BondsTags: application process, procedures, surety process, underwriting | Comments (3)
January 6, 2009 by Matt Gerdes
For many years the surety industry has experienced considerable profitability due to the backing of a strong economy and a theoretical zero percent loss ratio business plan. This model for operations worked very well for many years, but also set the stage for a few years that hurt the surety industry on a whole, leading to much stricter underwriting guidelines and pricing.
Up until around 1989 the surety industry had experienced a fairly consistent low loss ratio, with moderate times of increasing and decreasing loss amounts, combined with considerable premiums being earned, newer players entered the market and began competing with previously existing players. This resulted in a much more lax standard on background checks for the principals applying for the bonds as well as driving costs down. It is widely noted that many bonds began to be written with little regard to risk consideration due to this more aggressive market with underwriters competing with each other. Around 2000 the economy experienced a faltering that resulted in principals getting into financial difficulties, requiring support of the surety bonds and ultimately the bond companies. The number of claims that were experienced between 2000 and 2002 were staggeringly high, resulting in a huge direct loss ratio that contradicted to original model of zero loss. Many carriers were forced to withdraw themselves from the market as others became insolvent.
While the terrorist attacks on September 11, 2001 did not directly affect surety companies in the same sense as careless underwriting did, there was an adverse effect that was experienced. The insurance companies that paid out money for property and casualty losses were in many cases the sureties’ parent companies as well as their affiliates. This caused the insurance companies to tighten up on requirements from the primary sureties that they owned, which in turn caused bond underwriters to make more disciplined decisions while trying to place their bonds. Around this same time period Enron filed for bankruptcy, which in turn had a negative impact on economy. Once again this created a difficult time for principals that were trying to maintain their bonds, relying on help once again from the surety bonds causing more claims.
All these events have led up to this current state of conservative guidelines for underwriters to consider while they issue the bonds, although this does have a positive consequence for all parties involved in the bonding relationship. The surety companies can avoid hazardous claims and work back closer to a zero loss ratio, stabilizing the bond market which will ease guidelines and pricing in the near future. Principals also benefit from this; companies that would have a difficult time meeting their requirements won’t get into any obligations that will hurt them financially in the long run during this unstable economy.
Category: Commercial Bonds, Contract Bonds, General BondingTags: underwriting | Comments (0)
November 8, 2005 by Michael Weisbrot
Bonding companies look at far more than just owners’ personal credit when it comes to contract surety over $100,000. A surety wants to have confidence in their bonded contractors prior to approval. There are numerous different actions a contractor can take to instill confidence in a bonding company. A contractor must be organized and practice restraint when necessary to gain the trust of an underwriter.
For most, the best way to run a company in an organized fashion is to hire professionals they can count on to assist in decision making. A bond producer well versed in contract bonding should be a top priority. If your agent is not knowledgeable enough or does not have the markets to fit your company’s needs, then there is little other professionals can do to help with your bonding needs. An accountant that understands construction is a must. The business financial statements are the highest weighted item for underwriting a contractor. You can think of them as the underwriter’s window into your company. A contractor must walk away if their accountant does not know how to complete financial statements on a percentage of completion basis. A good relationship with a banker is a rather obvious need for any business that relies heavily on loans to operate. There are numerous other professionals that one could utilize such as good a good controller and legal counsel, but we will stop our list here so it still applies to most contractors.
Surety underwriters will want to periodically meet with their medium to larger sized contractors. The underwriter will want to see that the contractor knows their cash flow and their receivables that are over 90 days. The underwriter will also want to see that the contractor can answer all other questions regarding their company. In other words, the underwriter will want to leave feeling confident that the contractor knows their industry and the specifics on their company.
Earlier, I mentioned that a contractor must practice restraint when necessary. By restraint, I mean that they can not be blinded by profits and take risks above and beyond their ordinary work. A surety will not be comfortable approving a bond twice the size of any previously bonded work for a new company. A red flag is raised for any contractor that wants to do work outside of their niche and or territory. If an underwriter is not comfortable with the contract for any reason, they will decline the contractor.
A contractor must keep in mind that they are essentially obtaining surety credit. Underwriters must use the financial documentation provided and personal relationships to decide the risk on a particular account. A contractor that is well organized with a team of professionals to assisting them will create a great deal of confidence in a surety’s underwriters.
Category: Bid Bonds, Contract Bonds, General Bonding, Performance Bonds, Subdivision BondsTags: bonding companies, bonding company, bonds, contract bond, contractor, surety bond, surety bonds, underwriting | Comments (0)
August 25, 2004 by Riskwriter
Turning back the clock…..and bond agents working for a living.
Do you recall the late 90’s and way early in 2000 when getting approved for contractors Performance & Payment bonds were as easy as having a pulse? “Oh, you’re breathing? You’re approved!” That time period was an interesting but a rather frightening time in the surety industry. All the bonding companies began to become more and more competitive in this dog eat dog industry, so much that sureties were giving things away to contractors! Waving your spouse from the agreement? SURE! waiving personal indemnity all together for that matter! Dropping rates down to $6 per thousand….the list goes on.
Since the sureties have exceeded losses in the past couple years more than the losses they had throughout the whole past decade, has forced them to re-group themselves. Underwriting has taken an entire swing the other way and is incredibly conservative in all spectrums of underwriting. Aggregate bond lines have been sliced in half, rates have doubled, the re-insurers even writing surety have dropped to a measly 10 and all of this is all a snowball effect of one thing affecting another. However, In the end, it does change the industry in a positive way.
For one thing, it means that any contractor OR sub-contractor with a Performance bond in hand for the guarantee of their contract, likely, truly is qualified to get that job done-AND will get it done per the terms of their contract.
The obligee (who is requiring the bond) won’t feel the reluctance in accepting a bond as they may have in the soft bond market previously due to the soft underwriting that was occurring. Previously, many contractors still defaulted on jobs, and did so more willingly with no personal indemnity on the line.
Now, there is a rigorous underwriting process that each contractor must face. And there should be! Applying for a bonding line of credit and or Performance bond is just like applying for a line of credit from your bank. It is CREDIT. In this case, it’s not simply just to pay back a loan but to actually perform on a contract. Of course, with this type of guarantee the bonding company must make, their research into each contractor is complete.
This makes performance bonds not only a stronger tool for the owner that accepts them, but it sure does make us agents work for a living!
Category: Contract Bonds, Performance Bonds, Surety NewsTags: Add new tag, bonding company, bonds, contractors, performance bond, soft market, surety bond, surety bonds, underwriting | Comments (0)
