THE BOTTOM LINE

Atlantic Coverage Corp.

EXCELLENCE IN SURETY BONDS

Summer 2004 Volume 6, Issue 3

Filling the Surety Gap: Individual Sureties “Famous Quotes” “I shut my eyes in order to see.” Paul Gauguin French painter “Some people are always grumbling because roses have thorns. I am thankful thorns have roses.” Alphonse Karr “Humility is the mother of all virtues, courage the father, integrity the child, and wisdom is the grandchild.” Stephen R. Covey “Rule Number 1 is don’t sweat the small stuff. Rule Number 2 is it’s all small stuff. And if you can’t fight and you can’t flee, flow.” Robert S. Eliot “I can usually judge a fellow by what he laughs at.” Wilson Mizner            In business it is always good to have a choice. Whether you are a contractor or a baker when you can have vendors competing for your business it allows you to bargain for a more competitive price. Competition always drives down the price of goods and services. There should be a limit as to what that price is and the economic climate of the marketplace helps determine where that limit should be. In a good economy this price limit can actually be lower than the vendor’s cost when the vendor is looking to increase market share, and in a difficult economy the price limit will be substantially higher due to rising costs, etc...           The same factors affect the surety bond industry. Presently in a difficult market, other articles have discussed how Surety firms have consolidated or left the industry completely. This of course has served to drive prices up, but more importantly for commercial contractors, it has served to tighten the underwriting requirements necessary to achieve competitive bond credit to near ridiculous levels. Within the past year many contractors’ surety bond credit has been severely curtailed or lost completely. Contractors doing any business in the five boroughs of NYC have been hit especially hard. This is a direct effect of the limited markets now available to commercial contractors and the markets realizing this. To some extent it has been intimated that now these remaining Surety Markets are dictating the future of commercial construction in our area. To some degree this is true.           This is an election year and it usually signifies a rise in commercial contracts. In addition, New York City alone has plans for major construction and renovation projects. Most of these projects will require substantial bonds geared for the mega contractors. However, there is a trickle down effect and many subs of these contractors will be required to provide smaller subcontract bonds. The way the Surety Industry is situated today, there might not be enough credit capacity to handle this amount of work. This would not be a positive reflection for the Surety Industry, nor would it give confidence to many public owners in the area. Remember, a Contract owner benefits by having more QUALIFIED bidders on a project. This hopefully allows for the lowest possible price of the proposed project that will allow it to be completed successfully and to the satisfaction of the owner. With limited sureties offering less surety credit how can there be truly competitive bids. It will cost the owners additional funds to complete projects, and it will delay projects for the owners because there might not be enough capacity to issue the work when the funding is available.            The American way has always been to find opportunity in tough times. This is no different. Just when the surety industry has become very difficult to deal with, another type of surety is beginning to emerge. Individual Suretyship was the earliest form of Suretyship. It is basically a situation where one individual or a group of individuals pool private resources together to provide a public owner with a surety guaranty. These private resources act as collateral to the owner that the project will be completed. Individual surety is regulated and has to abide by certain restrictions to be a viable resource, however, it is not encumbered by all the corporate rules and regulations that is right now handcuffing corporate surety markets.           The Individual Surety still requires that its contractors be qualified to perform the work it wants to bid on. The difference is there is much more flexibility in the underwriting in terms of the approach. Ratios are used as guidelines, just like standard sureties but there will be more impact on experience, type of work, location, etc... when considering requests. Individual Sureties have been accepted by the Federal government and projects in excess of $100MM have been bonded with Individual Sureties. Not all owners are familiar with Individual Sureties and need to be educated about the quality of the private assets being used and how they provide the same protection as standard corporate sureties.           Atlantic Coverage has been working with one Individual Surety that has issued projects in excess of $100MM to the U.S. Navy and has recently placed smaller surety bonds with a major General Contractor for one of its subs. The prices are higher than standard surety markets offer at this point, but the benefit of being able to get to the table and have access to projects which are very profitable that would not normally be bonded by the standard sureties far outweighs the difference in price.           Standard Sureties are still the market of choice when considering surety bonds, especially for bonded lines of credit. However, the Individual Surety might allow those contractors that have fallen between the cracks to start bidding on public works contracts again. It will also allow for some additional flexibility if you qualify to go after that larger project or higher backlog that the standard surety is unwilling to offer with today’s tighter underwriting guidelines. In any event, it will allow some additional qualified contractors to start - Continued on page 3 -

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THE BOTTOM LINE

“In life, as in a football game, the principle to follow is: Hit the line hard.” Theodore Roosevelt “The most beautiful things in the world are the most useless: peacocks and lilies, for instance.” John Ruskin “He that scattereth thorns must not go barefoot.” Thomas Fuller “It is easier to fight for one’s principles than to live up to them.” Alfred Adler “You can fool all of the people some of the time, and some of the people all of the time, and that’s good enough.” Laurence J. Peter “If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man.” Mark Twain “People who don’t mind their own business either have no mind or no business.” Leopold Fechtner Review and Analyze Those Bid Results           There may be a way to give yourself a raise. Over a twelve-month period, keep, review and analyze the bid results on all of the projects that you were low on. If you won significant projects by 1%, stop reading now. This article’s ideas will mean nothing to you.           When a firm is extremely busy, many business consultants advise their clients to raise their prices by a fixed amount, let’s say 10%. We have heard that this has worked very favorably for many residential construction firms, but would it work for the types of clients that we deal with the commercial and public works contractors? In theory, it should.           The key is to find out at what level you could have raised your bid prices by and still not have lost any significant size projects. Let’s take an example:       Project 1     Your Bid $2,000,000   ABC $2,100,000 5% spread       Project 2     Your Bid $3,000,000   ABC $3,150,000 5% spread       Project 3     Your Bid $1,000,000   ABC $1,100,000 10% spread           All of these bids had ‘acceptable’ spreads from both a surety’s standpoint and most contractors’. But, what if you increased all of your bid prices by 4%?   The results would be as follows:       Project 1     Your Bid $2,080,000   ABC $2,100,000         Project 2     Your Bid $3,120,000   ABC $3,150,000         Project 3     Your Bid $1,040,000   ABC $1,100,000             On three relatively small projects that you won, you realized an extra net income / profit of $240,000. Remember, your job costs and overhead did not change. Not a bad raise for doing the same amount of work. Even if you lost a $500,000 job in this example, assuming a gross profit margin of 15% or $75,000, you will still be well ahead of the game.           Many construction firms look at and discuss bid results, but it appears that very few truly analyze them to see where improvements can be made.           Of course, this example is simple, but it is just meant to get you thinking. We know that you are equally upset when you raise your bid price at the last minute, only to lose the job by a few dollars. But that ‘fear’ should not stop you from analyzing the results. Good luck. Saving On Express Mail Cost           Do you find your express mail cost spiraling out of control? Express mail is an undeniable fact of doing business in today’s world. You want to make sure that bid bond gets to you and to the owner on time. The last thing you want is to have your the contract documents not be received by the appropriate person or to be floating around the office or sitting in a mailroom somewhere. This does not mean that you have to spend exuberant amounts of money to meet your company’s needs.           Atlantic Coverage Corp. has teamed with PGP Overnight, an authorized selling partner of DHL/Airborne Worldwide Express, to offer national account pricing to the small to mid-size shipper. This arrangement allows ACC and PGP to offer discounted DHL/ Airborne services at a 10% to 25% savings over FedEx and UPS book rates.  DHL Airborne offers overnight, second day, international, freight and ground shipping services to any size business.  There are no commitments, quotas or requirements of any kind associated with this discount program. You do not have to cancel your current carrier, simply give DHL a try. If you’re happy with the service, continue to use it.           For more information on establishing an account, for pricing information and for a free web shipping consultation, contact Matt Lulley at 631-951-9200 Ext 182, email Matt at lullyeym@pgpovernight.com, or speak to any of the Account Managers at Atlantic Coverage Corp. When speaking to Matt let him know that you were referred by Atlantic Coverage Corp. and be on your way to saving up to 25% on your shipping.

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THE BOTTOM LINE

“Great minds discuss ideas, average minds discuss events, small minds discuss people.” Hyman G. Rickover “Do not anticipate trouble, or worry about what may never happen. Keep in the sunlight.” Benjamin Franklin “He who fears something gives it power over him.” Moorish proverb “It is not the situation that makes the man, but the man who makes the situation.” F.W. Robertson “The man who strikes first admits that his ideas have given out.” Chinese proverb “No one is useless in this world who lightens the burdens of another.” Charles Dickens “When a man has pity on all living creatures, then only is he noble.” Buddha “We have met the enemy and he is us.” Walt Kelly Filling The Surety Gap - continued from page 1 bidding in tough areas like the five boroughs of New York City again. New York City owners who have not been made aware of Individual Sureties should be educated quickly. Conceptually NYC should welcome the addition of Individual Sureties as it will allow city contractors access to additional bonding. Allowing for greater competition and hopefully lower prices on city contracts. The Individual Surety will also allow contractors to bond projects while hopefully improving their financial status and project experience so they could qualify for the standard market in the near future.           Overall, this could be a win-win situation for everyone in our industry. The City Owners might get lower project prices, contractors who deserve bonding might have a market to go to and the standard surety markets will be able to maintain the underwriting criteria they feel necessary at this time to be profitable without diminishing surety capacity in our area. The proper Individual Sureties might be in a position to solidify the current surety market in our area if used properly. Individual Surety is a tool you may want to consider depending on your specific situation. The Importance of Paying Bond Premiums on Time             Paying your bond premiums on time is not only expected, but is taken into consideration when the underwriter does its annual review of your account. It had become common practice to pay the bond premium once the project for which the bond was written starts and the first requisition is paid. Underwriters had come to expect this and accepted this as a matter of course. However, in today’s marketplace, this is no longer being accepted as common practice.           Why would the surety underwriter expect you to pay the premium even if the job has not started? A common analogy often used is “you pay for your groceries when you leave the store, not when you eat them.” The same is true when bonding a project. The surety requires payment for the bond when they issue it, not when the project starts.           The surety’s liability starts as soon as the bond is issued and filed with the obligee. If between the times you file the bond and the job actually starts you default on the contract and cannot start or complete the work, the surety is fully liable to the owner to go in and complete the project. This is no different from any other insurance product. Your auto liability coverage begins the day it is bound by the underwriter. If you’re in an accident the same day your coverage is bound, you are covered. Hence, most auto underwriters require a deposit premium up front for a new policy and payment of premium by, if not before the renewal effective date. Unlike other insurance products, however, most surety bonds cannot be cancelled for non-payment of premium. Therefore, the entire premium is due at the time the bond is written.           Most underwriters will allow a 30-day grace period, but this is extended to the surety bond agent. An agent for the insurance company enters into an Agency Agreement in order to do business with that company. One of the key provisions of that Agreement is that all premiums, whether collected or not, are payable to the company within 30 to 45 days (depending on the company) of the date the bond is written. This in essence is an extension of credit granted to the surety agent. The agent in turns will usually pass some of this on to their clients. Many companies have gone so far as to impose a late fee if the premium is not paid on time. Any late fees or interest is then passed onto the bond principal.  Other companies have taken the position that if a bond principal cannot pay their premiums on time, they are not deserving of surety credit and their lines are suspended and no further bonds can be issued until the premium payments are resolved. This action leaves a bad taste in the underwriter’s mouth and you can bet it will not be forgotten when the next bond is required or when they do their annual review of the account. Your credit worthiness is now questionable.           As in all things there are some acceptable exceptions. We have seen instances where a project is bid, awarded and all the paperwork, including the bond, is filed, and the owner does not have the construction financing in place. This delays the job, sometimes for many months. With a letter from the project owner explaining the delay, the underwriter may be willing to defer the premium payment. If, however, the delay extends for an inordinate length of time, the underwriter may ask for the return of the bond. They can then cancel the premium and when the project financing is in place and the owner is ready to start they can reissue the bond.           As you are with your business, everyone is concerned about cash flow. Your surety agent as well as the surety company, is looking very hard at collection of accounts receivable. Because your surety relationship is very important to the success of your business and one you want to preserve, it is important that your underwriter sees you as creditworthy client who pays his bills on time. This doesn’t just mean that you pay your vendors in a timely manner, but your service providers as well.           Do not be offended if your surety agent requires payment upfront for the bond you are requesting or if their bookkeeper is calling you more often than usual to clean up your account. As the agent, they are sometimes put into an awkward position of explaining to the underwriter why the account that they just convinced them was so creditworthy and deserving of that bond, cannot pay their bond premium.           It is important that every effort is given to paying your premiums in a timely fashion and in accordance to whatever the payment arrangements established by your surety agent and surety company.

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