Surety Program Guidance for the COVID-19 Crisis
We are all experiencing dramatic disruptions in our business and personal lives in the midst of the COVID-19 crisis. Early forecasts of the crisis-duration of a few weeks appear somewhat random and are, most likely, optimistic.
We need to prepare for the long-haul, and while we all hope this is not the case, we have to look ahead and prepare for a prolonged battle.
Uncertainty = fear, and that’s no way to run a business
In the construction industry, projects are slowing or stopping in their entirety. On March 16 the City of Boston shut down all construction projects with the exception of emergency and essential utility work. Inevitably, construction companies will experience a slow-down whether due to project delay or shut-down, illness of employees and/or management, governmental intercession, or supply chain interruptions.
It was also noted that the State of New Mexico pulled $100 million out of their construction budget based on expectations of falling tax revenue. While the dollar value isn’t significant, this practice could spread like an economic virus from state to state, speeding the descent of the industry.
In the current environment we all want nothing more than to look ahead to when the crisis comes to an end, and the life that we are accustomed to resume. This optimism will drive us forward and we will emerge stronger, as we always do in the United States.
Looking ahead is also the key to ensuring the flow of surety credit to your company remains unimpeded and maximized in the current environment.
This means spending more time with your accounting and surety professionals in forecasting future results. New work pipelines, bid schedules, probabilities of acquiring new work, and adjusted overhead levels need to be carefully analyzed and factored into an income statement forecast for the near-term. A reasonably accurate forecast will not only eliminate a “surprise” underwriting reaction to an unfavorable financial statement, it will provide underwriters with an estimate of the timing and expected results during the inevitable economic rebound.
For those companies “born” into the recovery, now is the time to self-evaluate. We’ve lived through a few of these cycles, and every time we’re on the downside we’ve had clients say,
“if I only managed my company this well when things were good imagine how strong we’d be?”
Now, while your backlog is likely strong and profitable, is the time to fix any leaky practices.
During the great recession that began in 2008, surety companies, in general, did a terrific job of recognizing the economic strain being placed on valued clients in a depressed economic environment. While underwriting the capital structure and liquidity is always paramount, during the great recession underwriters put a greater emphasis on underwriting the quality of their client’s organization, management and operational capabilities; they exhibited an uncommon degree of tolerance for disappointing financial results.
In short, underwriters looked ahead to the end of the recession. This patience and tolerance paid off as valued clients surged out of the recession with strong profits and moved ahead to retain earnings and restore balance sheets that may have been weakened during the recessionary period.
That having been said, it should be noted that many of the surety industry’s young and talented underwriters entered the industry after the recession. They have not experienced, first-hand, game changing economic impacts of this nature, and the virtues of exercising patience and credit assessment through a “new normal” underwriting lens, and consequently may find it difficult to properly identify risk, or the absence thereof.
Know your audience.
The same thought process that positioned the construction and surety industries to succeed post-recession needs to be re-adopted under the COVID-19 crisis environment, perhaps on a more compressed schedule. In the coming fiscal quarters our contractor clients will inevitably see their results negatively impacted by the crisis.
Underwriters that recognize the strength of their client’s organization and their ability to manage through the crisis using forecasting tools, guidance from surety and accounting professionals, and exhibit patience particularly as respects the capital underwriting dimension of the underwriting process will ultimately be rewarded with successful clients, and stronger relationships, as we all emerge from the COVID-19 crisis together.
This collaboration is by Surety Alliance members Steve Raffuel and Brian Rossi, the first in a series of the 'State of Surety' in a Covid-19 pandemic world.
Steve Raffuel is President of the Raffuel Surety Group and may be reached at (609) 924-2426 or email@example.com
Brian Rossi is Executive Vice President at The Hilb Group of New England and may be reached at (617) 999-9188 or firstname.lastname@example.org