John Shingler Joins Sterling Risk Advisors

by Sterling Risk Advisors

Former SVP of Wells Fargo Insurance brings over 30 years experience

(ATLANTA)  John Shingler, a respected leader of the Southeast commercial risk management industry, has joined Sterling Risk Advisors as a Strategic Risk Advisor.

Previously, Shingler was senior vice president at Wells Fargo Insurance. He held the same position with Wachovia Insurance Services for more than a decade, prior to its acquisition by Wells Fargo.

In the past, Shingler has managed a book of business of approximately $15 million in insurance premiums.

At Sterling Risk Advisors, Shingler will continue to focus on manufacturing, healthcare organizations, construction and private equity firms with revenues over $25 million.

Earlier in his career, Shingler was senior vice president for Poe & Brown for 13 years.

Shingler graduated cum laude from the University of Georgia with a bachelor’s degree in Journalism/Advertising. He obtained his Accredited Advisor in Insurance (AAI) designation in February 1991.

Married with three children, Shingler is a member of Peachtree Road United Methodist Church, where he is past Chairman of the Finance Committee and also previously served on the Board of Trustees and Administrative Board. He is past Chairman of the Board of Trinity Community Ministries and continues to serve on the Board.

About Sterling Risk Advisors:

Sterling Risk Advisors is a full-service Atlanta-based risk management and insurance firm.

For more information about Sterling Risk Advisors, please visit: www.sterlingriskadvisors.com; or call (678) 424-6500.

Storm Clouds Gathering

by Sterling Risk Advisors

Atlanta Business Chronicle by Douglas L. Rieder , Sterling Risk Advisors

Date: Friday, December 2, 2011, 10:26am EST

The Surety & Fidelity Association of America recently released mid-year surety results for the top 100 surety companies reflecting very good aggregate results for losses relative to premiums earned.  The “direct loss ratio,” a number resulting from direct losses incurred, divided by direct premium earned, is only 11.8 percent for the period for the top 100 companies. 

This is an excellent number by any historical standard. 

 However, when users of the data look deeper into the statistics, they will note what we are observing among clients and colleagues in the industry: That over the past four to five months there has been a notable uptick in financial distress.

 On the surface, the mid-year results of the top 100 surety companies are encouraging.

 Generally, loss ratios below 30-35 percent reflect good profitability for the carrier. Overhead expenses of 45-50 percent normally must be added to the loss ratio to come up with a combined ratio (a combination of losses and expenses) and measure true profitability.  A combined ratio of 80 percent implies a profit margin of 20 percent to the carrier.

 However, if one takes the time to eliminate a few of the larger carriers who are actually showing “negative” losses, the data may provide a different picture.  Negative losses generally reflect the carrier adjusting loss reserves downward when better than anticipated outcomes are realized from claim settlements.  Since the largest companies tend to have large absolute loss reserves on their balance sheets, adjustments of this type can skew a given quarter significantly. For that reason, we caution users of the data to look beyond these few outliers that heavily impact the averages due to their size.

 When you do this you can’t help but note an increasing number of carriers beginning to “run a temperature”, that is, reflecting loss ratios above 30 percent.  Many of these higher loss ratios are emanating from the same sureties providing surety credit to smaller general contractors and subcontractors.

 This is consistent to what we are observing in our client portfolio and is consistent with what we are hearing from underwriters and contractors around the country.  Over the past four to five months we have seen a notable uptick in financial distress caused by slow paying owners (including public owners), the impact of thin profit margins, balance sheets weakened from losses the past three years, the lack of any cost contingencies and downstream default risk rippling up through the contractor ranks.  This is resulting in extremely tight cash flow and heavy bank borrowing.  As a result, sureties are starting to be called upon to help finance the remaining work or in the worst cases to take over the backlog directly. 

 We expect this trend to continue through 2012 as attrition reduces the ranks of the industry to match the significantly reduced available work.  This outcome is simply a reflection of the market’s willingness to take cheap work 12-18 months ago.  This work has an elevated risk profile from all the factors mentioned above and is now coming home to roost in the form of tight cash flow, losses, defaults and insolvency in the subcontractor community primarily, but can filter up to the general contractors if they are not cautious.

 As a result, are strongly cautioning our general contractor clients to maintain the quality and diligence of their subcontractor prequalification efforts and manage their exposure to subcontractor default by prudent bonding practices and / or subcontractor default insurance.  We recommend you press your broker and surety into service to supplement these efforts.  They will be happy to do so.

Douglas L. Rieder is president and founding principal of Atlanta-based Sterling Risk Advisors and head of its Construction Services Practice. He is a board member of Associated Builders and Contractors of Georgia Inc.

Insurance takes the bite out of bed bug liability

by Sterling Risk Advisors

Sterling Risk Advisors Principal Paul Baker is quoted in the article, “Insurance takes the bite out of bed bug liability,” which appeared in the Atlanta Business Chronicle November 18.

The article discusses new insurance tools that are available to mitigate the damage wreaked by the pesky insects on a hotel’s bottom line.

Bed bug infestations have increased exponentially in North America, Canada, Europe and Australia since the late 1990s, according to the article, which cited a study by the U.S. Environmental Protection Agency.

Baker, an expert on insurance for the hospitality industry, noted that standard commercial property coverage does not cover infestation, meaning hotels cannot claim loss of revenue.

“And that’s what hits the hospitality industry the hardest, especially the smaller to midsized hotel operators,” he said.

Baker specializes in providing risk management consulting and insurance solutions to the real estate, construction and hospitality industries.

For more information, please call Paul Baker at: (678) 424-6521; pbaker@sterlingriskadvisors.com

Publication: Atlanta Business Chronicle

Tips For Maintaining Your Surety Credit

by Douglas L. Rieder

In today’s economy managing your surety credit is more important than ever. This is due to the fact that the significant downturn experienced in the industry has begun to impact the carriers’ loss results. This is causing them to tighten their underwriting standards and increase the intensity of their scrutiny.

We recommend several proactive measures you can take to keep your surety informed and comfortable that your company is one they should want to keep on the books.

Communicate – We have seen several instances over the past 3 years where previously successful clients have “gone underground” (our term for not communicating) for several quarters. That is, they failed to report regularly and communicate with us and the surety.

This is normally ultimately followed by reporting a large loss and / or problem project(s). In most cases the accounts would have been salvageable with the current surety, if only management would have come clean and admitted the issues and discussed their strategies for addressing them with their underwriter. This would have made it possible to solicit the surety’s input and counsel, demonstrating that the client values the relationship.

This might not always work but in our experience it has a much better chance of preserving the relationship if the contractor has the ability to survive the situation and recover to health. On the other hand the surety will have a hard time staying involved if they perceive their client to have a character issue as a result of the lack of communication.

Our agency will generally cease working with a client if we cannot be assured that this sort of thing will not be countenanced going forward. It is very difficult for us to maintain our credibility in the marketplace if the client is unwilling or unable to follow through on reporting and representations.

Forecast – Most contractors have less surety credit than they think they need. This has become more of an issue recently as more of the industry’s opportunities are coming out of the government sector. Some of the characteristics of this sector which impact the need to manage the surety credit are:

• Most projects require bid bonds.

• The government is slow to make procurement decisions.

• Much work coming out of the government sector is going design / build. This method serves to have a greater impact on the contractor since the work is now in the backlog during the design phase, not just the construction phase.

Since surety credit is a function of the balance sheet these additional pressures make it more important than ever to lay out a road map for your surety which reflects expectations for gross profits, overhead and net earnings as a function of the company’s backlog and its burn off expectations. This will enable you to focus their attention to key items like interim profit expectations, growth in working capital and key characteristics of the backlog. Highlighting how much of the work is in design phase (when it places little to no strain on the financial position of the company) can help the underwriter to see that they need to focus on the “hard dollar” or construction phase of the backlog.

Bonding Out of State Projects

by Douglas L. Rieder

According to the Associated Builders & Contractors “investment in nonresidential structures – the construction of new buildings – dropped 21.7 percent in the first quarter of this year”. As the political will to continue supporting the construction industry with government stimulus has waned the fact remains that the industry is still in a deep recession. In Atlanta where I am writing this a significant drop in office, retail and condo construction has left our market with far too many contractors chasing far too few projects. While the school, water/wastewater, road and medical markets are all alive (if not thriving) there are too many contractors moving over from those other markets which is putting extreme pressure on margins. There are also simply too few jobs to go around.

As such, many contractors are simply trying to survive and one way they are attempting to do that is by “casting a wider net” by entering new geographic markets. Recently it was published that since the credit crunch of 2008 Texas has single handedly accounted for 47% (check this) of the job growth experienced in the whole country. Texas is a very large economy underpinned by the oil and gas industry which remains healthy due partly to $100+ per barrel oil prices and a flight from the dollar to commodities.

Unfortunately, there is much evidence in the industry that expansion beyond one’s normal trade area is one of several important causes of contractor failure(1). Thus underwriters are trained from their earliest days to view such as dangerous to the contractor’s health.

Obviously every contractor would prefer to follow a friendly owner where construction costs, plans and specifications are essentially repetitive from prior projects. Familiar architects and subcontractors (who can travel) may also contribute to friendly working conditions. Unfortunately, in many cases contractors end up dealing with new owners, new architects, city inspectors, subcontractors, vendors, construction workers, weather, and soil conditions as well as disgruntled supervisory personnel unhappy to be working on the road. These challenges are real and give grave cause for concern when a client takes this very serious step.

However, as communication, project management and accounting systems have improved exponentially over the past 20 years so has one’s ability to manage a wider geographic footprint. Key success factors when travelling out of your normal territory include:

Estimating – A good contractor has superior estimating skills and systems in place to manage costs. Estimating and project management must work together to get proper feedback back to the estimators.
Subcontractor / Vendor Prequalification & Selection – This is crucial to working on the road. It won’t be possible to bring your best folks with you. You will need to partner with new subs and vendors. More and more subs are also operating across territories. Use repeat subs where you can but develop a disciplined detailed approach to soliciting and prequalifying subs & vendors. Enlist your surety and agent’s assistance with this. Most larger sureties have offices across the country and can be an asset here. If your surety is in the loop and helping to prequalify they will be more confident a system is in place and being utilized.
Project Control – good contractors develop processes and procedures for managing their projects. The more you measure and manage the more successful you will be. With today’s communication tools this is much easier today than 20 years ago. Systems which are slow or outdated will not be able to generate useful management information in real time. If data is slow to management course corrections will be sluggish and opportunities to correct problems will be inefficient or lacking.
Planning – Develop a marketing and overall business plan for the new territory. Leverage your key strengths and personnel. Seed your new office with some of your strongest performers. Communicate the plan to your surety and other key stakeholders. If operating losses are to be incurred during “start-up” be conservative and realistic so that expectations are reasonable.
Consider Partnering with a local firm – Properly structured Joint Ventures or other project participation arrangements can significantly reduce risks associated with working in unfamiliar territories. Local knowledge of the subcontractor market, design professionals and the local regulatory environment can reduce the local risk factors. We recommend seeking out a partner with a similar culture and approach to estimating & project management, but perhaps with different product type or market experience. Complementary skills and assets are ideal. An ability to share the bonding is also a good way to manage and leverage your own bonding program. Again, seek your surety’s input into your prequalification / courtship of potential partners as this will enlist the surety’s support of the ultimate partner chosen.
Seek proper counsel – Unfamiliar jurisdictions are fraught with differences in regulation and statutes governing your operation from workers compensation benefits to statutes of repose, and indemnity provisions, etc. Seek appropriate input from counsel familiar with the law in that area.

In today’s market going out of state for work is very common. In the past this strategy has generated a significantly higher risk of failure. However, if handled properly advances in management tools and strategies make this a viable alternative to simply downsizing your company with a shrinking local market.

1. Managing To Survive – Tom R. Ragland, C. Walker Ingraham

General Contractors: Cutting Overhead vs. Retaining Staff

by Douglas L. Rieder

Douglas L. Rieder, President and Head of Construction Services Practice at Sterling Risk Advisors

General Contractors: Cutting Overhead vs. Retaining Staff

We recently met with one of our best clients and discussed a crucial challenge facing most construction firms today. Do I keep my key people on board and risk burning through my capital base, which has taken years to amass. Or do I cut my staff to the bare bones in the hope of preserving my capital for when the rebound occurs, but at the risk of struggling to re-staff and rebuild the organization?
This is a challenge facing many companies in the industry right now. The recovery has been slow to take hold and many people predict it will continue at its tepid pace for some time. If this is the case, what is the right answer? It depends on your overall plan of attack.
In the case cited above our client has made the choice to “wait out their market”. That is, rather than explore new markets and new operating territories this company is “sticking with their knitting” and limiting their efforts to cultivating new clients in their existing markets, which in this case encompass mainly hospitality and retail – two markets devastated by the recession. In the mean time they have maintained their staffing at levels far in excess of that needed to manage the currently available volume. In fact, they have staff sufficient to execute $100MM worth of work but are only on track to do about half that amount this year. In the mean time, they are “doubling up” field supervision to keep people busy, investing in training and bidding a heck of a lot of work. This company is currently forecasting a seven figure bottom line loss for 2011. In other words, management is willing to consciously lose a certain amount of capital because they prefer to maintain their staff and leverage up quickly when the market recovers.
Of course it is worth noting that this company has been around for 3 generations and has transitioned majority ownership of the company several times while building a very strong, effective and conservative culture. They also perform in the top 10% of their peer group in terms of margin performance. This culture is reflected in strict operating discipline, extremely tight quality control standards and conservative financial strength. That is, their balance sheet is strong, liquid and conservatively leveraged against their surety program. In addition, they manage subcontractor risks very tightly by using quality risk transfer documents (contracts & bond forms), bonding subs religiously, prequalifying those they use continuously and monitoring exposure to any one subcontractor. On balance they perform better while maintaining a conservative risk profile.
More commonly, our clients have downsized their businesses to match the currently available backlog and are attempting to refashion their operations to fit the market. This may involve pursuing a broader geographic territory, new markets (Private vs. public), new product types (institutional, multi-family, etc.) and / or partnerships (JVs, Teaming, etc.) to broaden their appetite and opportunities for new work. Of course this plan has risks as well. Many times these efforts are met with profit fades, estimate busts, different cash flow characteristics, etc. which morph into thinner margins (i.e. more risk) or worse yet, outright losses, as the companies go down the learning curve.
From our perspective we think the important thing is to continuously update your plan and to develop a plan that fits your organization’s strengths and weaknesses. In our first example the firm’s management believes their staff and culture are key ingredients to the firm’s long term success. Since we know the firm outperforms its peers there is objective evidence to argue that their staff and culture are correlated with their success. As such, management places a higher value on maintaining their organization intact. In their case, management believes it will be far more difficult to reconstitute their organization when the work comes back. However, that is not to say that management should lose sight of being a good steward of the firm’s capital.
Be realistic and update revenue forecasts frequently to help assess when cuts must be made if the work does not return. Develop a stair step staff reduction plan and perform a thorough staff talent evaluation so that when and if cuts are needed you have a plan in place.
We also recommend that you communicate frequently with your surety and your banker so that you enlist the “buy-in” of your surety and financial partners. If your plan calls for operating losses for a period of time until the market returns make sure you communicate this with your surety and allow them to question your assumptions, forecasts and conclusions. Your underwriter and banker can be great sounding boards and can provide broader context to which you can compare your thinking and strategy.
Be realistic and conservative. Our sample company is very conservative in all they do. Contingencies are kept in the cost column until the job is done and interim margins are held down to levels well below what they typically realize (3-5% during construction and 10-12% at completion). When profit write-downs are necessary they are aggressive and early. Cash management – billings and collections – are aggressive. This long record of conservative management has set the table for the surety and banker giving them the benefit of the doubt and being patient.
At the end of the day, surety credit is generally expressed in terms of multiples of operating capital because operating / working capital is the cushion that exists to the contractor to absorb uncertainties (losses, collections hiccups, sub failures, etc.). If a contractor operates on the bleeding edge of the multiple spectrum (20-25+ times operating capital) their surety will be less patient with a plan that calls for operating losses generated from maintaining staffing levels. For those companies who manage at more conservative multiples (10-15 times capital) and properly communicate their plans the surety will be inclined to “ride with management” and let the plan play out. The trick is to continually update the plan for new information and revised / updated expectations to allow for greatest flexibility to control one’s own destiny.

By Douglas L. Rieder, President / Principal, Sterling Risk Advisors
Contact: DRieder@sterlingriskadvisors.com / (678) 424-6502

About Sterling Risk Advisors, Inc.

by Sterling Risk Advisors

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