Communication ‘early and often’ is the key to strong surety relationships

By Chris Nolan, Head of Large Contract Surety for U.S. National Accounts, Zurich North America

Surety underwriters often cite close collaboration as a key tenet of a successful relationship among a surety provider, agent and customer. The most important contributor to strong collaboration and a mutually beneficial relationship is effective communication. For many years, I have told customers that the more surety underwriters know about their businesses and strategic plans, the better job they can do to meet their needs. By openly communicating issues “early and often” and notifying the surety underwriter of pending changes or transactions that will impact the customer’s surety risk, the surety relationship can drive the best outcome for all parties and help to avoid surprises.

A family affair

After three generations of family ownership, the management of a long-standing Zurich customer reached the decision that there was no clear heir apparent within the family to take the reins of leadership going forward. In recent years, this has not been an uncommon scenario and challenge for some firms. Fortunately, there are several options that family-owned businesses can explore when planning to engineer a sale or ownership transfer.

The customer informed Zurich of their plan to initiate a sale and retained outside consultants to guide them through a major process in which they had no prior experience. After reviewing analysis provided by the consultants, the firm narrowed their options down to three possibilities: sell to a private equity firm, sell to a competitor or establish an ESOP (Employee Stock Ownership Plan).

As decision time approached, the customer expressed interest in understanding how each scenario would impact available surety credit. This allowed the customer, the broker and Zurich to have an open and honest discussion about the pros and cons of each scenario and the potential impacts. Ultimately, the ownership group felt most comfortable with an ESOP, both as an expression of loyalty and trust in their key employees, and a desire to help keep intact for years to come the long-standing corporate culture the family had built.

Because ESOPs can take different forms, there were a variety of decisions to be made regarding the structure of the transaction. Also, since the company was seeking to maintain the same level of surety capacity going forward, Zurich offered insights into customer experiences seen with similar structures.  After offering valuable feedback, the surety underwriter connected the customer with another business having undergone a similar transaction. As a result of the perspectives provided, a final plan was chosen which met the customer’s objective of successfully transferring ownership to key employees while maintaining surety capacity. Clearly, frequent communication between the customer and underwriter from the earliest days of this plan was key to arriving at a mutually successful solution.

Leveraging a new opportunity

Recently, another customer expressed interest in acquiring a firm whose activities paralleled their core line of business, but which was doing specialized work the customer did not currently perform. Prior to engaging in serious negotiations, the customer informed us of this opportunity, requesting a conference call to discuss why the transaction made sense, how they proposed to finance the acquisition, and how they were protecting themselves. A key concern was ensuring that this transaction would not be a “deal killer” regarding existing surety capacity. Following the discussions, we told the customer that we were comfortable with the transaction as described. The customer expressed appreciation and made a formal bid for the firm.

While the bid was successful, prior to closing a new twist arose as one of the advisors on the transaction suggested the new entity should remain completely separate from the customer as a “Special Purpose Entity”(SPE). After bringing this to our attention, we detailed the issues we saw in having separate companies and separate surety programs, but particularly the leveraging of available surety capacity for the new entity. The customer was surprised that the SPE structure would have such a significant impact on the new entity’s go-forward surety credit and committed to returning to the original plan and structure.

Had the customer not made a point of consistently communicating progress on the transaction, it is likely they would have overlooked the downside of keeping the acquired company separate, which would have impacted the newly acquired firm’s ability to maintain their level of surety support. Fortunately, the risk manager communicated with us early in the process and maintained communication on an ongoing basis, avoiding a potential surprise. They were very appreciative of our support and direction.

Getting back to the table

Like so many other aspects of our lives, the COVID-19 pandemic temporarily put the brakes on person-to-person communication often vital in sorting out the details of complex business transactions such as mergers, acquisitions and major, organizational changes. Zoom and other technologies helped us maintain good communication during the pandemic, but they are no substitute for sitting across the table from customers and colleagues to work out complex, often very high-value transactions. Our hope is that in-person meetings will soon become the norm once again so that we can leverage the power of across-the-table dialogues important in executing effective business deals.

The more that surety underwriters can meet and interact in-person with customers and brokers in open, transparent communication, the more successful we will be together in working to help drive economic recovery and growth in a coming post-pandemic world.

Learn more about the range of surety products and solutions available from Zurich North America.

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Chris Nolan is Head of Large Contract Surety for U.S. National Accounts. Drawing upon more than 22 years in the business, Nolan brings to Zurich broad knowledge and experience in contract and commercial surety through former roles with surety teams. Most recently, he was Chief Risk Officer and Head of Commercial Surety. Nolan now leads a Zurich Contract Surety unit providing an array of products to contractors performing a wide range of public works projects as well as private construction projects.
Chris can be reached at christopher.nolan@zurichna.com