Underwriting Guidelines

Transcription

1 Home Warranty Insurance Fund Underwriting Guidelines Effective from 1 December 2013 This document has been prepared by: Home Warranty Insurance Fund New South Wales Self Insurance Corporation ABN: PO Box A2615, Sydney South NSW 1235 Tel: (02) Fax: (02) homewarranty@sicorp.nsw.gov.au Website: Please contact the Home Warranty Insurance Fund if you have any questions regarding this document. Printed copies for this document are uncontrolled.

2 DOCUMENT DETAILS Document Details Document Title Underwriting Guidelines Version V-5 Effective Date 1 December 2013 File Location G:\SICORP\Home Warranty\Underwriting\documents & forms Owner Home Warranty Insurance Fund REVISION HISTORY Version Date Author Draft Approved Revision Notes July 2010 Finity Consultant Draft August 2010 Finity Consultant Draft Crown Solicitors Compliance August 2010 HWIF Manager Approved BEAT Rating Criteria September 2010 HWIF Risk Manager Approved 7.1 Name of Application Forms September 2011 HWIF Underwriting Manager Approved Significant revisions based on 12 months trading October 2011 HWIF Manager Approved V3.0 Revisions approved Nov 2011 HWIF Manager Approved 6.3 Major builder segment 11.1 Securities February 2012 HWIF Manager Approved Consequential changes on commencement of Home Building Amendment Act Nov 2012 HWIF Manager Approved Significant revisions based on two years of trading Dec 2013 HWIF Manager Approved Revision approved by HWAIF Underwriting Committee on 12/11/13

3 Table of Contents 1. Introduction Guidelines Purpose Home Warranty Insurance Fund Objectives Builder Eligibility Form of Insurance Cover Offered Certificate of Insurance Decision-Making Framework Rating Tools 8 2. Builder Eligibility Assessment Construction Work Types Builder Segments Eligibility Assessment Non-Financial Eligibility Assessment - Financial Other Underwriting Issues Assessing Turnover and Project Limits Benchmarks of the Financial Strength Other Risk Factors Fatal Characteristics The Rating Category Addressing Weaknesses Underwriting Requirements for Certificates of Insurance Including 31 Pricing Issues 3.1 Applications Specific Underwriting Issues Developers Underwriting of New Multi-Unit Projects Speculative spec Construction Architect/Designer Managed Projects Architect Tendered Construction Project Management New Multi-Dwelling and High Value Constructions (>$750,000) Proof of Funding Cost Plus Contracts Contract Variations Retrospective Cover Certificate Referral Requirements Cancelled and Amended Certificates of Insurance Subsequent Applications Involving the Same Parties and/or Site Fraudulent Certificates of Insurance Receipt of Information Underwriting Reviews and Builder Monitoring Programmed Periodic Eligibility Reviews Demarcation of Responsibility Major Builders Restrictive Conditions 47

4 4.4 Triggered Special Eligibility Reviews Builders Subject to Intensive Monitoring Eligibility Profile Changes Premium Pricing Builders Subject to Flat Rate Pricing Multi-Dwelling Projects Pricing Securities Requirement for Securities New Eligibilities Following Dissolution of Partnerships, Trusts or Companies Evidence and Value of Securities Group Entities & Group Trading Agreements (GTA) Review of Securities Release of Securities Expiry of Securities Declinature, Cancellations, Suspensions and Modifications of Eligibility General Suspended Eligibility Cancelled Eligibility Modification of Existing Eligibility Profile and Terms Communication Escalation and Disputes Risk Management Active Monitoring of Risks Distribution and Advocacy Reserving Credit Terms and Application of Premiums to Policies Intermediary Responsibilities Change of Intermediary and Insurance Agent Protocol Underwriting Committees Insurance Agent Underwriting Committee HWIF Underwriting Committee Other Special Underwriting Considerations Kit Homes Marketing Groups and Franchises Tax File Numbers Building Contract Review Program ( BCRP ) Underwriting Considerations Outline of BCRP Eligibility and Certificate Process Overview operation of Building Contract Review Program Services to Insurance Agents (and/or Intermediaries) Summary Reporting Services to the HWIF Periodic Reviews of Builders and Exiting the Program 74

5 13. Owner-Builders Period of Insurance The Type of and Cost (Value) of the Work Owner-Builder Works Owner-Builder Work Contracted to a Licensed Builder or Licensed Trade Contractor Owner-Builder Applications Owner-Builders - Standard Documentation Checklist Requirements Availability of Final Occupation Certificate Owner-Builders Inspection Report Requirements Declining an Owner-Builder Work Application Customer Service Standards Complaints Against the Insurance Agent Complaints Management System General Insurance Code of Practice - Buying Insurance What is a complaint? What is a dispute? HWIF Complaints and Disputes Procedures Guideline 83 Appendices Appendix A - Scope of Insurance Cover 85 Risks Covered 85 Statutory Warranties 85 Losses Indemnified 86 Making Application for Home Warranty Insurance Cover 86 Key Definitions 87 Appendix B - Market Practice Guidelines 88 Effect of Eligibility 88 Requirements for assessment of Eligibility 88 Decision to issue a Certificate to a Builder 88 Requirements for assessment of Owner-Builders 89 Conditions 89 Guarantees and indemnities 89 Appendix C - Home Building Act Key Definitions 90 Appendix D - Asset and Liability Discount Values 97

6 1. Introduction 1.1 Guidelines Purpose The material in this Guideline has been prepared to provide builders, insurance intermediaries and professional advisors with a key reference source and guidelines for underwriting home warranty by the Home Warranty Insurance Fund (HWIF). The HWIF is the trading name for the NSW Government s home warranty insurer the NSW Self Insurance Corporation (SICorp). SICorp underwrites and administers the HWIF, which holds the NSW Government s home warranty insurance assets and liabilities. In this guideline, a reference to the HWIF includes a reference to SICorp. 1.2 Home Warranty Insurance Fund Objectives The home warranty insurance scheme is an integral component of the Government s consumer protection strategy for homeowners having building work undertaken in NSW. Home warranty insurance provides specific safety net protection where a builder is unable or unwilling to fulfil their contractual obligation to a homeowner. This includes where the contractor does not begin or complete work under a building contract and/or return and rectify defective work because of death, disappearance or insolvency [including licence suspension for failure to comply with a compensation (money) order of a Court or the Consumer, Trader and Tenancy Tribunal in favour of the homeowner]. It also protects successors in title to an owner-builder where the owner-builder is unable to rectify defective work (that has not been excluded from insurance) because of death, disappearance or insolvency. The objectives of the Home Warranty Insurance Fund are to: 1. Provide a home warranty scheme that meets the minimum requirements for a licensed builder under the Home Building Act Proactively protect homeowners by identifying unacceptable risks and taking appropriate action. 3. Ensure that builders are able to take on a level of work (and have access to home warranty insurance cover) commensurate with their capacity to do so. 4. Minimise unnecessary disruption to the NSW residential construction industry and ensure a consistent approach to the underwriting of home warranty insurance without consideration of market influences. 5. Manage the risk of loss to the HWIF (and, therefore, the Government and people of NSW), with the scheme run on a financially prudential basis that is ultimately to be not-for-profit. 6. Contribute to the improvement in standards within the NSW residential construction industry. Insurance Agents may receive advocacy from builders or their Intermediaries, which are considered in a manner consistent and compliant with this Underwriting Guideline. Appropriate advocacy by Intermediaries does not include attempting to influence decisions of Insurance Agents by reference to the overall business relationships between the Intermediary and Insurance Agent. 1.3 Builder Eligibility Eligibility is the term used to describe the entitlement that a builder has to apply for a Certificate of Insurance for specific projects and under what conditions. Builder Eligibility conditions take account of the following major criteria: builder s capabilities builder and key manager s financial history key manager s previous home warranty claims history Page 6 6

7 builder s financial backing and the level of external fianancial support offered on behalf of the builder by directors or related entities or third party-related indemnifiers should there be financial stress on the business. All Eligibilities have an appropriate Eligibility Profile in accordance with this including: annual turnover limit and individual job type contract limits. The Eligibility Profile may also include relevant conditions: maintaining capital levels maintaining specified security levels utilising a Building Contract Review Program service provider the frequency of financial reporting and other requirements as may be appropriate from time to time. Annual turnover is where each certificate of insurance issued reduces the annual limit available for purchasing certificates for a period of 12 months. The contract value associated with a certificate of insurance only replenishes the annual turnover limit available after this 12-month period. It is the absolute intent of annual turnover limits to provide a control that limits purchasing of policies by a builder over a 12 months period. An under construction limit can be applied to manage intensively monitored risks or to reduce existing risk, with written approval from the HWIF. The Insurance Agent undertakes an underwriting assessment for each builder upon receipt of an Eligibility Application. Eligibility Approval following the builder assessment process to approved builders. The approval summarises the builder s Eligibility conditions for accessing home warranty insurance cover for specific projects (i.e. by maximum annual insurable turnover and type of construction etc.). The Eligibility Approval also lists circumstances, which may lead to the cancellation of Eligibility. There is one form for a builder to make an application for Eligibility. 1.4 Form of Insurance Cover Offered Certificate of Insurance The HWIF offers a Project Specific form of home warranty insurance cover whereby each insurable residential building contract (or dwelling) proposed to be undertaken by a builder requires an individual policy (contract of home warranty insurance), as evidenced by the issue of a Certificate of Insurance. Cover for an individual project, is processed on application from an eligible builder or owner-builder using the appropriate application form. There are three (3) Project Application forms: Licensed Builder All Work (other than Multiple Dwelling Projects) Licensed Builder Multiple Dwelling Projects (i.e. two (2) or more dwellings) and Owner-Builder - All Work (as per the owner-builder permit). Applications may be rejected for individual projects or have specific conditions applied if they do not satisfy underwriting criteria (refer section 2). Refer also to section 13 for information on dealing with applications by owner-builders. 1.5 Decision-Making Framework To achieve an appropriate level of consistency a framework is provided in which decisions are to be made. This seeks to standardise the consideration given between Insurance Agents and within Insurance Agents, notwithstanding the extent of experience and skill applying. Page 7 7

8 The Eligibility decision framework consists of two (2) aspects: 1. A financial assessment (objective) utilising standardised parameters of the respective financial elements. 2. A qualitative assessment (subjective) of other relevant factors within guidelines. 1.6 Rating Tools Builder Eligibility Assessment Tool (BEAT) Small and Medium Builders BEAT will consider financial and non-financial factors including: time in business extent of any adverse history net tangible assets profitability and working capital. BEAT benchmarks the builder against industry ratios and provides an indicative rating of the home warranty risk with strengths and deficiencies identified. This report can be a catalyst for useful business planning discussions with insurance and financial advisors External Credit Rating Agency Major Builders The HWIF may appoint an appropriately skilled and experienced external commercial credit rating agency to assist, where considered appropriate, in the financial assessment of Major Builders (and any other builders or classes of builder that may be referred to the HWIF from time to time), including possible related entities. Corporate Scorecard Pty Ltd is the appointed agency at the date of this version of the Underwriting Guideline. The intent of this rating agency engagement is to obtain an independent view of the credit worthiness of a builder to support the decision by HWIF. The rating report will not be provided to the Builder but the relevant BEAT report will capture any concerns upheld by HWIF. Direct contact with builders is often needed by rating agencies for additional clarification or related party financial statements to complete this assessment. The builder s Insurance Intermediary will be made aware of all such requests. A summary of the information required by the rating agency are set out in the Eligibility Fact Sheets for the relevant builder size which are available on the HWIF website which are intended to be consistent with this Guideline. HWIF reserves the right to carry out major builder assessments in-house or require medium builders to be externally credit rated. Page 8 8

9 2. Builder Eligibility Assessment 2.1 Construction Work Types Below is a list of the current work types that builders can seek eligibility approval to carry out. The coding is based on that originally contained in the specifications Guideline for reporting of data to NSW Fair Trading. (Note new C02 category since October 2011) Code C01 New single dwelling construction Table 1. Construction Types Work Type C02 Multi dwelling alterations/additions (i.e. majority of work is structural) any number of storeys and including duplexes, triplexes, terraces, villas, townhouses or multi dwelling units C03* New multi dwelling construction (three [3] storeys or less) - duplexes, triplexes, terraces, villas, townhouses etc. or multi dwelling unit construction (e.g. blocks of units, flats etc.) C04 Single dwelling alterations/additions (i.e. majority of work is structural) C05 Swimming pools C06 ** C07 Renovations (i.e. majority of work is non-structural) - single and multi-dwelling Other not included above *The C03 category DOES NOT include the construction of free-standing dwellings on individual sites without any shared services or structural components (e.g. common walls, roofing etc.) and which will not be subject to strata title or community title on occupation. ** The C06 category may include the following structural contracts, which are considered renovations for premium purposes (i.e. coded as C06 contracts), even though a six (6) year period of insurance may be deemed to apply: the erection of prefabricated patios, garages and sheds bathroom and kitchen renovations that may include projects involving window replacement and water proofing membranes replacement of roof coverings without alteration to roof structure timber decks (including timber slatted balconies) and pergolas landscaping where retaining walls do not exceed 25% of the contract price solar panels driveways and other paving. 2.2 Builder Segments Whilst home warranty insurance is effectively a generic product in the sense of the protection it affords beneficiaries, the HWIF has in place several customised Eligibility conditions targeted at various segments of the residential construction industry as listed below. In the below segment categories, turnover covers residential and non-residential work undertaken in and outside of New South Wales and includes: The business turnover of related entities under the same management control or ownership; The business turnover of entities under the control of the same parent entity; and Budgeted construction costs for jobs under project management agreements. Note: The definition of related entity and control is to be interpreted in the broadest context so as to cover all business activity, assets, equity and/or liabilities with common director or shareholder interest or control to the building operations being assessed. Where in this Guideline there is a reference to New Builders, Small Builders, Medium Builders, Major Builders, Major Project Home Builders or Non-Reviewed Builders, it is a reference to builders fitting the following criteria. Page 9 9

10 2.2.1 New Builders New Industry Entrant The application for New Builder Eligibility is for residential contractors/builders who fall within the following criteria: have not previously contracted direct with homeowners have not undertaken any speculative constructions have not previously operated their own building business (including being a Director/Key Manager of a building company) past insolvents and their associates may also be placed in this segment as a condition of granting Eligibility. Note: Trust structures will not be approved for New Builders. Conditions to apply to Eligibility, except in exceptional circumstances where the New Builder is able to demonstrate to the Insurance Agent a reasonable justification to exceed the conditions, should be: The builder must utilise the services of a Building Contract Review Program service provider for all contracts of $50,000 and more. Profiles permitting the construction of new dwellings should be limited to maximum of two (2) concurrent dwellings with each job to be confirmed and signed-off by the homeowner or certified by the Building Contract Review Program service provider. Maximum Insurable Turnover $1 million in value over a 12 month period. The following Types of Construction are not generally available to New Builders: speculative dwellings, unless the Insurance Agent is satisfied that the land purchase and construction will not place an excessive financial strain on the New Builder Architect/Designer tendered and managed projects multi-unit developments high-rise rectifications Developer projects. The facility will be reviewed at expiry of an initial 15-month period to determine ongoing Eligibility and any change/increase in maximum insurable turnover. Following an acceptable review of financial performance and practical experience the Insurance Agent may elevate a builder from the New Builder to the Small Builder segment Small Builders Existing builders with a NSW HWIF approved turnover over $1.5 Million & do not meet the Non Reviewed or New Builder segments. This application for Eligibility is for builders with an annual business turnover of less than $3 million. The principal(s) of a Small Builder is required to have traded as a licensed builder for at least 12 months, or more than three (3) years experience as a manager or supervisor with another licensed builder in the building construction type sought or at least equivalent other suitable and relevant experience, or satisfied the Growth Matrix requirements. Refer to the Growth Matrix, from table 8 as a basis of consideration for acceptance Non reviewed Small Builder Existing builders (holding a full unrestricted NSW builders licence) with a NSW HWIF approved turnover up to and including $1.5 million with standard construction values (as set out in Table 3). Or Is a Specialist Contractor: Where the NSW Licence confirms that the applicant is a specialist contractor with a NSW HWIF approved turnover up to and including $500,000. Page 10 10

11 A full Periodic Eligibility Review (PER) will not be conducted where a builder; has a total business turnover limit that does not exceed $1.5 million, or $500,000 if a specialist contractor (including group activity); does not have an adverse trading history (e.g. previous insolvencies, past home warranty claims, outstanding Consumer, Trader, Tenancy Tribunal (CTTT) Orders, complaints, notifications) including key managers, is contracting within the standard construction values permitted in Table 3 has been contracting residential building work for over 12 months; and where the directors have no other Eligible entities. Notwithstanding the above, the initial assessment of an application for Eligibility of a builder fitting the above criteria will be in accordance with that for the Small Builder segment Medium Builders Existing builders with an annual business turnover of over $3 Million and are not major builders. The principal(s) and/or key management personnel of a Medium Builder need to be able to demonstrate that they have: traded as a licensed builder for at least two (2) years in the Small Builder category and have adequate financial performance, or more than three (3) years experience as a manager or supervisor with other small and medium licensed builders in the building construction type sought or at least equivalent other suitable and relevant experience, or satisfied the Growth Matrix requirements from table 8 as a basis of consideration for acceptance Major Builders The following types of builders are considered to be major builders for assessment and review purposes: a) Project Home or residential alterations and additions builders with an annual business turnover of $15 million or above b) Swimming pool or renovation builders (Construction types C05 and C06) with an annual business turnover $30 million or above. c) Commercial or multi dwelling builders with an annual business turnover of $30 million or above d) Medium Project Home builders, who request an increase in turnover of 50% or more e) High value prestige home builders, with an annual business turnover of $30M or above The principal(s) and/or key management personnel of a Major Builder need to be able to demonstrate that they have either: traded as a licensed builder in the small and medium category for at least five (5) years adequate financial performance over a three (3) year period, or more than five (5) years experience as a manager or supervisor with other medium and major licensed builders in the building construction type sought at least equivalent other suitable and relevant experience satisfied the Growth Matrix requirements from Table 8 as a basis of consideration for acceptance. For the purposes of home warranty insurance, a builder considered to be a major project home builder where the builder is a project home builder with an annual business turnover, or approved HWI limit of $15 million or above. These builders predominantly generate sales through display homes. Page 11 11

12 Table 3. Standard Construction Values by Builder and Construction Type Building Construction Type New Builder (inexperienced) [must be subject to Managed Builder Program) Small Builder (incl. New licence with 5 yrs expiry) Medium Builder Major Builders Non Reviewed Small Builders New single Construction $350K $600K $600K $1M New Multi-Unit (4 or more Units) No (on application) (on application) (on application) No Multi-Unit Rectification No (on application) (on application) (on application) No $600K New multi-unit, duplex or villa (3 or less units per site) Structural alterations and additions (non Multi-Unit) Swimming Pools $200K $250K $400K $400K No $350K $350K $500K $1M $350K $50K (for pool specialist only) $75K $100K $100K No Renovations (non Multi-Unit) $50K $150K $200K $200K $100K Multi-Unit Alterations and Renovations No (on application) (on application) (on application) No Notes: 1. These construction amounts are the standard generally allowable for the category concerned, but may be adjusted up or down by the Insurance Agent, based on the builder s construction history and experience. Builders are free to apply for more or less than the standard. 2. Builders will be granted an Eligibility profile consistent with their history, skills and experience and need not be granted Eligibility for all construction types. 3. Where builders are seeking higher than the standard limit, applications must be supported by an appropriate construction history and experience demonstrated through references from a structural engineer, architect or similar. References are to detail the address of the work, construction value, date completed, scope of work, licensed builder s role and the principals and key management personnel involved. The Insurance Agent will be satisfied that the references support the builder s competence within the proposed work/limit. 4. A referral requiring up to 20% profile construction limit increase on successfully completed projects is permitted without professional references. 5. Annual indexation of completed projects is to apply. The annual indexation rate applicable is the greater of 5% or the Australian Consumer Price Index 6. Where builders are members of a group (as defined in the Corporations Act 2001), considerations of turnover limits to be included in builder profiles should apply to the entire group. 7. The experience required for a New Builder to gain immediate Small Builder status includes three years experience as a manager or supervisor for a previous builder employer relevant to the building construction type sought or other suitable and relevant. Page 12 12

13 The builder must demonstrate previous experience in: managing contracts with home owners engaging and supervising a wide range of subcontractors satisfying the specifications and building codes on projects completion of projects on time and to budget. Participation in the Building Contract Review Program (BCRP) will satisfy the requirements for experience after three (3) similar projects are satisfactorily completed. 2.3 Eligibility Assessment Non Financial Information Required for Eligibility Assessment Table 4 sets out a summary of the basic information required to apply for and to be assessed for Eligibility, by builder industry segment. Further detail of the information requirements and how Eligibilities are assessed is included in section 2.4. Table 4. Information Required by Builder Segment Information Required New Builder Small Builder (including Non- Reviewed builders) Medium Builder Major Builder Business details/history (including Management Yes Yes Yes Yes Structure) Builder Licence Information Yes Yes Yes Yes Source of Financial Information Provided Yes Yes Yes Yes Costing System Used No No Yes Yes Proposed Construction Turnover Yes Yes Yes Yes Proposed Construction Type Yes Yes Yes Yes Details of Principals and Private company applicants Yes Yes Yes Yes Building Qualifications Yes Yes Yes Yes Building experience supporting construction type, limit and turnover Principals history in building or other businesses (including adverse issues) Yes Yes Yes Yes Yes Yes Yes Yes Current securities held over business Yes Yes Yes Yes Profit and loss financial statements prepared by external accountants for the previous three (3) financial years. Builder in-house interim financial reports prepared by internal accounting packages and certified by the principals N/A Preferred Yes Page Yes (including interim statements as required) N/A Yes Yes No

14 Information Required New Builder Small Builder (including Non- Reviewed builders) Medium Builder Major Builder Tax returns in place of financial statements for previous three (3) financial years Yes Yes No No Audited financial statements N/A N/A N/A Preferred Statement of financial position of principal/s working director/s or shareholder/s Statement of working capital (including for medium and major only details of aged debtors and creditors) Yes Yes Yes Yes No Yes Yes Yes Declarations and to disclosure Yes Yes Yes Yes Work in progress report No Yes Yes Yes Turnover sought Yes Yes Yes Yes Group Structure (and all related parties including No No Yes Yes shareholding) Display Home Information No No Yes Yes Business Operational Plan* No No Yes Yes Budget to Actual income and expenses No No No Yes Related Party Financial Statements (if connected by some substantive financial transaction) No No Yes Yes Work in Progress Reports A Work In Progress Report (WIP) sets out the following all for incomplete building contracts: name of homeowner site address commencement date current stage of works estimated completion date contract value balance of progress payments outstanding estimated cost to complete (for identifying cash flow concerns) Management Issues For Medium and Major Builders, an assessment of the capabilities and depth of any applicant s management team and its structure is to be undertaken. The higher the profile sought, the greater the management capability required including: an assessment of succession planning in the organisation (for Medium and Major Builders) to ensure continuation of the business in the event of death or disability of key personnel * In general terms the Business Operational Plan is to assist HWIF understand the nature and maturity of the business as well as the future plans of the principals. HWIF does not require a formalised business plan. The Business Operational Plan will include current and anticipated sales volumes, market segments and regions targeted, staff organisational chart, CV s for key managers, group corporate tree with shareholder details, and back office structures and systems to support the proposed turnover levels. Page 14 14

15 the nature of building controls and quality assurance systems in place. Other management and officers for consideration for overall evaluation of capabilities, degree of influence and time in current positions qualifications, time with company and depth of experience include: Ownership: corporate officers and shareholders,. Key personnel: executive management, project managers, licensed supervisors, estimators, internal accounting staff, sales management and marketing managers. The assessment process should emphasise the company s management and control of the following functions: job selection and marketing estimating and scheduling construction productivity purchasing cost accounting cash flow management philosophy where appropriate Accounting Systems and Job Costing Systems Accounting and Job Costing systems used by a builder need to be understood, reflect the size and sophistication of the operation, level of building activity and type of construction undertaken. Smaller builders may utilise Guideline job costing and internal record systems, or may use an off the shelf record keeping systems. Nevertheless, many businesses prepare financial statements for budgeting, financing, tax and GST purposes through external accountants. Some small businesses will only have their record keeping transaction file reviewed annually by an accountant at tax time. Most Medium and Major Builders are expected to have an internal accounting system to understand their current cash flow and account for the profitability of each job at the different stages of the contract. Major Builders may use specialised electronic job costing and record keeping systems, and have the ability to produce management reports at regular intervals. They will generally have reporting processes in place to monitor individual projects. It is expected that the builder has an internal accountant/financial controller who is well versed in all aspects of the building industry. The internal or external accountant should be contacted if there are any discrepancies or queries with the accounts, internal loans, loans between parties within a group structure, excessive director loans or drawings. Public companies, major proprietary companies, registered schemes and all disclosing entities are required to prepare an audited financial report. All companies that prepare audited financial statements should provide them as part of their insurance application Common Directorships with Eligible Entities and Group Structures If there are related entities that are licensed in NSW or are recorded on BEAT, then the application cannot proceed until the following is implemented. A group assessment must be conducted The applicant must select one Insurance Agent to conduct the required group assessment In order to apply through a different Insurance Agent, the applicant must first cancel or switch the Eligibility If Insurance Agent switch is required, this is coordinated through HWIF The applicant entity must indemnify the first entity, as a condition of any terms offered to the new applicant entity Insurance Agent must advise HWIF of the outcome of the assessment It is critical to identify related eligible entities and conduct group assessments through one Insurance Agent. Page 15 15

16 2.3.6 Adverse History History is viewed as a sound indicator of the potential for the future and is thus to be thoroughly considered in terms of risk. However, it should also be noted that the past may have been a learning process and thus that applicants may be able to demonstrate that they have redeemed a previous position. The onus should be on the applicant Claims CTTT/Court Orders and Builders Licence Incident Record Past home warranty claims paid by insurers, including HWIF, are a fatal characteristic for builder eligibility where key managers, directors, principals or shareholders (including all financial or management interests) had an association with the business giving rise to the claims. Builders will be given the opportunity of providing explanation for consideration but where there is evidence of significant defective work or incomplete projects giving rise to claims there is to be limited leniency. All past claims are investigated whether emanating from the first resort period or arising from a prior business failure under the last resort scheme. Similarly, orders against the builder (or an associated entity or former associated entity) made by a court or the Consumer, Trader and Tenancy Tribunal (CTTT), are also be taken into account. An order that has not been complied with will be considered a fatal characteristic for builder eligibility until remedied satisfactorily. The events giving rise to a tribunal order are considered in determining the competence of the key managers. The proportion of matters being referred to the Tribunal compared to the total volume of building activity may be an indication of a builder experiencing financial difficulty or exhibiting signs of adverse quality controls. The existence of tribunal actions is not necessarily considered to be a fatal characteristic as disputes will occur from time to time. NSW Fair Trading investigations are considered the same as CTTT matters. In most building entities, particularly small builders, the nominated supervisor should be deemed a key manager of the business. As such, any adverse track record of the nominated supervisor is to be investigated and appropriately mitigated, prior to the application proceeding. There are exceptions to this rule where the directors are sufficiently experienced in their own right Trade Credit History Extended Trade Credit terms negotiated with suppliers where the builder s financial information is sound should not be viewed adversely. All negative reports or credit checks are to be reviewed. Any identified behavioural issues that may affect risk should be fully investigated and where necessary, lead to a rejection of the application unless satisfied with the outcome of the investigation or the situation is rectified Association Membership Where absence of membership can be ascertained to be because of cancellation or suspension by the Association, the Eligibility or certificate should not be granted while ever that membership status remains Previous Insolvencies Previous insolvencies can go to the heart of a risk currently presented, whether they are of the builder or direct associates for example partners, directors. Consideration of past insolvency risk of any direct or related entity should consider the circumstances of the insolvency and the history subsequently. There should be an expectation of at least 10% ANTA (Adjusted Net Tangible Assets) or deeds of indemnity (with at least 5% entity ANTA) if such a builder is to be favourably considered for future Eligibility. Page 16 16

17 If prepared to accept the new risk, one avenue to pursue would be to place the applicant into the New Builder segment, only, allowing them to be assessed in that category and have New Builder conditions applied to them, until they are further assessed at New Builder review time Qualifications and Experience A builder s level of experience is a very important component of the underwriting process when assessing projected levels of construction, builder segment upgrades and job profiles. For example, where: the principal(s) of a New Builder has less than three (3) years experience as a manager or supervisor with a licensed builder for the building construction type sought or a single dwelling house builder is seeking an upgrade to multi-unit developments Builders will need to demonstrate they have the necessary experience and ability to undertake the project limits sought (or have the appropriate access to that experience such as an experienced manager/supervisor). Industry Association and Professional Institution Membership are to be taken into account for training, compliance, development and technical building standards. External trade qualifications should be assessed. Building history, including the three (3) largest residential construction or other building projects the builder has been involved in, and references from those sources should be utilised. Tertiary qualifications or specific training in the areas of accounting, business management and estimating should be regarded. The qualifications and experience of the key personnel should reflect the professional standing of the trading entity. 2.4 Eligibility Assessment Financial Financial Reports In applying for Eligibility, in addition to the declaration/s in the Application form, and in all Eligibility reviews all-corporate building entities (i.e. companies and trusts) are to provide the last three (3) years financial reports either as: Externally prepared financial statements, or Accountant and director certified internal financial statements. Note: Tax returns are not sufficient to conduct an assessment for Medium or Major Builders. All builders are to provide evidence of the assets and liabilities declared, including the assets and liabilities of related entities and principal(s). The Insurance Agent will take reasonable steps to verify that the assets exist; are owned by the entity stated; the valuation is reasonable; and the liabilities are complete and accurate. Declaration made by the principals (individuals in a partnership, directors in a company, and trustees of a trust) that all information provided (including financial statements) is true and accurate to the best of their knowledge Medium and Major Builder Financials The financial statements (Balance Sheet and Profit and Loss accounts that are accountant prepared including Notes to the Accounts) are central in determining a risk rating for the builder. Tax returns are not sufficient to conduct an assessment. The risk rating is established by using the criteria, the methodology and assessment model described. Any corporate structures must be clearly defined in the application and all other related documentation that Insurance Agents will need to understand the group structure must be provided. Such applicants must provide a corporate tree showing all related parties and ownership structures (directors and shareholders). Page 17 17

18 The currency of the annual financial reports is a significant factor in determining the reliability of the assessment that can result from the rating tools. The latest 30 June annual financial reports are required for the past three (3) years (or all years of trading if, less than three [3] years). Where a previous entity traded, the total of three (3) years annual financial reports can include the previous trading entity (i.e. two (2) years trading as a sole trader and one (1) year as a company would satisfy the three (3) year requirements). The latest annual reports are to be no older than nine (9) months at the time of assessment. Where an application or review is relying on accounts that are older than nine (9) months, interim management accounts no more than three (3) months old are required in addition to the annual accounts. For corporate structures, the same requirements for financial reporting will apply to all related entities that have balance sheet related loans with the builder that affect the ANTA or current ratio of the builder and where group treasury arrangements are practised. HWIF reserves the right to seek its own independent accounting investigation of any company or group that in the opinion of the agent or HWIF represents excessive risk. Builders in growth or showing adverse cash flow and equity are most likely to meet this requirement Small Builder Financials - Partnerships and Sole Traders It is required to establish three (3) years trading history where the entity has traded for three (3) or more years. Financials of previous trading entities controlled by the principals, directors or shareholders can be included in this requirement. Where an entity has traded for less than three (3 years) all completed trading years financials must be provided. The financial reports required include: The three (3) most recent tax returns or accountant prepared financial statements (latest not more than 12 months old), not the taxation assessment notices. Current Statement of Personal Assets and Liabilities (in the form set out in the Eligibility Application Form). Work in progress summary Small Builder Financials - Companies and Trusts The financial statements (Balance Sheet and Profit and Loss accounts that are accountant prepared signed off and details including Notes to the Accounts) are central in determining a risk rating. Financial reports required include: Up to three (3) years most recent accountant prepared financial statements. Where accounts are more than nine (9) months old an interim position that is no more than three (3) months old at the time of assessment is required. Interim accounts can be printouts from internal accounting systems. Tax returns are not sufficient to conduct an assessment. Internally prepared interim financial statements are acceptable. Current Statement of Personal Assets and Liabilities (in the form set out in the Eligibility Application Form). Work in progress summary. Where a previous entity traded, a total of three (3) years annual financial reports can include the previous trading entity (i.e. two [2] years trading as a sole trader and one [1] year as a company would satisfy the three [3] year requirements). Any corporate structures must be clearly defined in the application and the Insurance Agents will need to understand the Group structure. Such applicants may need to provide a corporate tree showing all related parties and ownership structures (directors and shareholders). Note: Directors extracts must be conducted on all applicant directors and nominated supervisors where common directorships with eligible entities and group structures are involved. Copies of Trusts Deeds are required for Trust corporate structures. Page 18 18

19 2.4.5 ANTA Calculations ANTA is the acronym for Adjusted Net Tangible Assets and is designed to represent the net fire sale position of tangible assets less third party liabilities. ANTA is viewed as being a buffer, available to the applicant business to successfully withstand normal business disruptions or shocks, such as A dispute with a home owner over a progress payment Seasonal issues, such as a building industry shut down Periods of extended inclement weather Other difficulties encountered that result in not being able to progress sites or collect progress payments Errors & unbudgeted unfavourable variances in pricing Errors & unbudgeted unfavourable variances in direct costs Errors & unbudgeted unfavourable variances in overhead expenses Abnormal & extraordinary expenses (such as inventory write downs) Events such as those listed above should not cause a cash flow crisis. Applicant business that are deemed to have insufficient contingencies to fund such disruptions are to be carefully considered, and monitored. The ANTA calculation is critical to this objective. When arriving at final ANTA calculation, the past two years ANTA must be considered. The final ANTA figure will be the lesser of the most recent assessment or the average of last two financial year-ends. This approach determines the ANTA for all assessment types, including requests to release Eligibility deeds of indemnity (not job specific deeds). An underlying assumption, in our underwriting approach, is the question of whether the building entity is generating consistent positive net wealth. Sometimes this wealth is retained in the builder s balance sheet (hence strong Builder ANTA position). Alternatively, that wealth may be diverted and reflected in the balance sheet or statement of financial position of the related entity/ director. Accordingly, in recognition of successful wealth accumulation that has enabled the builder to obtain external funding, there may be grounds to discount liabilities secured off the builder applicant balance sheet, where the secured asset holder s financial position is not more than 70% geared Balance Sheet Adjustments Contingent liabilities are treated at face value in ANTA calculations. Any contingent liabilities are to be assessed for their likelihood and impact by obtaining further information from the builder and Intermediary. Intangible assets, including but not limited to items of goodwill, establishment costs, licence fees and franchise fees are not to be included in ANTA calculations. Loans payable by related parties should only be considered as assets for the purpose of ANTA calculations if the full value of the loan remains on the balance sheet of the related party with a strong ANTA in its own right and the related party is directly related to the builder (i.e. for loans to related entities to be included the financial position of that entity must also be considered). Deferred Tax Assets are only useful in reducing future tax liabilities, and are not available to fund current working capital requirements. Retention payments arise out of contractual obligations with previous customers. Uncertainty often exists as to the collectability of these retentions, depending on the specific underlying contract, and the track record of the applicant in terms of previous retention releases. Any portion of trade debtors over 30 days, are to be treated as doubtful in the conservative calculation of ANTA. A close study of the trade debtors listing and trends in debtor days is required, Page 19 19

20 Assets that are to be fully discounted include: Deferred Tax Assets (DTA) Retentions. Trade Debtors over 30 days Loans to related parties Intangible assets Such assets are unlikely to be readily available for working capital purposes and are unlikely to be accepted as security for lines of credit or other sources of debt funding Gross Margins There are two (2) ways of expressing gross margin. The majority of builders and the HWIF BEAT calculates margin as a markup on the cost of sales (on-cost margin). Financial advisors and accountants will express the margin as a percentage of sales revenue (on-sales margin). It is essential that the correct comparison and communication be made. Inadequate gross margin is the primary cause of cash flow deficiency in the industry and is driven by inexperience and underpricing. Where there is a demonstrated weakness in the gross margin due to underpricing the Building Contract Review Program is an appropriate Eligibility condition for small builders. When assessing the gross margins of the business, the amount of Industrial/Commercial turnover is considered. Traditionally the gross margins obtained from commercial and industrial projects are lower than those obtained from residential building; therefore, any change in construction profile will need to be considered against historical performance. A consideration of the way overheads are accounted in the profit and loss report will affect gross margins. A builder who charges all direct overheads costs to a project will report a lower gross margin Current Working Capital Position Builders requesting cover in excess of $5 million are required to submit a current snapshot of their working capital position. This schedule will list the Current Assets and Current Liabilities of the business and used by the Insurance Agents to confirm the builder s liquidity, ongoing viability and ability to undertake and complete projects. Note: Debtor and Creditor Days are important indicators of the Cash Flow position of the business. Failure to pay creditors on a timely basis may result in decreased ability to secure materials or labour thus increasing the risk of insolvency. However, if the builder has legitimately negotiated delayed credit terms with a supplier/s and the business appears sound, such trade credit issues may be ignored. Other key factors include: overdraft balance and available limit. The Builder Eligibility Assessment Tool (BEAT) considers undrawn funding facilities. The value of undrawn facilities is considered as improving the overhead expense day s coverage taxation and GST liabilities work in progress levels agreed terms for suppliers and subcontract labour directors loans aged list of creditors and debtors bank facilities letter and letter from bankers confirming banking covenants have been met. In order to consider undrawn funding facilities, an up to date letter from the financial institution confirming the value of undrawn facilities. The funding must be in the name of the applicant entity, or its directors or shareholders. Multiple facilities may be aggregated. Page 20 20