Successful Partnerships

Surety Bond Assistance Fuels Growth

Brokerages help small business take on public works projects that would otherwise be out of reach.
By: | March 3, 2014 • 7 min read

Federal and state laws mandate that a certain portion of most public works projects be given to small, minority-owned or female-owned contractors. There is little argument that such rules have a great benefit, both in supporting bootstrap businesses, and also in bringing increased talent and competition to contract bidding.

Federal and local laws also mandate that contractors post surety bonds, often to the full value of the contract. The intention is to protect taxpayer dollars and public infrastructure against shoddy work. Often, the two mandates conflict with each other, because even healthy small firms have cash flow constrictions that make posting a bond prohibitive.

While legislative solutions are sought, the interim solution is bond assistance, or subsidy. A few local brokerages around the country, notably one on each coast, have specialized in this field. Most recently, the San Francisco regional Bay Area Rapid Transit (BART) retained Merriwether & Williams, a pioneer in this niche market, to assist in a new round of contracts and bonding.

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A completely separate firm, Surety Bond Associates of Bala Cynwyd, Pa., is active on the East Coast, and has been working with the Philadelphia Industrial Development Corp. for more than a year on an emerging-business capital assistance program.

“We are making final adjustments to the program, and hope to launch it in the second quarter,” said Ellen Neylan, president of Surety Bond Associates.

The national brokerages are not active in the business because it involves a lot of time and effort for a relatively modest return. The big firms laud the efforts, and are content to leave the business to the dedicated regional brokers.

“The bonding requirement is a huge hurdle for small and minority businesses,” said James E. Bridgeman, department manager of insurance for BART. He said that while the heavy burden on bidders’ cash flow and capital is the biggest challenge for them, there are others. “There is a formal bonding statement, accounting standards, and other requirements,” he said. Government entities and large contractors have the personnel and expertise to handle those on their own, but small businesses do not.

Bridgeman added that in meeting the inclusion goals of the contractor distribution laws, BART and other authorities also gain community involvement in local and regional public works. “Merriwether & Williams have held roundtables where prime contractors and subcontractors can sit down, get to know each other and the projects.”

“In these programs, our default is 0.2 percent, which is one-hundredth of the surety industry average of 20 percent.”

— Ingrid Merriwether, president and CEO, Merriwether & Williams

Question of Default

One major concern, especially with a bond assistance or subsidy program, could be default. But he noted the default percentage for contractors in such programs is quite small. “There is a real engagement by the brokerage, a real passion for this underwriting and assistance. They try to make default very difficult. Beyond underwriting guidance, they provide third-party fund administration and other support as part of their process, even beyond our contractor supervision,” said Bridgeman.

Ingrid Merriwether President and CEO Merriwether & Williams

Ingrid Merriwether
President and CEO
Merriwether & Williams

The BART commission comes 17 years after the first effort in bond assistance by Merriwether & Williams, said President and CEO Ingrid Merriwether. “We were handling OCIP for the San Francisco Airport Authority [SFO] when they asked us to help them with a $3 billion capital expansion project. They were having trouble meeting their Miller Act obligations. That is the federal law requiring a portion of the work be done by small, female- and minority-owned contractors. California and most states have similar laws.”

She said that SFO realized it would have to approach the problem in a new way, because this was a systemic challenge. The authority was willing to provide bonding subsidies to help otherwise capable contractors to qualify, but the process was complex. “Bonding is often an artificial barrier,” said Merriwether. “What is commonly called a subsidy or assistance is actually an investment. There are direct and quantifiable cost savings from having more bidders on a job, especially smaller contactors with less overhead.”

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There is a symmetry to the concept. The idea of the bond is that the contractor puts capital at risk but once the job is done, that capital is returned and the contract paid. Similarly, in the surety assistance, the authority provides a subsidy, and gets it back when the bond is returned. The net gain is the lower cost of the project.

“We never arrange for more than 40 percent assistance,” said Merriwether, “that means the contractor is still responsible for 60 percent. The surety is enduring.” For the Miller Act, the federal threshold is $100,000, so that covers just about any public work. “After the SFO project,” she said, “the mayor of San Francisco realized bonding was a major issue throughout the city and county, and within two years there was a citywide bond assistance program.”

The BART commission represents the eighth such project for M&W in the past 17 years. According to Merriwether, “in that time, we have enabled $699.3 million in transactions, of which $207 million have been successful bidders.” The more important ratio is the default rate. “In these programs, our default is 0.2 percent which is one-hundredth of the surety industry average of 20 percent. That is testimonial proof that bonding is an artificial barrier,” she said.

Another client of M&W is the City of Los Angeles, specifically several of its “proprietary” or autonomous departments. Curtis Kelley is senior risk manager for the city administrator’s office. “The mayor’s office received numerous calls regarding the difficulties that small contractors were having securing surety. I did some research and learned about the program that the City and County of San Francisco had established,” he said. “I called Ingrid and spoke at length with her as well as officials in San Francisco. We decided to establish a similar program here.”

LA started its program under the auspices of the sewer construction and maintenance authority, simply as a good fit with municipal process. Eventually the program grew to include transit and transportation, airports and ports, and central city government.

“For just the City of LA, we have assisted on $156 million in surety or contract value, of which $62 million in contracts were awarded. And we have never had a default.”

— Curtis Kelley, senior risk manager, Los Angeles city administrator’s office

“Merriwether & Williams have great contacts among prime and subcontractors,” said Kelley. “They go through their own underwriting process with the potential bidders on a contract. They determine which surety would be the best fit, then they go to the market with our guarantee. That is the smaller of either 40 percent of the value of the contract, or $250,000.”

Kelley stressed that the bonding underwriters still go through their own underwriting as they would if the contractors had come to them separately. The double underwriting seems to work: “For just the City of LA, we have assisted on $156 million in surety or contract value, of which $62 million in contracts were awarded. And we have never had a default. The savings came to $3 million. This approach has a real payback.”

Growing Program

Kelley expects the program to expand. “We have used the program for a new terminal at LAX, for wastewater projects, but the ports are probably going to be our biggest expansion in the program,” he said. “This is not just piddly little contracts; they have a huge impact for the city and for the people of LA.”

Merriwether also speaks in terms of “the double bottom line,” doing well by doing good. “We are a small, woman-owned firm, so this is our cohort. We can relate,” she said. “This is important work, and as far as I know we are the only firm in the State of California engaged in it. In the past few requests-for-proposal, we were told that we were the only firm to respond.”

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Government officials agreed. “The biggest challenge in our latest program was not getting approvals, it was the lack of competition for the contract,” said BART’s Bridgeman. “We have worked with Merriwether & Williams before as operations broker and also as a team member on construction projects.”

Bridgeman added that the hope of the brokers and of the city is that some of the repeat contractors taking advantage of the bond assistance will be able to build a track record and grow to the point where they no longer need the program.

M&W has several offices around California, and there is plenty of business. Said Merriwether, “We have a big back yard.” She is hopeful about legislative solutions, and M&W has other lines of work, but she expects to be at this for many more years.

“There are constantly efforts around the country to change bonding requirements because this is a real problem for governments at all levels,” said Merriwether. “The availability, or lack, of surety credit has a very big impact on public works everywhere. Surety bonds don’t exist in an abstract public-policy realm. They affect city and county budgets, local and regional economic development and infrastructure.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

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R&I Profile

Achieving Balance

XL Catlin’s Denise Balan stays calm and focused when faced with crisis.
By: | January 10, 2018 • 6 min read

In the high-stress scenario of kidnap or ransom, the first image that comes to mind isn’t necessarily a yoga mat — at least, not for most.

But Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin, who practices yoga every day, would swear by it.

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“I looked at these opposing aspects of my life,” she said. “Yoga is about focus, balance, clarity of intent. In a moment of stress, how do you respond? The more clarity and calmness you maintain, the better positioned you are to provide assistance in moments of crisis.

“Nobody wants to be speaking to a frenetic person when either dealing with a dangerous situation or planning for prevention of a situation,” she added.

“There’s a poem by [Rudyard] Kipling on that,” added Balan’s colleague Ben Tucker. “What it boils down to is: If you can remain calm, you can manage through a crisis a lot better.”

Tucker, who works side by side with Balan as head of U.S. terrorism and political violence, XL Catlin, has seen how yoga influences his colleague.

“The way Denise interacts with stakeholders in this process — she is very professional and calm in the approach she takes.”

Yin and Yang

Sometimes seemingly opposite or contrary forces may actually be complementary and interconnected. In Balan’s life, yoga and K&R have become her yin and yang.

She entered the insurance world after earning a juris doctor degree and practicing law for a few years. The switch came, she said, when Balan realized she wasn’t enjoying her time as a commercial litigator.

Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

In her new role, she was able to use her legal background to manage litigation at AIG, where her transition from law to insurance took place. She started her insurance career in the environmental sector.

In a chance meeting in 2007, Balan met with crisis management underwriters who told her about kidnap and ransom products.

She was hooked.

Because of her background in yoga, Balan liked the crisis management side of the job. Being able to bring the calmness and clearness of intent she practiced during yoga into assisting clients in planning for crisis management piqued her interest.

She then joined XL Catlin in July 2013, where she built the K&R team.

As she became more immersed in her field, Balan began to notice something: The principles she learned in yoga were the same principles ex-military and ex-law enforcement practiced when called to a K&R-related crisis.

She said, “They have a warrior mentality — focus, purpose, strength and logic — and I would say yoga is quite similar in discipline.”

“K&R responders have a warrior mentality — focus, purpose, strength and logic — and I would say yoga is quite similar in discipline.” — Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

Many understand yoga to be, in itself, one type of meditation, but yoga actually encompasses a group of physical, mental and spiritual practices. Each is a discipline. Some forms of yoga focus on movement and breathing, others focus on posture and technique. Some yoga is meant to relax the mind and create a sense of calmness; other yoga types make participants sweat.

After having her second child and working full-time, Balan wanted to find something physical and relaxing for herself; a friend suggested yoga. During her first lesson, Balan said she was enamored with it.

“I felt like I’d done it all my life.”

She dove into the philosophy of yoga, adopting the practice into her daily routine. Every morning, whether Balan is in her Long Island home or on a business trip, she pulls out her yoga mat to practice.

“I always travel with my mat,” she said. “Daily practice is the simplest form of connection to routine to maintain my balance — physically and mentally.”

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She said the strangest place she has ever practiced was in Lisbon. She was on a very narrow balcony with a bird feeder swarming with sparrows overhead.

After years of studying and practicing, Balan is considered a yogi — someone who is highly proficient in yoga. She attends annual retreats with her yoga group, where she is able to rejuvenate, ready to tackle any K&R event when she returns.

In 2016, Balan visited Tuscany, Italy, where she learned the practice of yoga nidra, a very deep form of meditation. It’s described as the “going-to-sleep stage” — a type of yoga that brings participants to a state of consciousness between waking and sleeping.

“It awakens a different part of your brain,” Balan commented. “Orally describing it doesn’t quite do it justice. One has to practice Nidra to fully understand the effect it has on your being.”

Keeping a level head during a crisis is key in their line of business, Tucker said. He can attest to the benefit of having a yogi on board.

“I’ve seen her run table-top exercises where there is this group of people in a room and they run an exercise, a simulation of a kidnap incident. Denise is very committed to what we’re doing,” said Tucker.

“She brings that energy. She doesn’t get flustered by much.”

Building a K&R Program

When Balan joined XL Catlin, she was tasked with creating the K&R team.

Balan during a retreat in Sicily, Italy, 2017

She spent time researching and analyzing what clients would want in their K&R coverage. What stuck out most to Balan was the fact that, in these situations, the decision to purchase kidnap and ransom cover is rarely made because of desire for reimbursement of money.

“I asked why people buy this type of coverage. The answer was for the security responders,” she said.

“These are the people who sit with the family. They’re similar to psychologists or priests,” Balan further explained. “Corporations can afford to pay ransom. They buy [K&R] because it gives them access to these trained and dedicated professionals who not only provide negotiation advice, but actually sit with a victim’s family, engaging deep levels of emotional investment.”

“I’ve learned to appreciate all moments in life — one at a time. The ability to think clearly and calmly guides my work, my practice and my personal life.” — Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

Balan described these responders as people having total clarity of purpose, setting their intentions to resolve a crisis — a practice at the very heart of yoga. She knew XL Catlin’s new kidnap program would put stock in their responders.

“I’ve worked closely with the responders to better understand what they can do for our clientele. These are the people who run into danger — warrior hearts married to dedication to our clients’ best interests.”

But K&R is more than fast-paced crisis and quick thinking; Balan also spent a good deal of time writing the K&R form and getting the company’s resources in order. This was a huge task to tackle when creating the program from the ground up.

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“A lot of my day-to-day is speaking with brokers and finding ways to enhance our product,” she said.

After a few months, she was able to hire the company’s first K&R underwriter. From there, the program has grown. It’s left her feeling professionally rewarded.

“People don’t often get that opportunity to build something up from scratch,” she said. “It’s been an amazing experience — rewarding and fun.”

“She brings groups of people together,” said Tucker. “She’s created a positive environment.”

Balan’s yogi nature extends beyond the office walls, too. Her pride and joy, she said, are her kids. And while it may seem like two large parts of her life are opposite in nature, Balan’s achieved balance through her passions.

“[Yoga] has given me the ability to see beyond only one aspect of any situation” she said. “I’ve learned to appreciate all moments in life — one at a time. The ability to think clearly and calmly guides my work, my practice and my personal life.” &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]