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

More from Risk & Insurance

Insurance Executive

A Leader for Turbulent Times

Lloyd’s CEO Inga Beale is tasked with guiding the venerable insurance market through Brexit and the demands of the fiercely competitive global specialty business.
By: | July 6, 2017 • 12 min read

Underwriters at Lloyd’s are accustomed to taking on complex, even daunting, risks. The company’s leader looks at the world today and sees plenty of opportunity, but also much to be concerned about.

“Political instability is something that troubles me more than anything else because I think there is now more uncertainty across the world than there has ever been,” said Inga Beale, CEO of Lloyd’s of London.

“It feels that all of the norms that I grew up with are being challenged — openness, globalization, acceptance, inclusion — on a global scale.”

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Appropriately, we’re sitting around a table in Beale’s modern glass-fronted office at the top of the Lloyd’s Building — itself a vision from the future — to talk about Brexit and Lloyd’s newly announced Brussels subsidiary.

Add to the mix Donald Trump and the threat of nuclear attack from North Korea, the bombing of Syria and a spate of terrorist attacks across Europe, and it’s clear we are living in the most dangerous period certainly since the Cold War, or possibly ever, believes Beale.

That belief received even more chilling reinforcement when terrorists detonated a bomb at an Ariana Grande performance in Manchester, England on May 22.  Twenty two people, some of them children, were killed and more than 50 wounded in that attack.

Three years ago, it was Beale herself making world headlines with her appointment as the first female CEO in Lloyd’s 329-year history. But now Brexit and other seismic disruptions to world order have taken center stage.

Lloyd’s announced at the end of March that it would establish a new European subsidiary in Brussels in time for January 1, 2019 renewals so it can continue writing risks for all 27 European Union (EU) and three European Economic Area states after the UK exits the EU.

Currently, it uses its passporting rights to serve EU customers from London, but the expected loss of those rights after Brexit necessitated the establishment of a new subsidiary.

For now though, it’s business as usual, said Beale, with the UK remaining a full EU member for at least two more years. She added, with a reassuring smile, that there will be no immediate impact on existing policies, renewals or new policies written during that time.

“We were campaigning very much to remain in the EU before the referendum because we knew what the likely impact [of leaving the EU] would be on Lloyd’s,” said Beale, whose impressive resume includes stints with GE Insurance Solutions, Zurich and Canopius.

“We rely very much on our licensing network, and being part of the EU means that from London we can write insurance and reinsurance for all of the EU countries with our passporting authority.

“But with the UK exiting the EU, it now means that we lose those licensing powers to offer insurance with immediate effect. To counteract this, we have determined to set up a subsidiary within the EU, meaning that about five percent of our global revenues will have to go through this subsidiary because it is insurance business offered to our EU-based clients.”

Beale and her team also negotiated that most of Lloyd’s underwriting business will remain in London, as will the majority of the transactions and decision-making powers. Meanwhile, the manpower needed to run the new Brussels operation will be in the “tens rather than hundreds,” she is quick to point out.

“It’s not a huge raft of people having to move over,” she said.

“Lloyd’s will continue to do 95 percent of its business as it has always done — it’s only the other five percent that will have to go through a separate legal entity, and we’re not anticipating any further changes to our business model as a result.”

Beale, whose dual role is both supervisor and advocate for the market’s 100-something member underwriting syndicates, says that the franchise board chose Brussels over other locations including Luxembourg, Dublin and Malta because of its “robust and quality” regulatory regime.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it.” — Inga Beale, CEO, Lloyd’s of London

It also provides access to a multilingual talent pool, is near to London, and, most importantly she stresses, is located in a member state with a “very high certainty of staying in the EU.”

“We want people who reflect our customers,” she said.

“The London insurance market is littered with people from all over the world because London is such a global insurance hub, so we need experts here who speak the language and understand the different cultures.”

North American Footprint

Despite its large European market, it’s the other side of the pond where Lloyd’s really thrives. Approximately 46 percent of its business comes from the U.S., mainly California earthquake and East Coast hurricane risks, she said.

Lloyd’s also remains the No.1 excess and surplus lines insurer in the U.S. and the largest non-U.S. domiciled insurer, she added.

“We have done really well in terms of growing our E&S market share over there,” she said.

“That’s our sweet spot; those non-standard risks that are hard to place.”

By contrast, Beale said that reinsurance has become a much more competitive market with new entrants offering alternative types of reinsurance putting a squeeze on prices. As a consequence, Lloyd’s has focused more on insurance, she said.

“We have also done well in Canada and with our delegated authority through our Managing General Underwriters and Managing General Agents,” she said.

“It’s this very local and specialist distribution channel that has been our success story across North America.”

In January, Beale was made a Dame Commander of the Order of the British Empire — the female equivalent of being knighted — and is also the Association of Professional Insurance Women’s Insurance Woman of the Year for 2017.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries.” — Inga Beale, CEO, Lloyd’s of London

As the person directing Lloyd’s, she is also acutely aware of the shift in power towards emerging economies, with McKinsey recently reporting that 67 percent of commercial insurance growth will come from those markets by 2020.

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In response, Lloyd’s has focused its efforts on Asia and Latin America, transferring more than half of its managing agents to its Shanghai and Beijing platforms; and it was recently granted final approval to open a reinsurance office in Mumbai, she said.

“That’s where the future’s going to be,” she said.

“We know that a lot of the business is no longer coming to London in the traditional way, hence we have set up a Singapore platform and platforms in China, and opened up an office in Dubai as well as in India to be closer to our clients and brokers there.”

Lloyd’s profits last year were flat at $2.7 billion, while GWP was up $3.9 billion.

The market made a profit despite taking a $2.7 billion hit for major claims — the fifth highest such total since the turn of the century — primarily due to Hurricane Matthew and the Fort McMurray Wildfire in Canada.

Although natural disasters are Lloyd’s bread and butter, its real strength is in insuring complex risks, from cargo ships and satellites to political and terrorism risks.

Lloyd’s Role in Cyber

It’s the aggregation of those harder-to-quantify risks such as cyber security that concerns Beale most. Expected to grow to $7.5 billion in global premiums business by 2020, cyber is a big focus for Lloyd’s. It has a 25 percent market share and aggregate limits of approximately $650 million per risk, she said.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries,” she said.

“We saw that with the financial crisis and the collapse of Fanny and Freddie, and its impact on Greece, but now it’s cyber.

“We have interviewed numerous risk managers and they are telling us that they are only insured against less than 10 percent of the risks that their businesses face on a daily basis. Our challenge is to make sure that we are continuing to adapt as fast as their businesses do and that we are delivering the relevant products that they need.”

Another area where Lloyd’s has seen an uptick is political and terrorism risk, said Beale.

The U.S. standoff with North Korea, Brexit and a swath of ISIS terrorist attacks across Europe have only exacerbated the problem, heightening fears among those countries’ citizens and tearing whole communities apart.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].” — Inga Beale, CEO, Lloyd’s of London

Just witness the anguish of the victims and families in the Manchester concert bombing.

“We have seen a dramatic increase in demand for these types of products because of the political instability everywhere at the moment, particularly for companies that are trading cross border with countries where governments can suddenly intervene at a moment’s notice,” she said.

“Similarly, businesses are looking to protect themselves against the ever-growing threat of terrorism, which is where Lloyd’s can step in to give them the confidence to keep on trading.”

Reforming Lloyd’s

Within Lloyd’s itself, Beale has been at the forefront of trying to modernize the aging institution. Despite its modern metallic and glass exterior, inside Lloyd’s there’s still very much what some might term a stuffy “old boys’ club” culture.

Men are required to wear a tie and women weren’t allowed into the underwriting room until 1972. Brokers still walk around with leather slipcases crammed full of paper.

The Lloyd’s headquarters on Lime Street.

Beale’s predecessor, Richard Ward, tried to modernize Lloyd’s but left plenty for Beale to address in that respect.

Beale committed $700 million over the next five years to upgrade Lloyd’s aging computer and IT systems, with the end goal of achieving one-touch data capture to speed up the premiums and claims process.

“It’s about following that data all the way through the process from the client to the intermediary and the underwriter, and the processing of the premiums and claims,” she said.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].”

Another area Beale is keen to shake up is diversity within Lloyd’s itself. Currently the market is two-thirds male, while only 11 percent of the whole London insurance market are non-UK nationals — a damning statistic that Beale is all too aware of.

“The Lloyd’s market doesn’t reflect the demographics of the whole of London and we are very conscious that we’re not tapping into all of the available talent that’s out there,” she said.

“We need to cut out the old ideas, try to challenge the unconscious bias and create an environment that is welcoming for people who are a bit different.”

Beale has also been pushing the [email protected] initiative, currently in its third year, and in September Lloyd’s will host the third annual Dive In festival to promote diversity and inclusion in the insurance industry.

In addition, 95 percent of the Lloyd’s market has already signed up to its Diversity & Inclusion charter to improve diversity, she said.

“To attract the best talent we need to modernize and look at how we can change our working practices and hiring decisions for the better,” she said.

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“There’s a vast amount of work that we are actively doing to encourage people to be more open and seek more diverse talent.”

On a personal level, Beale readily admits that she was late to the leadership game, and it was only her mentor, Annette Sadolin at GE, who convinced her to take her first promotion.

That lack of confidence is something that, as a leader, Beale has witnessed in her own team and she is keen to help overcome.

“Annette became very much a mentor for me throughout my career, so whenever I have had to make key decisions I would always ask her view,” she said.

“The key lesson that I have learnt from her is that things move so quickly and you need to take opportunities when they come along that give you exposure to something new, even if they don’t seem like a natural career path at the time.

“For me, being a leader is all about inclusion and being passionate about the people you work with because you need to inspire and motivate them. But there is also nothing more rewarding than watching people progress their careers.”

A Truly Global Journey

Beale, who initially harbored ambitions of being an architect, admits that she “fell into reinsurance,” starting as a trainee international treaty reinsurance underwriter at Prudential Assurance Company in London in 1982. But once she had a taste there was no turning back.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it,” she said.

“I fell in love with the global nature of the risks that came to London; one day you could be looking at a piece of business from Chile, the next from Australia.”

But, back then, working in a male-dominated industry where she was the only woman among 35 men, Beale struggled to fit in. So she quit and went travelling for 10 months.

It was during her time as a receptionist at the BBC in Sydney, Australia that Beale worked under her first female boss, a formidable woman, she said.

Inspired by her boss’s strong work ethic, Beale decided to return to the insurance business.

She soon landed a job with GE Insurance Solutions in Kansas City, where she held various underwriting management roles, before being appointed president of GE Frankona and head of continental Europe, Middle East and Africa for GE Insurance Solutions in Germany.

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After 14 years at GE, Beale moved to Switzerland with Converium as group CEO in 2006.

Two years later, she joined Zurich Insurance Group as a member of the group management board in Zurich before being appointed global chief underwriting officer, prior to her appointment as group CEO at Canopius in 2012.

The breadth and depth of her experience makes Beale a natural fit for the demands of the Lloyd’s top job.

There’s no doubt she’ll be drawing upon every ounce of that expertise and experience to keep Lloyd’s at the cutting edge of this harrowing new world we live in.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]