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EPISODE TRANSCRIPT:

00:00:03

Alix McCabe: They might just be the most misunderstood, often overlooked insurance offering in the entire world.

00:00:08

Clip: A surety bond? Like a bond, like an investment in a bond kind of thing?

00:00:13

Alix McCabe: Well, you got the name right anyway. Yes, I'm talking about surety bonds.

00:00:18

Clip: I do not know what a surety bond is. I have a feeling it might have something to do with the fiscal sector? Finance? But I'm not sure.

00:00:27

Alix McCabe: As it turns out, not one person we approached on the street for this episode had a clue what a surety bond is.

00:00:32

Clip: No idea. Sounds like a business term. A surety bond? I mean, I couldn't even guess. No, never heard of it in my life. No idea. I don't know what it is. I don't know how to use it.

00:00:47

Alix McCabe: But despite their relatively low profile, surety bonds have played a critical role in public works projects in America for more than a century. Surely that secures them a spot on the ever-spinning Wheel of Risk. Welcome to Wheel of Risk, proudly presented by Allianz Trade. I'm your host, Alix McCabe. On every episode we spin the wheel to choose a topic and then provide expert insights and actionable advice to help you keep your business solvent, secure, and well ahead of the competition.

Today I am super pleased to introduce a guest and a colleague of mine from a branch of the Allianz family tree that we haven't featured here on the show before. Nick Verna is the regional head of surety for Allianz Trade Americas. Nick, welcome to Wheel of Risk.

00:01:30

Nick Verna: Thank you, Alix.

00:01:33

Alix McCabe: I'm really glad you could join us here today. My first question for you, Nick, is more of a request, actually. Would you mind doing the honors of giving the wheel a spin?

00:01:42

Nick Verna: Sure, I will.

00:01:45

Alix McCabe: Nice. You've hit unsung heroes, a peek into an underappreciated part of our portfolio that happens to be right in your wheelhouse.

00:01:57

Nick Verna: Absolutely. But surety is a pretty big topic. Would it be okay if I brought in some help?

00:02:02

Alix McCabe: Absolutely. Who do you have in mind?

00:02:03

Nick Verna: I know exactly who to call. Surety squad, congregate.

00:02:06

Clip: Whenever a project is in jeopardy or a contract contested, they are America's last best hope.

00:02:16

Alix McCabe: What wait? How did they even get in here?

00:02:21

Nick Verna: Oh, we're everywhere. Alix, please allow me to introduce Nicole Beck, the underwriting director for commercial surety at Allianz Trade in the US and David Brehm, the underwriting director for contract surety at Allianz Trade in the US.

00:02:35

Alix McCabe: Great to meet you guys. Welcome to the show.

00:02:37

Nicole Beck: Thank you, Alix.

00:02:38

David Brehm: Great to meet you. Thank you for having us.

00:02:40

Alix McCabe: That was quite the entrance. You guys really don't mess around. Nick, Nicole, David, thank you all for being here, now let's congregate.

 

They may fly below the radar for most of us, but surety bonds have actually been mandatory on all federal public works projects in the US for more than a hundred years. Lately they've become really important in private development projects as well, thanks to the supply chain disruptions and labor challenges of the pandemic. They're also instrumental in ensuring many public services keep running as they should, like garbage collection and school buses. In short, surety bonds play a critical role in a staggering number of projects, products, and services we depend on every day.

 

But let's start maybe with some definitions. Keep in mind, I will actually be secretly scoring your answers behind the scenes, team. How do you all explain what a surety bond is to someone who's never even heard the term before? Maybe Nick, I'll go to you first.

00:03:41

Nick Verna: Well, Alix, it is a confusing topic for many people, but we like to talk about how surety bonds are involved in many facets of life. Wherever there's a need for a guarantee between two parties, to ensure that parties do the work that they're asked to do, a surety bond can be used in that particular place.

 For example, in the construction market, David can give some examples of how surety is used on a day-to-day basis.

00:04:07

David Brehm: Sure, yeah.

 

Surety bonds are used in all types of projects. Every bonded project in construction dating back to the Miller Act and subsequent federal and state acts, called at the state level the Little Miller Act, are required to protect taxpayers and public money to make sure that bridges, roads, schools, hospitals, basically anything that can be built using public funds is backed by a surety bond to make sure that those projects are completed to scope and to spec and delivered for the use of the public.

00:04:40

Nick Verna: Additionally, in the non-construction space, we have commercial surety bonds. Nicole can tell you a little bit about what we see in the commercial space.

00:04:49

Nicole Beck: Commercial surety bonds encompass any bond that is non-construction: judicial bonds, statutory bonds, and bonds that secure non-construction contracts. Examples are if in a court case an appellant needs to pay a judgment against them if they're not successful in their appeal. Situations that we all may run into, such as we rent an Airbnb for a rental house, and your payments never make it to the landlord because Airbnb fails to remit them. There's a bond there to protect you.

 

Another time a commercial surety bond can protect people is when they prepay their gym memberships. Now, this isn't as common anymore, but if your gym goes out of business, you can make a claim for any deposit that you made. Commercial surety bonds are used for any foreign good to enter the country, and a porter must provide a bond to US customs. Examples are well-known fashion houses like Chanel and Prada and liquors such as Jose Cuervo and natural stone and solar panels.

 

The manufacturing of fire trucks, rail cars, and police cars is another activity that requires a bond. We also talked a little bit earlier about school buses that come to pick up your kids and the trash haulers that come to pick up your trash. These services are guaranteed by a bond as well.

00:06:09

Alix McCabe: Wow, so surety really is the silent protector sitting behind so many different types of projects and products and services.

 

Nick, in follow-up, there are typically three parties when we talk about a surety bond? Can you explain what those parties are and their roles?

00:06:23

Nick Verna: That's correct though it's in surety we have a tri-party relationship as opposed to traditional insurance. Those parties are our surety principle, our obligee or the beneficiary of the bond, as well as the surety company as the third party.

00:06:37

Alix McCabe: Okay, so Nick, who is it that benefits primarily from surety bonds?

00:06:42

Nick Verna: Well, in the Americas market we refer to the beneficiary as an obligee. That is the party that is protected by the bond. It's usually posted by the principal that they've engaged in the contract with. In this sense, they're benefiting by ensuring that the terms of the agreement are contract are performed, and ultimately any payments they make are properly dispersed and utilized.

00:07:07

Nicole Beck: Alix, a lot of times the obliges are government agencies or municipalities, so the bonds that they're requiring are really ultimately for the protection of their citizens. Which protects all of us because they want their public project completed on time and without extra costs to their taxpayers.

00:07:24

David Brehm: In addition to that, the obligee has the peace of mind of knowing that the project will get completed on time and then they know where to go if there are any issues. The taxpayers, there's no wasted money, and they know they're not going to have a half-completed bridge or an unbuilt school when the next year starts and the kids have nowhere to go.

 

And then your subcontractors and suppliers benefit from the bond. Say you have a general contractor who didn't pay the sub or didn't pay the supplier. They can also make a claim on our bonds and file a complaint that they haven't gotten paid. It doesn't just guarantee the performance, it also guarantees the payment in that instance.

00:08:15

Alix McCabe: Nicole gave us some really interesting examples of cases when a bond would be in play. I'd love some more specific examples of situations in which surety bonds are useful. Maybe David, back over to you.

00:08:28

David Brehm: Sure.

 

Well, I just got back from an account visit. We supported a bridge. It's a $ 290 million bridge that goes over a fairly large river canyon. It doesn't support traffic, so they have to build a new bridge and tear down the old bridge. It's obviously going to benefit all the commuters, everyone in that community. Projects are bid in a competitive manner where the lowest best offer, most qualified bidder wins the award. And then that contractor will go out. Once they're issued a notice to proceed, they'll go out to the site and start the construction process laying the foundations for the bridge. In bridge construction, there's all types of engineering and a ton of concrete that needs to be poured. You have to drill piles down into the riverbed. This was a cast-in-place bridge, so you slowly build up the pillars and then you lay the decking down.

 

These projects usually take anywhere from two into five or seven years to complete, so we're bonding long-term guarantee. We underwrite them very extensively. We look at what projects they've completed in the past, we look at their financial strength, and then we underwrite the actual bridge itself and the complexity of it.

00:09:42

Alix McCabe: If I didn't know better, David, I would think you are a bridge engineer because you know an awful lot about it.

00:09:47

David Brehm: I've picked up a little bit from various meetings.

00:09:49

Alix McCabe: You've picked up a little bit along the way.

 

Nick, how are surety bonds different from other forms of insurance like trade credit, and can they complement each other in your view?

00:09:59

Nick Verna: Yeah, absolutely, Alix.

 

Surety bonds do complement other insurance products like trade credit. Surety bonds are broader in the sense that they look at the overall performance on the transaction. In a relationship between two parties, you want to ensure that not only are you paid, but you also get the service or the product that you requested. That's where surety bonds differ. They provide a much broader level of performance guarantee than that of more specialized insurance products.

00:10:30

Alix McCabe: Okay, got it.

00:10:31

Nicole Beck: I'll add to what Nick said in that surety bonds also fall a little bit closer to a financial assurance in many cases than an insurance policy. Sometimes bonds are required. It can be a bond, a letter of credit, an escrow account, or cash to fulfill a requirement. Examples of this are when someone is responsible to fill a landfill or remove natural gas through a pipeline or plugging an oil well at the end of its useful life, decommissioning a cell phone tower. Typically, these contracts allow for a bond as one of many options, but insurance policy alternatively is typically not one of those options.

00:11:10

Alix McCabe: Got it.

 You guys deal with this stuff day in, day out. It's your bread and butter. But do you get the sense that surety is widely understood and appreciated by the general public?

00:11:21

Nicole Beck: I don't think anyone in my family even fully understands what my job is, so I think the general public doesn't know very much about surety bonds at all.

00:11:29

Alix McCabe: Despite how many times you explain it to them, right? I've had that conversation with my own family.

00:11:34

Nicole Beck: Exactly. It's a running joke in the surety industry. When we have a meeting, one of our big icebreakers is, how do you describe surety in an elevator?

00:11:45

Nick Verna: Yeah, we joke that surety is sort of the silent oil in the world from the time you wake up and turn your light switch on to driving a car, taking a train, to sitting at your desk and using your computer, to getting a meal at a restaurant. All those functions require some level of surety bonding through each process and it's relatively unknown by the general public. But they definitely benefit from having surety in place and bonding out there in general.

00:12:13

Alix McCabe: With the product being unknown, David, I'm interested to know how did you learn about it to explore a career in surety?

00:12:20

David Brehm: Yeah, it's funny. When I interviewed for my first job in surety, it was actually my future employer explaining to me what surety bonds were. Going into it, I Googled it. I did some research online about it. It's a difficult concept to grasp because of the performance nature of it. It's not really an insurance product and the truest sense of it. I learned on the go. And then the more I learned, the more I learned to like the product. I've just enjoyed working in surety ever since.

00:12:53

Alix McCabe: Nicole, was it a similar story for you?

00:12:55

Nicole Beck: Yes, and I even had a few insurance classes in college. I looked back at my books once I took the job in surety and I found one line total about surety in those books, so not much exposure to it before I started on the job. But like David, it was explained to me in the interview and it sounded so much more interesting than any other interview I had. It has proven to be a great career path.

00:13:19

Alix McCabe: And the rest is history as we say.

00:13:21

Nicole Beck: That's right.

00:13:24

Alix McCabe: It's safe to say that surety is not a totally mainstream topic, right? I'd be interested to know what are some of the most common questions that you guys hear from clients or prospects.

00:13:34

Nicole Beck: This is a tough one, Alix.

 

First, sometimes there's confusion from clients who've never needed a surety bond before as to which party should even be obtaining it because it's not that party that's protected that actually needs to purchase the bond. Sometimes they'll call a surety company and they actually are the party requiring the bond. In general, we'll get a lot of inquiries that turn out to be education sessions on what a bond is and what benefit it provides.

00:14:04

Alix McCabe: Similar for you, David?

00:14:05

David Brehm: A lot of times we'll get questions like what differentiates us from other sureties in the marketplace. In the US, there's 130 at least different sureties that are operating. It's a bond, it's a piece of paper. What makes your company different?

00:14:21

Alix McCabe: And what does make our company different in your view?

00:14:23

David Brehm: Well, I don't want to make this a shameless plug, but Allianz is one of the largest insurance companies in the world and one of the most financially sound. We bring a lot to the table when you think about a reliable, consistent, strong financial partner.

00:14:38

Alix McCabe: Excellent.

 Anything to add, Nick?

00:14:40

Nick Verna: I would only add that our people are a differentiator in the market. The knowledge of our talented team members and our clients when we meet with them find our team members to be knowledgeable and helpful.

00:14:53

Alix McCabe: People are not to be underestimated, right?

00:14:55

David Brehm: Surety is a relationship business.

00:14:59

Alix McCabe: You aren't the only part of the equation when it comes to providing surety services, right? What is your relationship with brokers?

00:15:06

Nick Verna: Well, Alix, our brokers maintain the relationship with our clients. We've explained our clients are not overly familiar with the products that they need to secure their business. The brokers provide that level of expertise working with the clients to identify what products are needed, what sureties provide the types of products that they need, and ultimately make the connection between the client and Allianz Trade.

 

At that point, our underwriters work very closely with that broker to get the information they need to perform their underwriting, and hopefully get to a point where they're providing an actual bond to the client. That broker then takes that relationship and manages it for the years to come.

00:15:48

Alix McCabe: Pretty key, and I think I'm not mistaken when I say that 100% of your business is in partnership with brokers.

00:15:55

Nick Verna: That's correct. As a regulated industry, it's important that we work through licensed and appointed brokers that have followed and are within their state's requirements for providing this type of information to their client. We do work 100% through our broker relationships.

00:16:13

Alix McCabe: Guys, I have one last question before I pit you all against each other in a battle for life or death. Just kidding. It's not a battle for life or death. It's for surety supremacy, okay? Can you maybe recommend any resources for folks who want a little more information or further reading?

00:16:30

Nick Verna: Our industry group is the Surety and Fidelity Association of America, so you can find some great resources on surety. org. There's also the National Association of Surety Bond Producers, NASBP.org, that can provide links to brokers that may be in your area for local information.

 

There's also been a recent study produced by Ernst & Young called the Economic Value of Surety Bonds. That's a great read that really talks about how the public benefits from surety bonds being in place, and that the overall costs of construction projects are lower due to the use of surety bonds.

00:17:11

Alix McCabe: Good stuff.

 

There isn't a lot of music out there it turns out about surety bonds, so we've settled for a different bond theme here. The fact that we're hearing it now means that it is time for a pop quiz. Here's the deal. I have four trivia questions, but they're a little tricky so I've made them multiple choice. I'm going to ask them, you're each going to give me your guess or your response. Does that sound okay?

00:17:39

Nicole Beck: Sounds great.

00:17:40

David Brehm: Yes, sounds great.

00:17:42

Alix McCabe: Okay, let's do it.

 

Question number one, surety bonds have been required on all federal public works contracts in the US since which year? A, 1912, B, 1894, C, 1901, or D, 1882.

00:18:02

Nick Verna: Alix, I'd say B, 1894.

00:18:05

Alix McCabe: Okay.

 

Nicole?

00:18:07

Nicole Beck: Well, I would have picked 1935, the year the Miller Act was passed by Congress, but since that's not an option, I will take the same answer as Nick 1894, when I believe there was a predecessor act to the Miller Act passed.

00:18:27

Alix McCabe: Okay.

 

David, do you concur or do you want to go out on a limb?

00:18:31

David Brehm: No, not this time, Alix. I'm sticking with the crowd.

00:18:34

Alix McCabe: Okay, so the crowd agrees on answer B. It is correct. The Heard Act, which required contractors on federal public works contracts to obtain surety bonds to protect subcontractors and suppliers, was actually enacted in 1894. It was superseded, Nicole to your point, by the Miller Act of 1935. Everyone was correct on that one.

Question number two, what is the estimated worth of all the surety bonds issued globally in 2001? A, $ 950 million, B, $ 21 billion, C, $ 14 billion or D, $ 7.5 billion. David, I'll go to you first since I went to you last for the previous time.

00:19:21

David Brehm: Sure. Got a pretty large variance here of answers. For some reason 21 billion sounds low, but it is 2001. I'm going to go with C, 14 billion.

00:19:35

Alix McCabe: Okay.

 Nicole?

00:19:36

Nicole Beck: I'm going to go with David, 14 billion.

00:19:39

Alix McCabe: Nick?

00:19:40

Nick Verna: Well, Alix, I would say D, seven and a half billion dollars. That's going to be my guess.

00:19:45

Alix McCabe: Okay. You are incorrect, Nick. Your team is actually correct.

00:19:50

Nick Verna: That's why we have them. They're the talent.

00:19:53

Alix McCabe: They're the real talent.

 

According to our own Allianz Trade figures, more than $ 14 billion worth of bonds were issued in 2021, with the US accounting for more than half of them. The US is, as we mentioned before, the biggest surety market in the world.

 

Okay, so Nicole and David are pulling ahead here in this fight for surety supremacy. Third question. The first legal documentation of suretyship was written by the king of which ancient empire? A, Babylon, B, Persia, C, Carthage or D, Rome. Nicole, I'll go to you first.

00:20:32

Nicole Beck: All right. I have no idea on this one, so I'm going to go A, Babylon.

00:20:37

Alix McCabe: Just like lucky guess? It feels right?

00:20:40

Nicole Beck: Feels right.

00:20:42

Alix McCabe: Okay.

 David?

00:20:44

David Brehm: So this one, first of all, I'm a history buff, and I feel like this was one of the first facts that I ever learned about surety when I was back and I was an underwriting trainee. I feel very confident about this answer. It's A, Babylon and I believe it was in the Code of Hammurabi.

00:21:00

Alix McCabe: Oh, you even are citing a code. Okay.

 

Nick?

00:21:03

Nick Verna: Well, apparently I can't go wrong by following David or Nicole, but I do happen to agree that it is A, Babylon.

00:21:10

Alix McCabe: All right. You are all correct. Although there's evidence of individual surety contracts dating back to 2750 BC, the concept wasn't formally enshrined in law until the Code of Hammurabi, which I've never heard of if I'm honest, but David just rattled it off like everyone knows it, which was written by the ancient Babylonian king in 1790 BC.

00:21:34

David Brehm: There we go.

00:21:35

Alix McCabe: That was impressive that you all knew that.

 

Okay, the definitive final question in our quiz is as follows, which famous piece of American infrastructure is the first example of co-surety, where companies pull their resources to underwrite large construction projects? Your options are A, the Golden Gate Bridge, B, the Interstate Highway system. C, the Hoover Dam, or D, the New York City Subway.

 

Nick, I'll go to you first.

00:22:06

Nick Verna: Well, Alix, I would say C, the Hoover Dam.

00:22:09

Alix McCabe: Do you just know it or you are guessing? What's your confidence level?

00:22:13

Nick Verna: My confidence level is pretty high. I think that the Hoover Dam would be a large enough project to have multiple sureties involved.

00:22:20

Alix McCabe: Okay.

 

David?

00:22:22

David Brehm: I would absolutely agree with Nick. I think it's the Hoover Dam.

00:22:24

Alix McCabe: Okay.

 

Nicole?

00:22:26

Nicole Beck: Yeah, I'm not going to stray from the crowd on this one. That was what my inclination was as well. It feels like about the right time period and a nice, big, iconic project.

00:22:38

Alix McCabe: Okay. You're all correct. Built from 1931 to 1936, the Hoover Dam was an engineering marvel that weighed 6. 6 billion tons and required the largest bond ever at the time, which was $ 5 million. There were 24 surety companies that joined together to write it.

00:22:55

Nicole Beck: Took 24 sureties to write a $ 5 million bond? That is something.

00:23:00

Alix McCabe: Wow, so you guys, you know a lot about what you do. Everyone did a great job.

 

Let me tally up the scores. Let's see here. You know what? Great news, it's a tie. It is a tie. Nicole and David, congratulations. I would love to say we have a great parting gift for you or a winning gift, but it's a lie. We don't. You'll just have to settle for bragging rights. Nick, you can definitely learn something from your team, I think.

00:23:30

Nicole Beck: Thanks, Alix. Bragging rights are great for me.

00:23:33

David Brehm: It's exciting.

00:23:34

Alix McCabe: Congrats again, Nicole and David.

 

Sadly though, surety squad, that music means we are out of time for today. It has been a blast chatting with you and learning about the surety world. Thank you so much each of you for taking part in the podcast today.

00:23:48

Nick Verna: Appreciate the time and thank you.

00:23:50

David Brehm: Thanks again for having us.

00:23:51

Nicole Beck: Yes, thank you, Alix. And thanks for bringing some visibility to surety.

00:23:55

Alix McCabe: Absolutely. My pleasure.

 

My guests today have been Nicole Beck, Nick Verna, and David Brehm, all members of our surety team here at Allianz Trade in the US. I'm Alix McCabe and this is Wheel of Risk. Thanks for listening. If you learn something today, we'd appreciate if you could leave us a nice review wherever you get your podcasts. Talk to you soon.