When it comes to Surety Bonds, little guys will be serviced. Two lawyers find a common bond with small firms. It’s easy for bigger firms to get performance bonds. That’s why two ex-law partners are thinking small.

By Jeff Swimmer
Special to the Inquirer
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Ray Hovsepian and Sid Zilber believe not only that small is beautiful, but also that it can be very profitable. Especially in the surety-bonds business.  The two former law partners gave up legal careers about five years ago and began laying the groundwork for a thriving company in an often-overlooked part of the surety-bonds business—the small, independent contractor.

They had spent about 16 frustrating years in a Center City law firm, watching small contractors repeatedly get turned down for lucrative municipal contracts because they were too undercapitalized to get bonded.  Then, in January 1990, they sang the anthem that has launched a thousand career changes: “Hey—I can do this on my own much better.”  “The first bond is always the hardest to get for independent contractors,” said 46 year old Hovsepian, chairman of the duo’s Bala Cynwyd firm, Commonwealth Insurance Company. “The trouble is, the big insurers don’t want to bond the little guys. But Sid and I have made this profitable.”

The smaller contractors were essentially in a Catch-22: Too small to get bonded, they found that getting bonded was the only way many smaller firms could grow at all.  Speaking with evangelistic zeal, Zilber, 45, says the two found that the number of industries where small players couldn’t get bonded was enormous, and just waiting to be tapped.  “This business has been a money machine. We’ve helped bond anyone from a pig farmer building a pig shed, city excavators and even wrestling promoters,” Zilber says.  While the bigger players in the insurance and bonding industry tend to scoff at taking on bonds worth less than a few hundred thousand dollars, Zilber and Hovsepian shoot far lower.

Commonwealth will do bonds for as little as $1,000.00 and rarely takes on clients seeking bonds for more than $1 million.  “All we care about is that they have a good credit standing and a good reputation in the community. We’re willing to take risks,” says Hovsepian.  To set them apart from the high rollers in the insurance business, the two also will take not just cash, but also real estate as collateral.  Their rates, though, are comparable to those of the industry heavy weights – about 2 percent to 3 percent of each bond – and sometimes about ½ percent higher for especially risky clients.

Is the work better than lawyering?  Hovsepian is not shy. “It’s about a hundred billion times better,” he says.  Zilber gives it a humanitarian twist: “It’s not just combat, like in the legal world. In this business we’re helping people build tangible things, not just fighting with people all the time. You can get tired of that.” 

The business environment in early 1990 was not particularly friendly to start-up businesses, and the two knew they were taking a big risk.  “We saw an opportunity and we knew we had to seize it, even though times were bad. So many small contractors needed bonds and would have been good risks, but there were barely any firms that would deal with them,” says Hovsepian.  After clearing about $365,000 in premiums in their first year, and $846,000 in 1991, they expect to turn a new pretax profit this year of about $250,000 to $3000,000.

The risk is thus starting to feel very worthwhile.  Next year, the two hope to set up shop in New Jersey, Delaware and Maryland – states where they say they now have to turn down business constantly because they are unable to operate there – through a $3 million private stock placement.  “What’s exciting is we’re finding nearly everyone needs bonds. We’re in markets most people don’t even know exist,” says Hovsepian.  Some of these niche markets include health clubs that need bonds before they are allowed to set up annual membership; landlords who need bonds so they can invest tenants’ security deposits, and even people who want to build fences for church cemeteries.  Hovsepian and Zilber say the core, bread-and-butter work of the bonding business – like builders, electricians and bridge designers – will remain a steady source of money to pay the bills.  “The real beauty of this company is that the infrastructure of this country is deplorable,” Hovsepian explains, with a trace if irony.

With the growth they foresee in the next few years, do Hovsepian and Zilber threaten to start looking like the big industry players they originally set out to battle?  For now, they say no.  “We don’t want the big contractors. There are plenty of large insurers they can get bonds from,” says Hovsepian. But plans for the firm, which has a staff of just about half a dozen, are ambitious. It’s cash rich – about $1.3 million to $1.4 million on hand – and the two talk about the possibility of eventually taking the company public.  “We want to make bonds available to anybody who needs them. In an industry dominated by giants, we just seem to keep growing,” Zilber said.

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