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Finance 431
Property Casualty Insurance
Finance 431
Mark Vonnahme Former President
and CEO,CNA Surety
Property and Casualty -Specialty Insurance Products
Surety Bonds
All layout enhancements courtesy of Kurt Vonnahme
Surety Will introduce some new concepts
to you Surety business Define suretyship Distinguish from and compare to
insurance Compare to banking
Surety Discuss different types of
obligations/bonds
Discuss high profile cases
Discuss real life examples
Surety What is surety ?
Ancient process Biblical commentary Babylonian Roman times English history U.S. history
Surety Personal surety Legal development Common law v statute Statute of frauds Development of corporate surety
Surety Essence of the surety relationship Three party arrangement Surety guarantees the obligation of
a primary obligor(principal) to a third party ( the obligee)
Surety -- Principal -- Obligee
Surety Industry highlights $ 3.7 billion business-approximately
1% of annual p/c revenues 135 or so groups of companies write
bonds Multiline and specialty companies Top ten write approx. 70% of
business
Surety Classifications of bonds
Contract
Commercial
Surety Bonds support both public and private
transactions Bonds are typically statutory in nature 85 to 90% of contract industry
premium relates to public works projects
99% plus of commercial premium relates to statutory obligations
Surety Contract
Bid Performance Payment
Surety Example Contractor wants to submit a
proposal to UIUC for a new building ECP: $ 50 million What happens ?
Surety The bid process
Discussion Underwriting process
The three Cs of Credit extension An expensive and in-depth process
Surety Character
Too often a given, but essential Stature in community/reputation Relationship with other business
partners Experience says watch out if an
underwriter is aware of character issues
Surety Character
Example Contractor takes money out of company
w/o telling you … or invests in business unrelated to his construction business …
Bankruptcy… Other …
Surety Capacity
Proven track record on similar size,scope and location of work
Organization Comprehensive business plan Performance record plus the ability to
meet obligations on current and future work load, bonded and unbonded
Continuity plan
Surety Capacity-common issues
Contractor’s experience is on $ 5 million highway project
Wants to bid on $ 25 million highway job
Highway contractor wants to build a $ 25 million commercial building
Surety Capacity-common issues
Have a company doing business within 100 miles of Champaign,Illinois
Wants to go to Florida…. or Iraq Identify some issues
Surety Capital
CPA certified audited f/s for 3 to 5 years Work in process for bonded and un bonded work Cost control systems Investment strategy Perform complete analysis
Trends over time in profitability and liquidity Credit history Bank relationships Accounting system CFO/financial staff Reputation of CPA performing audits and other services
Surety Capital-common issues
Poor accounting system Lack of accounting and finance personnel
Contractor lost money in three of the past four years
Bank debt and overall debt is growing Disputes on projects leading to A/R
slow A number of jobs are losing money –
drain on company’s financial resources
Surety Commercial
Fiduciary License and permit Court Public official Miscellaneous Fidelity
Surety Commercial
Fiduciary Executor or administrator of estate Guardianship of minor Trustees in bankruptcy
Surety License and permit
Virtually all businesses will have some license bonds
Compulsory obligations Agents/brokers Real estate broker Permit when signs extend over a public walkway Truckers on road with overweight load Contractors license Tax bonds Reclamation bonds
Surety Court Plaintiffs and defendants
Attachment bonds Plaintiffs Release of attachment
Appeal bonds High profile cases
Auto companies Oil companies
Surety Public Official
Administrator Treasurer Tax Collector
Surety Miscellaneous
Loss securities/instruments bonds A number of guarantees which may
not fall into other classifications Forfeiture provisions Non-cancelability provisions Payment on demand Long term periods Indeterminate periods
Surety Fidelity
Honesty bonds Bankers blanket bonds May be written as a part of a package
policy in P/C
Surety Insurance v surety bonds Comparisons
Both regulated by statutes/reqs at state level
Transfer of risk/assumption of risk Premium paid Protection against financial loss Contract defining the risk
Surety Some key distinctions
Third parties receive protection Principal is not protected by bond
Law of large numbers does not apply Loss expectation v no loss anticipated
Principal is always primarily responsible for completion of the obligation
Surety Some key distinctions
Transfer of risk to insurance company Distinguish from insurance
Most surety obligations are not cancelable
Premium non payment is not valid reason to cancel the obligation
Surety Surety and banking
Surety like banking is an extension of credit
Both expect repayment of credit or obligation
Banks and sureties do not expect a loss
Rights to pursue defaulting principal
Surety Surety and banking
Banks extend credit/money Sureties extend credit Rights to restitution in case of default Bank credit is monetary in nature Sureties have both monetary and
performance responsibility
Surety Principal’s responsibility to surety
Complete the obligation Indemnify against loss May be asked to provide collateral
Surety Legal remedies in case of loss Principal is primarily responsible
for the obligation In case of loss
Indemnification Subrogation
Surety What happens in case of loss ?
Analysis Use of internal v external
sources/consultants
Performance v payment of funds
Surety Reinsurance
Co-surety
Surety Industry issues
Loss activity Four years of losses, improving results on horizon Economic transition Changes in so many key industries High profile cases
Capacity on Commercial surety products WCSI Reclamation Closure – post closure Appeal Other tough risks
Surety Industry issues
Expense structure Acquisition Underwriting
Reinsurance Capacity Pricing
Alternative products Insurance v surety
Pricing of surety Commercial exposures create real pricing issues Rating plans are antiquated
Surety International
U.S. v Guarantee market throughout the world
The European Union Other surety expansion
Critical issues on business practice Cultural differences Finding the right partners
Surety Summary
Surety Next class
Homework
