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INT401
SURETY BONDS SURETY BONDS
SOUTH OF THE BORDERSOUTH OF THE BORDER
Presented by:
Chad RosenbergPrincipalRosenberg & Parker
Carlos PliegoPartner & Surety Vice PresidentIntertec
Karen Vogler, ARMSenior Risk AnalystSun Microsystems, Inc.
• Rosenberg – U.S. Broker’s Perspective– U.S. Market Comparison– U.S. Companies with Mexican Surety Needs– Need for Local Presence
• Pliego – Mexican Broker’s Perspective– Laws, Rules & Regulations– Mexican Markets– Owner Directed Surety – Mexican Perspective
• Vogler – U.S. Risk Manager’s Perspective– Sun’s Bonding Requirements– Previous Surety Process– Current Surety Process
Preview
U.S. Broker’s Perspective
Chad RosenbergPrincipalRosenberg & Parker
Outline
• Overview• U.S. Surety Market• U.S. Companies with Mexican Bond Needs • Types of Bonds Required• U.S. Sureties Operating in Mexico• Need for Local Presence
A Bond is NOT Insurance
1. Three Parties• Obligee• Principal• Surety
2. No Losses3. Indemnity4. Rate
U.S. Surety Market
• $4 Billion Premiums• 100% Obligations• Owner Directed Surety• Rates Typically 0.5% - 2.5%• Premiums Paid to Broker• Broker Compensation Fee or
Commission• Licensed at State Level
U.S. Companies with Mexican Bond Needs
• Pharmaceutical• Construction• Manufacturing• Technology• Service
Types of Bonds Needed
• Bid• Performance• Maintenance• Penalties• Tax Appeal• Court• Customs• Lease Bond
U.S. Sureties Operating in Mexico
• Surety Must Have License in Mexico• Sureties Willing to Write Bonds in Mexico
Through Fronting Companies– ACE– AIG– CNA– Travelers– Liberty Mutual
• Rates and Fronting Fees
Need for Local Presence in Mexico
• Bond Forms• Language Barrier• Laws• Customs & Practices• Local Relationships• Credibility• Collateral Requirements
Mexican Broker’s Perspective
Carlos Pliego Partner & Surety Vice President Intertec
Outline
• Laws, Rules & Regulations• Mexican Markets
– Number of Sureties– Industry Restructuring– Current Developments– Market Share– Annual Profits– Progress– Local Capacity
• Guarantees• Types of Bonds• Owner Directed Surety
Laws, Rules & Regulations
Ministry of Finances
and Public CreditIRS
(Regulation)
Federal License:Individuals
Corporations
Federal Law of
BondingInstitutions
National Commissionof
Insurance & Surety(Supervision)
Number of Mexican Sureties
Year Sureties %2007 12* 57
1995 21 100
1991 16
1986 14
*Excludes Sureties specializing in Fidelity; another focused on Trusts.
Industry Restructuring• Half of the Sureties Exited Business• Rules Changed:
– Underwriting Regulations• Reserves Rules• “ω Factors”
– 36 Months Liabilities in Force vs. Claims Ratio
• Credit Bureau Consult• Money Laundering Prevention
Current Developments
• Mapfre Surety • Afianzadora Insurgentes -- Former St. Paul
Travelers’ Acquired Back by its Former Mexican Holders
• Electronic Bond
SOFIMEX $53.67 (13%)
INBURSA $50.55(13%)
BANORTE $22.29 (6%)
ASERTA $21.10(5%)
ATLAS $18.62 (5%) MONTERREY $96.42
(24%)
INSURGENTES $92.39 (23%)
OTHERS $17.98(5%)
ING $25.50 (6%)
Mexican MarketsMarket Share US $ Millions
2006
Source: Afianza
$14
$8
$27
$23
$10
$3
$12
$1
$0
$5
$10
$15
$20
$25
$30
ING Atlas Imbursa Monterrey Sofimex Banorte Insurgentes Aserta
Mexican MarketsAnnual Profit (in $US Millions)
2006
Source: Afianza
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
ING ATLAS INBURSA MONTERREY SOFIMEX BANORTE INSURGENTES ASERTA
Mexican MarketsAnnual Profit as a Percentage of Retained Premiums
2006
Source: Afianza
89% 86%
63%
40%
27%
16%13%
12%
Progress
• Premium 11% ‘06 12% ‘07 Private Market Expansion
• Annual Profit 312% ’06 20% ‘07
Mexican Local Aggregate Capacity
• Total Market: US $400 Million Premium
• Per Bond: US $69 Million
• Per Principal: US $300 Million
Guarantees
• Indemnity Agreement– Rating
• Fronting• Collateral
– Cash Deposit– Stand By L/C– Up to 100%
Mexican MarketsType of Bonds
Premium in US $ Millions 2006
JUDICIAL$17.5(4%)
FIDELITY$15(4%)
CREDIT$23.5(6%)
CONSTRUCTION &
COMMERCIAL$344(86%)
Types of BondsConstruction & Commercial
• Premium is Paid to the Order of the Surety
Bond Standard Bonded Amount
Market Annual Rate on Bond Amount
Bid 10-20% on offer 0.30%
Advance Payment 100% on payment 1.20%
Performance 10-20% on Contract 1.20%
Maintenance 10-20% on Contract 1.20%
Penalties 10-20% on Contract 1.20%
Tax Appeal 100% on Tax 2 to 4 %
Owner Directed Surety
• Legally Nationwide for Private Industry• Suppliers, Contractors & Subcontractors• Single Bonds or Global• Benefits
– Rate– Bond Language– Claims Procedure– Bonds Termination
Owner Directed Surety
OWNER – INTERTEC
Bonding Agreement
Contractors & Suppliers
Contact INTERTEC
INTERTEC
Integrates files, executes Bond. Monthly Report
Releases or Claims
Bond Cancellation / Claim
Surety
A U.S. Risk Manager's Perspective:
Sun Microsystems' Mexican Bond Experience
Karen Vogler, ARMSr. Risk AnalystSun Microsystems, Inc.
Outline
• Worldwide Surety Bond Distribution for Sun• Surety Requirements• Mexican Surety Process Prior to 2006• Issues with Prior Surety Program• Objectives• Current Mexican Surety Program• Results
Surety Requirements - US vs. Mexico
• US Bonds:– Bid Bonds – 5% - 20%– Performance/Contract – 100%– Court/Appeals – 100%– Customs – 100%– Workers' Comp/Disability – 100%– Sales Tax Bonds – 100%– Permit Bonds – 100%
• Mexico Bonds:– Performance/Contract – 10%
Mexico Surety Process Prior to 2006
Company’s Mexico
Finance Manager
Risk ManagementDepartment
U.S. SuretyBroker
Surety’s MexicanAffiliate
U.S. SuretyHome Office
Company’s Mexico
Finance Manager
Issues with Prior Surety Programs
1. Turnaround Time2. Contract Translation3. Time Zones4. Points of Contact5. Language and Cultural6. Costs & Complexity
Objectives• Business Opportunities Cannot Be Lost
• Leverage Local Relationships and Expertise
• Minimize the Number of Touch Points on Each Bond
• Contain and Minimize Costs
Current Mexico Surety Program
Company’s Mexico
Finance Manager
Mexico SuretyBroker
Support by:U.S. Surety Broker
& Risk Management
MexicoSurety Company
Results
• Business Transacted More Efficiently • Local Relationships have been Forged• Communication Path is Well-Defined• Bonds are Procured in a Matter of Hours• Costs have been Reduced
Wrap Up
1. Dealing with a Mexican Broker has Simplified Process
2. Mexican Broker Understands Local Laws & Customs
3. Using a Mexican Broker Can Expedite Bond Process and Create Cost Savings
Questions & Answers
