surety 201 presented by: chad rosenberg rosenberg & parker
TRANSCRIPT
Surety 201
Presented by:Chad RosenbergRosenberg & Parker
Outline
1. SATs
2. What is Surety
3. Current Surety Marketplace
4. Onerous Language
Surety Apptitude Test
SAT Question 1
After the U.S. what country has the most annual premium?
A. South KoreaB. CanadaC. MexicoD. Texas
SAT Question 2
What was the total surety industry premium in 2008?
A. $2.6 BillionB. $5.5 BillionC. $1.2 TrillionD. $8.3 Million437
SAT Question 3
Between 2001 and 2003 what was the only top ten surety company that did not replace its CEO?
A. ChubbB. USF&GC. SafecoD. CNA
SAT Question 4
A bond can be cancelled mid-term?
A. True B. FalseC. It Depends
SAT Question 5
Which Actress did not play the role of Jerry Seinfeld’s girlfriend?
What is Surety?
Surety is NOT Insurance
1. Three Parties• Obligee• Principal• Surety
2. No Losses
3. Indemnity
4. Rate
Surety is:
Credit
PrequalificationOngoing and Continuous
Non-Cancelable (in most cases)
A Guarantee
Leverage
• Contract• Commercial
– Court Bond - Judicial– Court Bond - Fiduciary– License & Permit– Federal & Public Official– Miscellaneous
Classes of Bonds
60%
40%
Contract Commercial
Financial Underwriting
1. Sr. Unsecured Debt Ratings
2. Transparency1. Financial2. Operational
3. Financial & Credit Profile1. Profitability2. Cash Flow3. Liquidity4. Capital Base
4. Security Packaging1. Collateral2. Indemnity
Credit Risk S&P Moody’s Fitch
Highest AAA Aaa AAA
High AA Aa AA
Upper Med. A A A
Medium BBB Baa BBB
Low Med. BB Ba BB
Low B B B
Poor CCC Caa CCC
Sr. Unsecured Debt Ratings
From the Top
“Companies with investment grade ratings
will continue to benefit from soft market
conditions.”
Bond Underwriting Criteria
1. Obligation
2. Bond Form Language
3. Duration
4. Bond Penalty
5. Pricing
Bond Obligations
• Performance and Payment
• Supply
• License and Permit
• Customs Injunction/Plaintiffs Appeal Tax Appeal Workers Compensation ♦ Advanced Payment♦ Deductible♦ Defendants Appeal♦ Pure Financial Guarantee
From the Top
“There continue to be opportunities to
replace bank letters of credit on self insurer
bonds, large deductible and retro
obligations, and environmental type
exposures.”
The Current Market Place
Top 15 Sureties – 1990 Top 15 Sureties – 2008
1. Fidelity & Deposit2. USF&G3. Reliance4. Aetna5. Fireman’s Fund6. Seaboard7. Continental8. CNA9. Safeco10.Hartford11.AIG12.Chubb13.St. Paul14.Amwest15.Cigna
1. Travelers2. Liberty Mutual3. Zurich4. CNA5. Chubb6. Hartford7. HCC8. IFIC9. ACE10.Arch11.NAS12.Great American 13.Hanover14.AIU Holdings15.RLI
U.S. Surety Marketplace 1990 vs. 2008
From the Top
“Chubb, Travelers, Zurich and Liberty
continue to drive the commercial and
construction surety markets. New entrants
in the commercial surety space (Argo,
Berkley, HCC and Hanover) have and will
continue to put pressure on terms for clients
with small to medium size programs up to
$50 million.”
Surety Companies
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
20
40
60
80
100
120
140
Source: The Surety& Fidelity Association of America
Surety Net Combined Ratio
(1997 – 2008)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
10
20
30
40
50
60
70
80
Source: The Surety& Fidelity Association of America
Contract Surety Experience
(1996 – 2008)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-20
-10
0
10
20
30
40
50
60
70
80
Source: The Surety& Fidelity Association of America
Commercial Surety Experience
(1996 – 2008)
“On the heels of a profitable year for the surety industry in 2009, there is a very competitive landscape in the commercial surety arena this year.”
Quotes from Industry Leaders
“Bankruptcies were at an all time high in 2009 and this trend is expected to continue in 2010.
This increase has not generated any significant loss activity for the commercial surety side of our industry.
It has however made the reinsurers very nervous. This could impact capacity in 2010 as the treaty renewal process unfolds.”
Unacceptable & Onerous Bond Forms
Definition
“That which extends the risks and
penalties beyond the normal and customary
terms found in standard bond forms.”
Owner’s Declaration
“Whenever Contractor shall be, and shall
be declared by Obligee to be, in default
under the Contract, the Owner having
performed its obligations thereunder, the
Surety shall:”
Limited Response Time
“Surety hereby covenants to commence
performance of this obligation within fifteen
(15) calendar days…”
Responsible For All Costs
“If completed by the Obligee, and the
reasonable costs exceed the Balance of the
Contract Price, the Surety shall pay to the
Obligee such excess and any and all expenses,
damages and attorney’s fees incurred by
Obligee in completing the Principal’s work.”
Demand Language
“Shall and do pay unto The School District
of Philadelphia upon demand…”
Damages, Losses, Expenses, and Fees… Oh My!
“…any and all demands, claims, actions,
judgments, costs, penalties, liabilities,
damages (including delay damages,
disruption damages, liquidated damages, and
consequential damages), losses (including
without limitation, consequential losses and
economic losses) and expenses (including
without limitation, investigative expenses,
consulting fees, experts’ fees and attorneys’
fees)…”
Confession of Judgment
“The Principal Obligor and Surety, and each
of them, hereby irrevocably authorizes and
empowers the Attorney for the Unionville-
Chadds Ford School District…to confess
judgment against such Obligor and/or Surety
for all sums due…Obligor and Surety, each,
waive the right to any stay of execution and the benefit of all exemption laws…”
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