Finance 431 Property Casualty Insurance. Finance 431 Mark Vonnahme Former President and CEO,CNA Surety.

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

Follow Up … Mark Vonnahme

110 DKH, T Th 1:30 –3:30pm

[email protected]@comcas

t.net

Surety Next class

Homework