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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