RMISuretySlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23RMIIntro to Surety plus …“Prof V goes back to Campus…”SuretyProf VCEO EmeritusCNA Surety CorpProf Emeritus UIUC FinanceEVP SuretyArch Insurance GroupSuretyWill introduce some new concepts to youOverview of surety business…Pre-qualification process…Compare to Insurance & Banking..Overview of claim process…Current issues…SuretyWhat is surety ?Ancient processBiblical commentaryBabylonianRoman timesEnglish historyU.S. historySuretyPersonal suretyLegal developmentCommon law v statuteStatute of fraudsDevelopment of corporate suretySuretyEssence of the surety relationshipThree party arrangement Surety guarantees the obligation of a primary obligor (principal) to a third party (the obligee) Surety -- Principal -- ObligeeSuretyIndustry highlights$ 5 billion annual business -approximately 1% of p/c revenues135 or so groups of companies write bonds in the USAMulti-line and specialty companiesTop ten write approx. 70% of businessSuretyBonds support both public and private transactionsBonds are typically statutory in nature85 to 90% of contract industry premium relates to public works projects99% plus of commercial premium relates to statutory obligationsSuretyClassifications of bondsContractCommercialSuretyContractBidPerformance PaymentSuretyThe bid processDiscussionUnderwriting/pre-qualification processThe three Cs of Credit extensionCharacter-Capacity-Capital/CreditAn expensive and in-depth processSuretyCharacterToo often a given, but essentialStature in community/reputationRelationship with other business partnersExperience says watch out if an underwriter is aware of character issuesSuretyCapacityProven track record on similar size,scope and location of workOrganization Comprehensive business planPerformance record plus the ability to meet obligations on current and future work load, bonded and un-bondedContinuity planSuretyCapitalCPA certified audited f/s for three to five yearsWork in process (WIP) for bonded and un bonded workInvestment strategyAffiliated businesses Perform complete analysis Trends over time in profitability,liquidity and leverageCredit historyBank relationshipsAccounting system/cost control systemCFO/financial stafReputation of CPA performing audits and other servicesSuretyCommercialFiduciaryLicense and permitCourtPublic officialMiscellaneousFidelitySuretySome key distinctions … Surety and InsuranceTwo party (insurance) v three party (surety)Principal (insured) is not directly protected by bondThird parties receive benefitLaw of large numbers does not applyLoss expectation v no loss anticipatedPrincipal is always primarily responsible for completion of the obligationSurety obligations are generally non- cancelablePremium non-payment not a reason for cancelationSuretySurety and bankingSurety like banking is an extension of credit; monetary v non-monetary obligationsAnalysis of business very similarRepayment of credit or obligationBanks and sureties expect repaymentBanks and sureties do not expect a lossRights to pursue defaulting principalCollateralIndemnitySuretyClaims processNumber of alternativesSurety’s responsibilitiesFulfill the commitments to various stakeholdersPerformancePaymentOtherSuretyIndustry issuesSurety has cycles too…Hard and soft markets impact suretyRegional and national economic impactHigh profile cases/issuesEnron and othersSub primeCapacity on major accountsLarge and mega contracts…Fortune 1000 exposures…SuretyIndustry issuesExpense structureAcquisitionUnderwritingReinsuranceCapacityPricingLegacy issuesAlternative productsInsurance v surety Pricing of suretyCommercial exposures create real pricing issuesRating plans are antiquatedSuretyInternational U.S. v Guarantee market throughout the worldThe European UnionOther surety expansionCritical issues on business practiceCultural diferencesFinding the right partnersSuretyWhy did the Prof go back to business….SuretyFinal thoughts….Mark VonnahmeEVP, SuretyArch Insurance
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