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UIUC FIN 230 - Intro to Surety plus

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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 VCEO EmeritusCNA Surety CorpProf Emeritus UIUC FinanceEVP SuretyArch Insurance GroupSuretyWill introduce some new concepts to youOverview of surety business…Pre-qualification process…Compare to Insurance & Banking..Overview of claim process…Current issues…SuretyWhat is surety ?Ancient processBiblical commentaryBabylonianRoman timesEnglish historyU.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 bondsContractCommercialSuretyContractBidPerformance PaymentSuretyThe bid processDiscussionUnderwriting/pre-qualification processThe three Cs of Credit extensionCharacter-Capacity-Capital/CreditAn expensive and in-depth processSuretyCharacter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 issuesSuretyCapacity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 un-bondedContinuity planSuretyCapitalCPA certified audited f/s for three to five yearsWork in process (WIP) for bonded and un bonded workInvestment strategyAffiliated businesses Perform complete analysis Trends over time in profitability,liquidity and leverageCredit historyBank relationshipsAccounting system/cost control systemCFO/financial stafReputation of CPA performing audits and other servicesSuretyCommercialFiduciaryLicense and permitCourtPublic officialMiscellaneousFidelitySuretySome key distinctions … Surety and InsuranceTwo party (insurance) v three party (surety)Principal (insured) is not directly protected by bondThird parties receive benefitLaw of large numbers does not applyLoss expectation v no loss anticipatedPrincipal is always primarily responsible for completion of the obligationSurety obligations are generally non- cancelablePremium non-payment not a reason for cancelationSuretySurety and bankingSurety like banking is an extension of credit; monetary v non-monetary obligationsAnalysis of business very similarRepayment of credit or obligationBanks and sureties expect repaymentBanks and sureties do not expect a lossRights to pursue defaulting principalCollateralIndemnitySuretyClaims processNumber of alternativesSurety’s responsibilitiesFulfill the commitments to various stakeholdersPerformancePaymentOtherSuretyIndustry issuesSurety has cycles too…Hard and soft markets impact suretyRegional and national economic impactHigh profile cases/issuesEnron and othersSub primeCapacity on major accountsLarge and mega contracts…Fortune 1000 exposures…SuretyIndustry issuesExpense structureAcquisitionUnderwritingReinsuranceCapacityPricingLegacy issuesAlternative productsInsurance v surety Pricing of suretyCommercial exposures create real pricing issuesRating plans are antiquatedSuretyInternational U.S. v Guarantee market throughout the worldThe European UnionOther surety expansionCritical issues on business practiceCultural diferencesFinding the right partnersSuretyWhy did the Prof go back to business….SuretyFinal thoughts….Mark VonnahmeEVP, SuretyArch Insurance


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UIUC FIN 230 - Intro to Surety plus

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