rmi intro to surety plus … “prof v goes back to campus…”
TRANSCRIPT
RMI
Intro to Surety plus …“Prof V goes back to Campus…”
Surety
Prof V CEO Emeritus
CNA Surety Corp
Prof Emeritus UIUC Finance
EVP SuretyArch Insurance Group
Surety
Will introduce some new concepts to you Overview of surety business… Pre-qualification process… Compare to Insurance & Banking.. Overview of claim process… Current issues…
Surety
What is surety ?
Ancient process Biblical commentary Babylonian Roman times English history U.S. history
Surety
Personal suretyLegal developmentCommon law v statuteStatute of fraudsDevelopment of corporate surety
Surety
Essence of the surety relationshipThree party arrangement Surety guarantees the obligation of a primary obligor (principal) to a third party (the obligee) Surety -- Principal -- Obligee
Surety
Industry 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 business
Surety
Bonds 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 obligations
Surety
Classifications of bonds
Contract
Commercial
Surety
Contract Bid Performance Payment
Surety
The bid process Discussion Underwriting/pre-qualification process
The three Cs of Credit extension Character-Capacity-Capital/Credit
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
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 un-bonded
Continuity plan
SuretyCapital 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 staff Reputation of CPA performing audits and other services
Surety
Commercial Fiduciary License and permit Court Public official Miscellaneous Fidelity
Surety
Some 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 cancelation
Surety
Surety 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 Indemnity
Surety
Claims process Number of alternatives Surety’s responsibilities
Fulfill the commitments to various stakeholders
Performance Payment Other
Surety
Industry 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…
Surety
Industry 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 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
Why did the Prof go back to business….
