RMI Intro to Surety plus … “Prof V goes back to Campus…”

Surety Prof V CEO Emeritus CNA Surety Corp Prof Emeritus UIUC Finance EVP Surety Arch 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 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 $ 5 billion annual business - approximately 1% of p/c revenues 135 or so groups of companies write bonds in the USA Multi-line and specialty companies Top ten write approx. 70% of business

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 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

Surety Capital 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….

Surety Final thoughts…. Mark Vonnahme EVP, Surety Arch Insurance Group