Surety 201 Presented by: Chad Rosenberg Rosenberg & 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 Korea B. Canada C. Mexico D. Texas

SAT Question 2 What was the total surety industry premium in 2008? A. $2.6 Billion B. $5.5 Billion C. $1.2 Trillion D. $8.3 Million 437

SAT Question 3 Between 2001 and 2003 what was the only top ten surety company that did not replace its CEO? A. Chubb B. USF&G C. Safeco D. CNA

SAT Question 4 A bond can be cancelled mid-term? A. True B. False C. 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 Prequalification Ongoing 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

Financial Underwriting 1. Sr. Unsecured Debt Ratings 2. Transparency 1. Financial 2. Operational 3. Financial & Credit Profile 1. Profitability 2. Cash Flow 3. Liquidity 4. Capital Base 4. Security Packaging 1. Collateral 2. Indemnity

Credit RiskS&PMoody’sFitch HighestAAAAaaAAA HighAAAaAA Upper Med.AAA MediumBBBBaaBBB Low Med.BBBaBB LowBBB PoorCCCCaaCCC 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 – 1990Top 15 Sureties – Fidelity & Deposit 2.USF&G 3.Reliance 4.Aetna 5.Fireman’s Fund 6.Seaboard 7.Continental 8.CNA 9.Safeco 10.Hartford 11.AIG 12.Chubb 13.St. Paul 14.Amwest 15.Cigna 1.Travelers 2.Liberty Mutual 3.Zurich 4.CNA 5.Chubb 6.Hartford 7.HCC 8.IFIC 9.ACE 10.Arch 11.NAS 12.Great American 13.Hanover 14.AIU Holdings 15.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

Source: The Surety& Fidelity Association of America Surety Net Combined Ratio (1997 – 2008)

Source: The Surety& Fidelity Association of America Contract Surety Experience (1996 – 2008)

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 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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