1. Finance 431 Property Casualty Insurance

2. Finance 431 Mark Vonnahme Former President and CEO,CNA Surety

3. Property and Casualty - Specialty Insurance Products Surety Bonds All layout enhancements courtesy of Kurt Vonnahme

4. Surety Will introduce some new concepts to you Surety business Define suretyship Distinguish from and compare to insurance Compare to banking

5. Surety Discuss different types of obligations/bonds Discuss high profile cases Discuss real life examples

6. Surety What is surety ? Ancient process Biblical commentary Babylonian Roman times English history U.S. history

7. Surety Personal surety Legal development Common law v statute Statute of frauds Development of corporate surety

8. 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

9. Surety Industry highlights $ 3.7 billion business-approximately 1% of annual p/c revenues 135 or so groups of companies write bonds Multiline and specialty companies Top ten write approx. 70% of business

10. Surety Classifications of bonds  Contract  Commercial

11. 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

12. Surety Contract  Bid  Performance  Payment

13. Surety Example Contractor wants to submit a proposal to UIUC for a new building ECP: $ 50 million What happens ?

14. Surety The bid process Discussion Underwriting process The three Cs of Credit extension An expensive and in-depth process

15. 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

16. Surety Character Example Contractor takes money out of company w/o telling you … or invests in business unrelated to his construction business … Bankruptcy… Other …

17. 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 unbonded Continuity plan

18. Surety Capacity-common issues Contractor’s experience is on $ 5 million highway project Wants to bid on $ 25 million highway job Highway contractor wants to build a $ 25 million commercial building

19. Surety Capacity-common issues Have a company doing business within 100 miles of Champaign,Illinois Wants to go to Florida…. or Iraq Identify some issues

20. Surety Capital CPA certified audited f/s for 3 to 5 years Work in process for bonded and un bonded work Cost control systems Investment strategy Perform complete analysis  Trends over time in profitability and liquidity  Credit history  Bank relationships  Accounting system  CFO/financial staff  Reputation of CPA performing audits and other services

21. Surety Capital-common issues Poor accounting system Lack of accounting and finance personnel  Contractor lost money in three of the past four years  Bank debt and overall debt is growing  Disputes on projects leading to A/R slow  A number of jobs are losing money – drain on company’s financial resources

22. Surety Commercial Fiduciary License and permit Court Public official Miscellaneous Fidelity

23. Surety Commercial Fiduciary Executor or administrator of estate Guardianship of minor Trustees in bankruptcy

24. Surety License and permit Virtually all businesses will have some license bonds Compulsory obligations Agents/brokers Real estate broker Permit when signs extend over a public walkway Truckers on road with overweight load Contractors license Tax bonds Reclamation bonds

25. Surety Court Plaintiffs and defendants Attachment bonds Plaintiffs Release of attachment Appeal bonds High profile cases Auto companies Oil companies

26. Surety Public Official Administrator Treasurer Tax Collector

27. Surety Miscellaneous Loss securities/instruments bonds A number of guarantees which may not fall into other classifications Forfeiture provisions Non-cancelability provisions Payment on demand Long term periods Indeterminate periods

28. Surety Fidelity Honesty bonds Bankers blanket bonds May be written as a part of a package policy in P/C

29. Surety Insurance v surety bonds Comparisons  Both regulated by statutes/reqs at state level  Transfer of risk/assumption of risk  Premium paid  Protection against financial loss  Contract defining the risk

30. Surety Some key distinctions Third parties receive protection Principal is not protected by bond Law of large numbers does not apply Loss expectation v no loss anticipated Principal is always primarily responsible for completion of the obligation

31. Surety Some key distinctions Transfer of risk to insurance company Distinguish from insurance Most surety obligations are not cancelable Premium non payment is not valid reason to cancel the obligation

32. Surety Surety and banking Surety like banking is an extension of credit Both expect repayment of credit or obligation Banks and sureties do not expect a loss Rights to pursue defaulting principal

33. Surety Surety and banking Banks extend credit/money Sureties extend credit Rights to restitution in case of default Bank credit is monetary in nature Sureties have both monetary and performance responsibility

34. Surety Principal’s responsibility to surety Complete the obligation Indemnify against loss May be asked to provide collateral

35. Surety Legal remedies in case of loss Principal is primarily responsible for the obligation In case of loss  Indemnification  Subrogation

36. Surety What happens in case of loss ? Analysis Use of internal v external sources/consultants Performance v payment of funds

37. Surety Reinsurance Co-surety

38. Surety Industry issues Loss activity Four years of losses, improving results on horizon Economic transition Changes in so many key industries High profile cases Capacity on Commercial surety products WCSI Reclamation Closure – post closure Appeal Other tough risks

39. Surety Industry issues Expense structure Acquisition Underwriting Reinsurance Capacity Pricing Alternative products Insurance v surety Pricing of surety Commercial exposures create real pricing issues Rating plans are antiquated

40. 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

41. Surety Summary

42. Follow Up … Mark Vonnahme 110 DKH, T Th 1:30 – 3:30pm 217-244-1616 Mvonnahm@cba.uiuc.e du Vonnahme@comcast.n et

43. Surety Next class Homework