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CAGNY Meeting. May 29, 2002. What is “Suretyship”?. Suretyship is essentially an extension of credit by the surety on behalf of the principal . Suretyship is designed to protect the Obligee from exposures to loss. What are “Surety Bonds”?.

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Cagny meeting

CAGNY Meeting

May 29, 2002


What is suretyship

What is “Suretyship”?

  • Suretyship is essentially an extension of credit by the surety on behalf of the principal. Suretyship is designed to protect the Obligee from exposures to loss.


What are surety bonds

What are “Surety Bonds”?

  • A surety bond is a written agreement providing for monetary compensation or satisfactory completion of an obligation by the surety. A surety bond is a three-party agreement whereby the surety is bound, with the principal to the Obligee.


There are two broad categories of surety

There are two broad categories of Surety

  • Contract Surety – a contract bond guarantees the performance of the principal under a written contract to build or supply goods and services.

  • Commercial Surety (also known as non-contract or miscellaneous bonds) – a commercial surety bond guarantees the principal will honor obligations to pay certain sums of money under defined agreements or statutory terms.


Industry results for contract and commercial surety 1987 1998

Industry Results for Contract and Commercial Surety - 1987-1998


Industry results for contract and commercial surety 1999 2001

Industry Results for Contract and Commercial Surety - 1999-2001


Top 25 writers of surety bonds in 1999

Top 25 Writers of Surety Bonds in 1999


Top 20 writers of surety bonds in 2000

Top 20 Writers of Surety Bonds in 2000


Top 20 writers of surety bonds in 2001

Top 20 Writers of Surety Bonds in 2001


Primary market changes from january 2000 december 2001

Primary Market Changes from January 2000 –December 2001

  • - Consolidation through acquisition

  • Travelers/Reliance

  • St. Paul/USF&G/Seaboard

  • Zurich/F&D

  • - Reduction through insolvency

  • Fireman’s Fund (Surety Operation)

  • Frontier

  • Amwest

  • First Indemnity of America


Reinsurance market changes from january 2000 december 2001

Reinsurance MarketChanges from January 2000 – December 2001

  • - Calendar year 1999-over 25 active reinsurers with a total

  • market capacity exceeding $250,000,000

  • - December 2001 – 12 active reinsurers with a

  • total market capacity at approximately

  • $90,000,000 (excluding New Bermuda markets)

  • - Between September and December we lost

  • FolksAmerica, St. Paul Re and Gerling.

  • Post January 1, 2002 Odyssey Re and Arch

  • Re emerged as new markets.


Loss activity contract commercial surety

Loss Activity (Contract & Commercial Surety)

  • Contract Surety

  • Loss activity over the past 5 years has increased in both

    frequency and severity

  • Gross vs. Net Results

  • Reinsurers share of the industry losses disproportionate

    Commercial Surety

  • Historically very profitable

  • Over the past 5 years: New product development

    • Growing number of high risk obligations


Recent claim activity

Recent Claim Activity

  • ContractSurety losses over $50 million are now common

    • Loss over $200 million is in the market; Freide Goldman

      Halter (two sureties involved)

  • CommercialSurety losses are growing with the biggest

    claim ever produced now in litigation.

    • The biggest potential loss is Enron Corp.

    • Another potential large loss is Kmart


Enron

Enron

  • US Surety Market & Exposures

  • Market participants

  • Primary companies:

  • ChubbSafeco

  • St. PaulAIG

  • Liberty BondCNA Surety

  • TravelersHartford

  • Fireman’s FundF&D Surety

  • KemperAtlantic Mutual

  • Total = $2,488,000,000


Enron1

Enron

  • US Surety Market & Exposures

  • Market participants

  • Reinsurance companies:

  • Transatlantic ReGerling Global

  • Swiss ReAmerican Re

  • Gen ReNac Re/XL Re

  • Partner ReSt. Paul Re

  • FolksamericaZurich Re

  • C.N.A. ReHanover Re

  • Employers ReEverest Re

  • SCOR ReBerkley Group

  • London

  • Total = $750,000,000


What do we know about enron corporation

What Do We Know About Enron Corporation?

  • Corporate Headquarters – Houston, Texas

  • Advanced Energy Trading Business

  • Divested (sold) most fixed assets from 1990-1998

  • Early 2001 market capitalization topped $88 billion

  • Leader in its market

  • Darling of Wall Street


Account underwriting

Account Underwriting

  • Corporate Financial Statement

  • Value Line/S&P Rating Etc.

  • Very Limited Client Contact


Surety involvement

Surety Involvement

  • ContractSurety

  • - Performance Bond / Payment Bonds

  • - Operations and Maintenance Bonds

  • Commercial Surety

  • - Advance Payment Bond

  • - Premium Payment Bond

  • - Financial Guarantee Bond

  • Domestic Business Interests

  • International Business Interests


Where are the losses

Where Are The Losses

  • Contract- most likely from the international business

  • - Argentina exposure most tenuous

  • - estimate $25-$200 million

  • Commercial- paid losses to date exceed $265,000,000

  • - A.P.E.A. Bond

  • - Winterthur Bond

  • - NEPOOL Bonds

  • - Mahonia Bonds


A p e a bond

A.P.E.A. Bond

  • Paid loss $250,000,000

  • Structure of the deal

    • Foreword sale agreement

    • J.P. Morgan/Chase

    • A.P.E.A.

    • End Users

    • Enron


Mahonia

Mahonia

  • Who/What is Mahonia

  • Six Open Bonds

    • Guarantee Advance Payment

  • Total Amount On Six Bond claims - $1.1 Billion

  • Current Litigation


Kmart

Kmart

  • Commercial Surety Loss

    • Workers’ Compensation/Self Insurers Bond

    • Lease Bonds

    • License and Permit Bonds


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