CAGNY Meeting

1
CAGNY Meeting

• May 29, 2002

2
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.

3
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.

4
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.

5
Industry Results for Contract and Commercial
Surety - 1987-1998
6
Industry Results for Contract and Commercial
Surety - 1999-2001
7
Top 25 Writers of Surety Bonds in 1999
8
Top 20 Writers of Surety Bonds in 2000
9
Top 20 Writers of Surety Bonds in 2001
10
Primary Market Changes from January 2000
December 2001

• - Consolidation through acquisition
• Travelers/Reliance
• St. Paul/USFG/Seaboard
• Zurich/FD
• - Reduction through insolvency
• Firemans Fund (Surety Operation)
• Frontier
• Amwest
• First Indemnity of America

11
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.
  
  

12
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

13
Recent Claim Activity

• Contract Surety losses over 50 million are now
  common
• Loss over 200 million is in the market Freide
  Goldman
• Halter (two sureties involved)
• Commercial Surety 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

14
Enron

• US Surety Market Exposures
• Market participants
• Primary companies
• Chubb Safeco
• St. Paul AIG
• Liberty Bond CNA Surety
• Travelers Hartford
• Firemans Fund FD Surety
• Kemper Atlantic Mutual
• Total 2,488,000,000

15
Enron

• US Surety Market Exposures
• Market participants
• Reinsurance companies
• Transatlantic Re Gerling Global
• Swiss Re American Re
• Gen Re Nac Re/XL Re
• Partner Re St. Paul Re
• Folksamerica Zurich Re
• C.N.A. Re Hanover Re
• Employers Re Everest Re
• SCOR Re Berkley Group
• London
• Total 750,000,000

16
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

17
Account Underwriting

• Corporate Financial Statement
• Value Line/SP Rating Etc.
• Very Limited Client Contact

18
Surety Involvement

• Contract Surety
• - 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

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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

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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

21
Mahonia

• Who/What is Mahonia
• Six Open Bonds
• Guarantee Advance Payment
• Total Amount On Six Bond claims - 1.1 Billion
• Current Litigation

22
Kmart

• Commercial Surety Loss
• Workers Compensation/Self Insurers Bond
• Lease Bonds
• License and Permit Bonds

23

• QUESTIONS