Casualty Actuarial Society 2002 Annual Meeting

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Casualty Actuarial Society2002 Annual Meeting

• November 11, 2002
• Surety Bonds A General Overview
• By Richard Meyerholz
• Vice President Underwriting

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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.

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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.

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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 a certain sum of money under a defined
  agreement or Govt. statute.

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Experience (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, but recently
  reported losses
• may wipe out accumulated profits from the
  last 15 years.
• Over the past 5 years
• New product development
• Growing number of high risk obligations

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2000 Surety Top 10
Data from Surety Association of America and A.M.
Best
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Preliminary Surety Results2001
Data from Surety Association of America
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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)
• As of today the jury is still out.
  Reinsurance Companies
• reviewing the market potential.

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Recent Claim Activity

• Contract Surety losses over 50 million are now
  common
• Loss over 200 million is in the market - Freide
  Goldman
• Halter (three sureties involved)
• IVI/Sade Vigesa 400,000,000
• Several others on the ropes
• Commercial Surety losses are growing with the
  biggest
• claim ever produced now in litigation.
• The biggest potential loss is Enron Corp.
• Other potential large losses include Kmart,
  Consolidated Freightways, CMC, Pacific Financial

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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

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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

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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 American Public Energy Agency
• - Winterthur Bond
• - NEPOOL Bonds New England Power Pool
• - Mahonia Bonds

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Example of a Forward Sale AgreementA.P.E.A. Bond
Chase

• Paid loss 250,000,000
• Structure of the deal
• Forward sale agreement
• J.P. Morgan/Chase
• A.P.E.A.
• End Users
• Enron

Enron
Bond Holders
A.P.E.A.
Utility
Benefit to Utility Discounted oil price
Tax credit Benefit to
Enron Use of money
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Mahonia

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

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Kmart

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

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IVI/Sade Vigesa

• Contract Surety Loss
• Performance and Payment Bonds on two oil platform
  projects for Petrobias
• Bonds written in 1995
• Judgment against Sureties 370,000.00

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Things To Consider

• Be sure to understand the product
• Know the reinsurance coverage
• Be aware of potential tail exposure
• Are claims adequately reserved
• Ask questions

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• QUESTIONS