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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 certain sums of money under defined agreements or statutory terms.
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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
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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)- 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.
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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
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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 (two sureties involved)
- Commercial Surety losses are growing with the biggestclaim ever produced now in litigation.
• The biggest potential loss is Enron Corp.• Another potential large loss is Kmart
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Enron
US Surety Market & Exposures Market participants Primary companies: Chubb Safeco St. Paul AIG Liberty Bond CNA Surety Travelers Hartford Fireman’s Fund F&D Surety Kemper Atlantic Mutual
Total = $2,488,000,000
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EnronUS 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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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
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Account Underwriting
Corporate Financial Statement
Value Line/S&P Rating Etc.
Very Limited Client Contact
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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
- 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
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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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