CAGNY Meeting
May 29, 2002
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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 threeparty 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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Industry Results for Contract and Commercial
Surety - 1987-1998
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Industry Results for Contract and Commercial
Surety - 1999-2001
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Top 25 Writers of Surety Bonds in 1999
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Top 20 Writers of Surety Bonds in 2000
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Top 20 Writers of Surety Bonds in 2001
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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 Market
Changes 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 biggest
claim 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
St. Paul
Liberty Bond
Travelers
Fireman’s Fund
Kemper
Safeco
AIG
CNA Surety
Hartford
F&D Surety
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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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
 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
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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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QUESTIONS