Letter from the President
As many of you have probably read by now, Markel Corporation had a great year in 2005. Despite net hurricane losses of $246.3m, Markel Corporation still posted an operating profit. For 2005, Markel's combined ratio was a 101%. This is a significant accomplishment for Markel and all of its subsidiaries. It affirms the emphasis we have on product line diversification and underwriting profitability. As Alan I. Kirshner, Chairman and Chief Executive Officer, commented, "While our 2005 results included significant hurricane losses, most of our businesses enjoyed excellent underwriting results. We are never happy to report an underwriting loss; however, we were able to withstand unprecedented catastrophic events and continue to grow book value, even if only modestly. Our portfolio of over 90 specialty products is well positioned to produce strong underwriting margins in 2006."
We at IUM are proud to be associated with such an outstanding organization. Over the past year, we have accomplished so much and we continue to strive for excellence in 2006. Our priorities for this year include but are not limited to Maintaining Underwriting Discipline, Pricing Integrity, Product and Geographical Diversification, Increased Marketing Efforts, Expanding Strategic Partnerships with Our Producers and Maintaining Strong Operational Disciplines. All of these initiatives reflect our desire to expand our producer relationships, strengthen our balance sheet and create products that will help all of you to grow in this challenging environment. Our management team at IUM is committed to these priorities and will work together to guarantee the success of each.
We sustained minimal hurricane losses at IUM. Overall, we had a good year in terms of loss experience, premium growth and strengthening our relationships with you, our valuable partners. We are beginning to reap the rewards from our past and current underwriting decisions to exit certain classes of business. These rewards will only increase as time goes on and strengthen our platform for growth with all of you.
Again, thank you for your support. If you have any suggestions or comments, please feel free to contact myself or any one of my managers. We welcome your thoughts and feedback as we continue our efforts to earn first call and last look!
Surety
A Business with its own Identity
by Ken Ryan
Although the surety line is regulated by the various state insurance departments, is generally underwritten by property and casualty insurance companies and is produced or brokered through independent insurance agents and national brokers, surety is not insurance. Those not familiar with the line might wrongfully assume “it is just a form of insurance that has to do with guarantees.” While the reference to guarantees is correct the reference to insurance is not. If it is not insurance, than what is it? Without giving a formal definition, an easier explanation would be that it is a hybrid between bank lending (credit) and insurance. In many ways surety is similar to insurance as:
1. Risk is assumed by a professional risk taker (surety or insurance company)
2. A premium is paid for taking the risk
3. There is protection against financial loss
4. There is a written contract in which the risk is defined (abond,rather than a policy)
However, when studied more carefully, one realizes that there are a number of differences between the two disciplines:
1. Insurance is a two party risk transfer while surety is a three party relationship
2. Insurance is not expected to be written loss free as insurance companies know there will be losses. Actuarial analysis is heavily relied on to price the product based on experience data and exposure models.
3. In theory surety is supposed to be underwritten from a zero loss point. Just as a bank would not grant credit to a prospective borrowers if they were unsure of the borrowers’ ability to repay the loans, a surety should not grant credit to clients that might default on performance and payment obligations
4. While the surety does collect a premium for issuing a bond, the true origin of the surety premium was actually a “fee” that was charged to pre-qualify the contractor to the owner (or obligee.) Over time and because of its complimentary and regulatory relationships with the insurance industry, the term “premium” replaced the term “fee.”
The principle of indemnity is probably what most distinguishes surety from insurance. Although surety is written from a zero loss point, of course, losses do occur. However, through the principle of indemnity, again in theory, the surety company is not supposed to suffer any ultimate loss. The basic premise of an indemnity agreement is to require the client (principal) to reimburse the surety in case the surety is called upon by the obligee to perform or pay for the principal’s default. When a contactor defaults on a project or is unable to meet its payment bond obligations, the surety is required to step in and complete the project and/ or respond to the payment claims. If it does, then the surety has the right, through the indemnity agreement, to try and recover its losses from its client, the principal. Unfortunately in many claim situations, there is not much left in the way of assets or salvage for the surety to recover.
In future articles we will look at the history of corporate surety in America, a surety’s options when a client does default and the present day state of the surety market.
In April of 2005, the Markel group re-entered the surety market by establishing a surety reinsurance division at Investors Underwriting Managers. This initiative is unique to IUM as all of the lines of business we presently underwrite are done so on a primary basis. The surety unit is entertaining submissions, through reinsurance intermediaries, for treaty reinsurance programs for both national and regional surety companies written on either a pro-rata and excess of loss basis.
IUM Opens New Environemental Office In Maryland
Investors Underwriting Managers, Inc’s Environmental Division is excited to announce the opening of a field office in Maryland effective February 27, 2006.
Tim Ho and Lou Ann Cook, formerly of AIG Environmental, will staff the office. They come to IUM with a strong background in the Environmental Wholesale Marketplace. They will spend the first month in Red Bank, NJ as we solidify office details for them in Maryland.
During this time, they can be contacted at 732-450-8763 – Tim Ho and
732-450-8728 – Lou Ann Cook. Tim and Lou Ann will be entertaining all of the existing Environmental Products that IUM currently offers.
Mark Brown, VP/Environmental Manager comments, “IUM and Markel are excited about the expansion of the footprint of our Division. I am particularly excited about the two staff members who bring worlds of experience and insight to our Company and Division.”
Please join us in welcoming our new team members. We look forward to an exciting 2006.
If anyone has further questions, please feel free to contact Mark Brown at 732-450-8766.