FINANCIAL GUARANTY INSURANCE AND BONDS

Lynne Cook, Early, Cassidy & Schilling, Inc. Rosemary Quinn, CNA Surety Disclaimer The material provided is not intended nor designed to provide legal advice. The purpose of this presentation is to provide information, rather than advice or opinion. It is accurate to the best of the speakers' knowledge as of the date of the presentation. Accordingly, this presentation should not be viewed as a substitute for the guidance and recommendations of a retained professional.

CNA is a registered trademark of CNA Financial Corporation. CNA Surety is a trade name of CNA Financial Corporation. Copyright (c) 2012 CNA. All rights reserved.

BIOGRAPHIES

Lynne Cook is Senior Vice President at Early, Cassidy and Schilling, Inc. (EC&S) where she leads the construction and bond teams, actively assists clients with their surety programs, and manages the agency’s carrier relationships for bonds. She joined EC&S in 1999 and has been a surety professional since 1979. She is active in a number of organizations: serves as Secretary for the Surety Alliance, as Vice-Chair on the NASBP Commercial Surety Committee, and participates with ASA MW, ABC and AGC. Ms. Cook served as President of the Central PA and the Upstate NY Surety Associations, and has worked for the SFAA. She has served as a director for the NASBP – and chaired its Commercial Surety Committee, and the ASA of Metropolitan Washington – and chaired its Education Committee. Rosemary Quinn is Vice President and Counsel for CNA Surety. Prior to joining CNA Surety in 2006, Ms. Quinn held similar positions with other surety companies. She co-authored the chapter on financial guaranty insurance which appeared in the ABA’s first and second editions of “The Law of Miscellaneous Bonds.” Ms. Quinn received a B.A. degree, cum laude, from La Salle University in 1976 and a J.D. degree from Rutgers University School of Law in 1979.

FINANCIAL GUARANTY INSURANCE STATUTORY DEFINITION

Financial Guaranty Insurance Guarantees: Repayment of Indebtedness Losses Arising from Changes in Levels of Interest Rates or Differential in Interest Rates Between Markets or Products Losses Arising from Changes in Rates of Exchange of Currency Losses Arising from Changes in Value of Assets, Financial or Commodity Indices, or Price Levels in General Other Substantially Similar Coverage

SURETY INSURANCE STATUTORY DEFINITION

 Each state has its own statutory definition  Since New York is the most active regulator of financial guaranty insurance, New York’s definition will be used for purposes of this presentation  New York Surety Definition Includes:  Contracts, Including Payment and Performance Bonds, Other than Contracts of Indebtedness  Indemnity Bond for benefit of public bond, railroad, or charitable organization or a lost security or utility payment bond  Any Unspecified Contract except Financial Guaranty Insurance  Obligations Required or Permitted in Judicial Proceedings or Otherwise Allowed by Law  Guarantee, for period not to exceed 5 years, of the payment of premium, deductible or self-insured retention to an insurer under a worker’s compensation or liability policy  Non-Residential Lease Obligations not to Exceed 5 Years  Guarantee of Indebtedness of up to $10 Million for One Obligor  Depository bond that insures deposits in financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC)

WHAT IS DIFFERENCE BETWEEN FINANCIAL GUARANTY INSURANCE AND SURETY INSURANCE?

There is an overlap of the two definitions New York, unlike most states, addressed some of the overlap by amending its definition to include many of the bond types now found in the surety definition History HISTORY OF FINANCIAL GUARANTY INSURANCE BUSINESS

 Written by Surety Departments of Multiline Property and Casualty Insurers  A Hybrid of Insurance and Investment Banking  Guaranty of Municipal Bond Obligations  Asset-Backed Securities; Limited Partnership Bonds  Highly Publicized Failures of Issuers HISTORY OF FINANCIAL GUARANTY INSURANCE REGULATION

 $500 Billion Aggregate Loss Exposure to the P&C Industry Estimated in the early 1980s  Series of Defaults with Large Losses  Potential To Bankrupt Multiline Insurers  Financial Guaranty vs. Property/Casualty The “Law of Large Numbers” Annual Adjustment of Premium NAIC Model Act (National Association of Insurance Commissioners) Study Group appointed in 1985 in response to this growing line of business Model Law adopted in 1986 and later amended in 1987 ADOPTION OF MODEL ACT

 NAIC Model Law Key Provisions: Creates special licensing requirements for financial guaranty insurers Restricts the writing of financial guaranty insurance to monoline financial guaranty insurers so that multi-line property casualty insurers are prohibited from writing this line of insurance  Florida - 1988  California - 1990  Connecticut - 1993  New York - 1989 Business Opportunities Extraterritorial Effect

NEW YORK’S “APPLETON RULE”

 Unique to New York  General Licensing Provisions ― not specific to financial guaranty insurance  “Domestic” Insurer may only write outside of New York those coverages which it may write in New York  “Foreign” and “Alien” Insurers licensed in New York may not write outside of New York any coverages which they may not write in New York  Failure to comply with the Appleton Rule may result in penalties that could include suspension of insurer license  Alien insurer fined $1 Million in 1997 by New York Insurance Department based on alleged violation FUNDAMENTAL PRINCIPLES

 Financial Guaranty Insurance is a distinct type of insurance which is subject to unique licensing and capitalization requirements  Only Monoline Financial Guaranty Insurers May Write “Financial Guaranty Insurance”  Multiline Insurers Are Forbidden To Write Financial Guaranty Insurance But May Write “Surety Insurance”  Surety Insurance is defined to explicitly exclude Financial Guaranty Insurance  Is It “Financial Guaranty Insurance” or “Surety Insurance”? STATUTORY PING-PONG

 Insurance Product May Fall Within Both “Financial Guaranty Insurance” and “Surety” Definitions  Financial Guaranty Insurance guarantees repayment of indebtedness  Surety Bonds may not guarantee repayment of indebtedness.  New York is the only state to issue guidance on how to resolve this conflict between the surety and financial guaranty definitions.  Bond covering Mixed Obligations: if there is no specific carve-out in the surety definition, NY will most likely treat as financial guaranty insurance  Bond that falls within surety and financial guaranty definitions will be treated as surety if the bond type is included in statutory list of permissible surety bonds. Otherwise, will likely be treated as financial guaranty insurance.

PERMISSIBLE SURETY INSURANCE

 Prior to enactment of financial guaranty chapter in the NY insurance law, New York’s Surety definition included list of more traditional surety bonds such as Contract bonds, Judicial bonds, and certain commercial surety bonds

 After recognition of the confusion caused by the enactment of laws governing financial guaranty insurance, New York amended its Surety definition in order to carve out certain types of Surety bonds from the Financial Guaranty definition:

 Guarantee, for period not to exceed 5 years, of the payment of premium, deductible or self-insured retention to an insurer under a workers’ compensation or liability policy

 Non-residential Lease obligations not to exceed 5 years

 Guarantee of Indebtedness up to $10 Million for One Obligor

 Depository bonds that insure deposits in financial institutions in excess of the amount already insured by the Federal Deposit Insurance Corporation (FDIC)

THANK YOU!

If we were not able to get to your question or comment during the presentation, you may contact the presenters directly: Lynne Cook: [email protected] Rosemary Quinn: [email protected]