Evolution of the Surety Bond market

Hungary 15 years

Dr. György Lampert

Managing Director – Eurobond

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Stone AGE - 2002

Absolute discrimination in legislation against insurance

companies

„Security can be provided in a form of cash deposit or bank

guarantee”

Bank market (45 banks in Hungary)

Only exceptions: Travel Bond, IATA Bond

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Medieval AGE - 2002-2006

2002 Set up EuroBond as a principal Agent of Groupama

/Strong professional support from reinsurer ZURICH Germany/

Vision: introduce surety bond product in Hungary

Lobbying to change legislation and create the bond market

Change CFO’s mind: discover the difference!!!

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Medieval AGE - 2002 -2006

Discrimination damages the market & competition:

CAN I HELP YOU?

Competition Authority

Practice of Western European countries (Hungary joined the EU in

2004)

ICISA

ICC, Association of Hungarian Insurance Companies, Constructors

Association

Large corporate

Philosophy: Insurers just follow the needs of above players…

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Medieval AGE - 2002-2006

Insurer is equivalent to Bank

Insurance contract vs. Bond

Guarantee vs. Suretyship

Classical Suretyship vs. On demand suretyship

Customs 2004 vs. Excise 2005

New legislations accept surety bond similar to bank guarantee:

Customs (2004); Excise (2005); EU Subsidy (2005); Public Procurement

(2006)

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New AGE - 2007

Bond / guarantee market Insurer Bank

USA: 100% 0%

Italy: 80% 20%

UK: 60% 40%

Germany: 15% 85 %

Hungary: 4% 96%

2015:

Hungary: 15% 85%

Total Hungarian market in premium: ~ € 43 million

40 banks vs. Eurobond

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Subsidy bond product

cancelled – 2012

Advance payment bond

20%

20% + 10%

Up to 50%

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Global AGE with Eurobond

Multiple agency

One of the largest, specialized, “surety only” agent in the region

Licensed for all EU countries

Focus on CEE region - Hungary (market leader with ~80% market

share), Poland Czech Rep., Slovakia, Romania

Started to operate in late 2002 (Founded by Ex-Zurich colleagues)

Budapest seat, Warsaw branch office

Doing all kind of bonds (except financial guarantees)

Professional team with special market/product knowledge

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Your CEE Partner 8

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EuroBond – in numbers I. 9

0,64 0,96

1,64 2,01

1,76

2,28

6,06

7,08

6,32

-

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

2007 2008 2009 2010 2011 2012 2013 2014 2015

GW

P

GWP 2007-2015 (m EUR)

17,90%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Claims

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EuroBond – in numbers II. 10

311 292

380

593 569

589

-

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015

Nr

of b

on

ds

Number of issued bonds*

*new issuances (existing bonds not included)

352,0 ; 42%

24,2 ; 3%

0,1 ; 0% 9,5 ; 1%

132,2 ; 16%

4,4 ; 0%

203,6 ; 24%

14,2 ; 2% 97,9 ; 12%

Share of bond portfolio (2015)

Advance Payment Bid Customs

Excise Maintenance Payment

Performance Subsidy Other

Total in EUR: 838m

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Services and geographical areas

We do…

Consultative surety services

Marketing and acquisition activites, focus on Mid and Large Corporates

Client relationship management

Risk assessment (complex risk referrals for insurers)

Contract management, complex legal solutions

Bond issuance, invoicing

Reporting for insurers and Financial Authority

Claims handling

Where…

CEE – Hungary (head office), Poland (branch office), Romania, Slovakia, Czech Rep.,

EU: Portugal, Spain, Austria, Italy, Netherlands, Germany, UK.

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Market potential 2014 - 2020 12

Market is boosted by EU funds

total EUR 453k million for the

whole period

Poland’s share is by far the

largest

Top3: PL 20%; IT: 10%; ES: 8%

Hungary: EUR 22k million

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Bonding in CEE - Good to knows

Insurance Premium Tax (IPT) Rules - implemented in 2013

- Tax rate is 10 %

- Progressive tax rates are applicable to insurance companies with less than 8 billion HUF insurance premium income per year:

2,5 % up to 100 million HUF tax base

5 % between 100 million and 700 million HUF tax base

10 % over 700 million HUF tax base (above referred tax base is the gross insurance premium per month)

- Tax return and payment are the liabilities of the insurance companies on a monthly basis posteriorly

- IPT will apply only to risks located in Hungary

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Bonding in CEE - Good to knows

Unfair calling:

According to Civil Code:

Forged document

After Completion

Intentional behavior prevented the performance of obligation

The obligation that has been declared annulled by court decision

Provisional measures („Ideiglenes Intézkedés”)

Performance Certification Board („Teljesítésigazolási Szakértői Szerv – TSZSZ”)

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Operation of Performance Certification Board

(„Teljesítésigazolási Szakértői Szerv – TSZSZ”)

I. Authority:

Design and construction works

Only Hungary

Public procurements and private investments

Both Bank guarantees and Insurance bonds

Decisions about only technical and not legal issues

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II. Proceedure:

Initiated by general contractor, subcontractor, designer,

beneficiary

30 days (optional +30 days extension)

Call of the bond received

Insurer informs the Principal (3 working days)

Application to TSZSZ (3 wd) / compulsory extension of the Bond

Decision about the initiation of the process

Inspection on site

Expert’s judgment

On the basis of the expert’s judgment the calling is fulfilled or not by

the Insurer

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Exclusions vs. bond wordings I.

Exclusions „container”: classes of business (Fidelity); subclasses (fin.

guarantees); risk classes (war), etc.

Problem: How to enforce them by Insurers?

Option „A” bond wordings

Option „B” insurance contracts

Option „C” underlying contracts between principals and beneficiaries

IF none is working Insurer may invoke the applicable laws to be released from its liability

What about Re-Insurers?

In an easier situation, no need to pay according to the re-insurance treaty

Result: the Insurer will have a „GAP”

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Exclusions vs. Bond wordings II. Hungarian civil code about exemptions from liability

„circumstances which are out of scope of control”

Traditional force majors and natural disasters (earthquake, fire, frost, strom, thunder…)

Certain political events (war, riot, revolution, sabotage…)

Certain acts of the state ( ban on import/export, embargo, boycott, FX restrictions…)

Radical market changes (price explosion, unusual FX change…)

Insurer is released from liability only if the above circumstances are both

Unforseeable by the party breaching the contract at the time of concluding the contract AND

It was not reasonable to expect from the party breaching the contract to prevent such damage or to avoid such circumstances

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Poland „cumulated” maturity – Can you cover it?

Performance and maintenance bonds may be combined in one document

- however still separate instruments from legal perspective

guarantee term is technically divided into two phases – performance (up to

5y) and warranty stage (up to additional 4y)

100% of the guaranteed sum for the performance stage and usually 30% for

the warranty period (sometimes 1st year 30%, 2nd year 20%, 3rd year 10% …)

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Our contact

HUNGARY

1111 Budapest, Budafoki út 59.

Tel: + 36 1 796 3508 + 36 1 202 0038 Fax: + 36 1 202 0674

POLAND

ul. Dantyszka 20, lok. 31/32, Warsaw (02-054)

Tel: + 48 796 950 551

www.eurobond.hu www.eurobondint.com

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