CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET

2010

Surety Losses & Profitability

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

LossRatio

Calendar Year

Contract Surety Industry Direct Loss RatiosCY 1958 - 2010

Source: The Surety & Fidelity Association of America

Ave

Surety Losses & Profitability

50.0%

70.0%

90.0%

110.0%

130.0%

150.0%

170.0%

CombinedRatio

Calendar Year

Contract Surety Industry Combined RatiosCY 1962 - 2010

Source: The Surety & Fidelity Association of America

A

Surety in the Early 1990s

Strong economy Excess capacity in surety market Low premiums Relaxed underwriting Commercial surety expansion

Surety in the Early 2000s

Sagging economy Significant commercial losses Heavy contract surety losses Increased failure rates

Surety in the 2000s

Source: BizMiner

Building, heavy/highway, and specialty trade contractorsIn Business Survivors Failure Rate

2002 2004

853,372 610,357 28.5%

2004 2006

850,029 649,602 23.6%

2006 2008

1,155,245 919,848 20.4%

2007 2009

1,424,124 969,937 31.9%

Contract Surety Premiums & Losses

0

0.5

1

1.5

2

2.5

3

3.5

1994 1996 1998 2000 2002 2004 2006 2008 2010

Billio

ns

of Dolla

rs

Direct Premiums Written

Direct Losses Incurred

Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (1999-2010) Surety Countrywide (Preliminary)”

Top 15 Writers of All U.S. Surety

Surety & Fidelity Association of AmericaTop 15 Surety Writers

1994 vs 2010

1994 2010

Surety

($millions)

Premium Surety

1 Reliance Travelers 147.1 1 Travelers Bond 857.32 USF&G St. Paul Travelers 144.1 2 Liberty Mutual Insurance Group 743.03 F&D Zurich 142.5 3 Zurich Insurance Group 498.94 St Paul Group Travelers 140.9 4 CNA Insurance Group 398.65 AIG AIU Holdings Chartis 111.5 5 Chubb & Son Inc. Group 251.66 Aetna Travelers 106.6 6 Hartford Fire & Casualty Group 177.17 Continental CNA 100.7 7 HCC Surety Group 176.18 Fireman's Fund Out of surety 97.3 8 International Fidelity Insurance Co. 142.79 CNA Insurance Companies 92.8 9 ACE Ltd. Group 106.7

10 Safeco Liberty Mutual 88.9 10 NAS Surety Group 104.211 Chubb 77.7 11 Great American Insurance Companies 98.112 Hartford 74.0 12 The Hanover Insurance Group 92.913 Amwest Gone 70.2 13 Lexon/BondSafeguard Insurance Cos. 80.414 Capsure CNA 55.3 14 RLI Insurance Group 77.515 CIGNA Group ACE 49.7 15 Arch Capital Group 63.3

($millions)

Premium

Companies that are gone in REDCompanies that merged or were sold are in BLUECompanies that merger or were sold a second time are in GREEN

Construction Activity

All Construction Public Private

Total Construction -8.0% -2.9% -10.7%

Nonresidential -15.2% -3.7% -24.8%

Lodging -62.1% - -63.6%

Manufacturing -31.4% - -31.8%

Public Safety -14.4% -13.4% -

Power -5.7% -24.2% -2.7%

Educational -18.6% -17.4% -24.7%

Transportation +13.8% +21.9% -10.9%

Amusement/Rec -17.7% -11.2% -26.4%

Office -33.8% -11.1% -41.9%

Highway/Street +5.6% +5.5% -

Health care -14.6% -7.0% -14.6%

Commercial -31.8% -37.4% -31.4%

www.census.gov/const/www/c30index.html

U.S. Census Gains May 2009-May 2010

Outlook for 2010 & Beyond

Increased risk for owners, contractors & sureties caused by current economy

Continued disciplined underwriting, exposure management & project analysis

Stabilized capacity & restored profitability

Growth in nonresidential construction expected in late 2010, early 2011

Outlook for 2010 & Beyond

Optimism about surety capacity & demand

Small, mega markets may remain tight Surety available for best contractors Marginal contractors difficulty obtaining

bonding More competition, fewer projects Tightened operations for contractors Increase in contractor failures

Underwriting

The 3 Cs: Capital Capacity Character

4 and 5: Continuity Contracts

Underwriting

Capital Financial statements Indemnity Working capital Work-in-progress

Underwriting

Capacity Resumes Contingency plan Business plan Equipment

Underwriting

Character Reputation Relationships References

Bond Premiums

Type of Construction

Geographic Area

Contractor Size

Still a Bargain

Pennies on the dollar

Premium

Capacity

Small( < $50 M)

SBAProgram

Medium($100 M)

CompetitiveSurety Market

Jumbo( > $500 M)

Multiple sureties

Joint ventures

Partial bonds

Capacity

Medium($100 M)

CompetitiveSurety Market

Jumbo( > $500 M)

Multiple sureties

Joint ventures

Partial bonds

Small( < $50 M)

SBAProgram

Claims

Severity&

Frequencyof Claims

Advice for Today’s Contractors Know rights & responsibilities Stay within capabilities Manage growth & overhead Learn why contractors fail

Advice for Today’s Contractors Communicate Prepare for economic recovery

Advice for Today’s Contractors Contract terms Bond forms Construction CPA Adjust overhead Bank line of credit Conserve capital Bond subcontractors Qualify the surety

Advice for Today’s Contractors

Underwriter

Producer

Contractor

Advice for Today’s Contractors

Underwriter

Producer

Contractor

For More Information

Surety Information Office (SIO)www.sio.org | sio@sio.org

SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond

Producers (NASBP).