CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET

2013

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 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 - 2012

Source: The Surety & Fidelity Association of America

A

Surety Losses & Profitability

50.0%

70.0%

90.0%

110.0%

130.0%

150.0%

170.0%

Calendar Year

Contract Surety Industry Combined RatiosCY 1962 - 2012

A

AverageCombined Ratio=105%

Surety in the 2000s

Source: BizMiner

Building, heavy/highway, and specialty trade contractors

In Business Survivors Failure Rate

853,372 (2002) 610,357 (2004) 28.5%

850,029 (2004) 649,602 (2006) 23.6%

1,155,245 (2006) 919,848(2008)

20.4%

897,602 (2009) 702,618 (2011) 21.7%

918,483 (2010) 696,441 (2012) 24.2%

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 2012

Billio

ns

of Dolla

rs

Direct Premiums Written

Direct Losses Incurred

Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (200`-2012) Surety Countrywide (Preliminary)”

Top 15 Writers of All U.S. Surety

Surety & Fidelity Association of AmericaTop 15 Surety Writers

1994 vs 2012

1994 2012

Surety

($millions)

Premium Surety

1 Reliance Travelers 147.1 1 TRAVELERS BOND 754.22 USF&G St. Paul Travelers 144.1 2 LIBERTY MUTUAL GRP 725.73 F&D Zurich 142.5 3 ZURICH INSURANCE GRP 462.54 St Paul Group Travelers 140.9 4 CNA INSURANCE GRP 411.25 AIG AIU Holdings Chartis AIG 111.5 5 CHUBB & SON INC GRP 198.66 Aetna Travelers 106.6 6 INTERNATIONAL FIDELITY INS CO 161.47 Continental CNA 100.7 7 HCC SURETY GRP 160.68 Fireman's Fund Out of surety 97.3 8 HARTFORD FIRE & CASUALTY GRP 159.79 CNA Insurance Companies 92.8 9 ACE LTD GROUP 129.1

10 Safeco Liberty Mutual 88.9 10 RLI INSURANCE GRP 110.611 Chubb 77.7 11 GREAT AMERICAN 104.212 Hartford 74.0 12 LEXON/BONDSAFEGUARD 100.913 Amwest Gone 70.2 13 THE HANOVER INSURANCE GRP 85.714 Capsure CNA 55.3 14 NAS SURETY GRP 78.215 CIGNA Group ACE 49.7 15 MERCHANTS BONDING GROUP 72.8

($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 +4.3% -5.1% +9.0%

Nonresidential -2.1% -5.2% +0.6%

Lodging +16.6% - +20.7%

Manufacturing +2.1% - +2.2%

Public Safety -6.1% -6.5% -

Power -1.6% 10.8% -2.8%

Educational -10.7% -12.7% -2.7%

Transportation +11.4% +16.1% +0.8%

Amusement/Rec -10.5% -12.2% -8.2%

Office +1.6% -30.7% +16.5%

Highway/Street -3.5% -3.4% -

Health care -3.3% +0.3% -4.5%

Commercial +1.9% -12.9% +3.0%

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

U.S. Census Gains April 2012 – April 2013

Outlook for 2013 & Beyond

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

Continued disciplined underwriting, exposure management & project analysis

Stabilized capacity & restored profitability

Construction investments—public or private—are unpredictable.

Outlook for 2013 & Beyond

Optimism about surety capacity & demand

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

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

Underwriting

The 3 “C”s: 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( < $10 M*)

Some sureties

SBAProgram

Large($100 M - $250 M)

CompetitiveSurety Market

Mega( > $250 M)

Top 5-6 sureties

Joint ventures

Partial bonds

Medium($10 M - $100 M)

CompetitiveSurety Market

*These figures represent the amount of contractors’ annual revenue

CapacityCapacity

Small( < $10 M)

Some sureties

SBAProgram

Large($100 M - $250 M)

CompetitiveSurety Market

Mega( > $250 M)

Top 5-6 sureties

Joint ventures

Partial bonds

Medium($10 M - $100 M)

CompetitiveSurety Market

*These figures represent the amount of contractors’ annual revenue

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).