Surety OutlookWillis Construction Risk Management Conference

April 19-21, 2011

Dallas, TX

Overview

• Historical Results – 12 year history

• Current Market Conditions

• Surety Carriers

• Surety Reinsurance

• Construction trends and surety impact

• Globalization

• The next three years

• What does this mean to your business?

• Willis Surety Solutions

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12 YEAR HISTORY

Written Surety PremiumSurety Losses (Contract & Commercial)Value Of Construction Put In Place

Billions

$8

$7

$6

$5

$4

$3

$2

$1

$831B

$1.17T

$788B

What a difference a decade makes!Top 10 Sureties & Written Premium (2000)

Travelers $388,872,000

St. Paul $387,649,000

CNA $285,528,000

Zurich $206,922,000

AIG $160,025,000

Liberty $141,603,000

ACE $125,781,000

Safeco $124,739,000

Chubb $120,138,000

Fireman’s Fund $106,144,000

Total: $2,047,401,000*

*Approx. 59% of all surety premium

Top 10 Sureties & Written Premium (2010)

Travelers $867,822,000

Liberty $751,166,000

Zurich $512,317,000

CNA $406,463,000

Chubb $256,920,000

Hartford $177,157,000

HCC $176,126,000

IFIC $143,273,000

ACE $109,531,000

NAS $104,845,000

Total: $3,505,620,000*

*Approx. 67% of all surety premium

Today’s Surety Market

• 5th consecutive year with loss ratio less than 20%.

• Capacity more than doubled!

• Returns attracting capital – e.g. XL for contract and Aspen, Arch and HCC in commercial.

• Co-surety compatibility – more inter party acceptance vs. mid 2000’s – e.g. CNA

• Procurement shifts – P3, RFP, gap, etc – legal review.

• Rates – the inverted pricing curve flattens (see chart).

Underwriting Trends

2006

• Managing Capacity

• Managing Work

• Finding Quality People to Perform

• Over-extended subcontractors

2011 & Beyond

• Subcontractor risks

• Contract Terms

• Expanding “strike zone”

• Margin Compression

• Project/owner financing

• Credit Relationships

$10.8B

CNA Chubb Chartis(formerly

AIG)

Zurich Travelers Liberty XL Hartford Arch

3500

0

EXTENDED SURETY CAPACITY (IN MILLIONS)

20022010

500

1500

3000

2000

1000

2500

$5.5B

25

10

0

15

PRICE CURVE

# OF SURETIES

$500M-$1B $1B$100M-$500M$10M-$100M$10M

CONTRACTORS - AGGREGATE SURETY CAPACITY

20072010

10

23

16

7

4

12

25

20

11

8

2007

2010

Surety Reinsurance

• Significantly more capacity today than early 2000’s which is reflected in growth in capacity.

• Largely an XOL business today versus quota share – reinsurers are further removed from frequency exposure.

• Highly profitable following fortunes of surety market the last five years.

• Larger retentions taken by surety companies based on their reserves, profitability and spread of risk from their consolidation – reinsurers competing for smaller risk transfer opportunity.

Reinsurance Program

Quota Share Excess of Loss

Q

1/3

RET

2/3

XOL

2/3

RET

1/3

Construction Industry Trends and Surety Impact• Reduced levels of construction spending and a projected slow recovery.

• Pendulum shift towards owners for contract procurement, and terms and conditions.

• Margin compression.

• Subcontractor default risk has increased.

• Procurement longer cycles – P3, RFP, Gap, funding delays, politics.

• Acquisitions – consolidations.

• Commodity escalation.

Globalization• Non U.S. contractors looking to expand into US markets – primarily via acquisitions – Spanish firms such as ACS, OHL and Ferrovial have been the most obvious examples.

• U.S. viewed as a stable market with long term potential and a short term buying opportunity, based on economic slowdown.

• U.S. contractors are expanding their strike zone to find work and we are receiving more inquiries from U.S. firms looking to expand outside of North America.

• Surety requirements for non U.S. companies require a meaningful U.S. asset base, parent guarantee and often LC’s. Non U.S. firms often find U.S. surety requirements inefficient.

The next three years• Slow growth – ENR survey – “improving” moves from 16% to 71% over three years.

• Persistent margin pressure

• Acquisitions – global and domestic

• Surety loss development – 2012 and 2013

• Global competition

• Joint Ventures – new markets, new skills, bigger

• Good people – team upgrade opportunities

• Reinvention – dealing with the new normal

• Strong survive and prosper

What does it mean to your business

• No opportunity to “wait it out” - adjust to a prolonged and different market.

• Expense strategies have been highly effective in short term but revenue strategies needed for the longer term, e.g. new markets, differentiation, acquisitions.

• Accept it is difficult, not hopeless.

• From a surety perspective, anticipate deterioration of results, but not a market change as dramatic as the early 2000’s.

• There will be adequate surety capacity in terms of limits, but patience and support for new strategies will be tested.

Willis Solutions• Networking for JV partners, subcontractor pre-qualification, acquisitions, surety work-outs, etc.

• Broad surety market relationships at the local and headquarter level to help you stay close to changes in people, appetite, loss development, co-surety compatibility, reinsurance, etc.

• Professional surety brokers - locally and nationally linked together.

• Close to emerging trends in project financing such as P3, last years Gap financing and next year’s solution TBD.

• Our partnership with you – our clients to invest in the business at the trade association level, local and national committees, this Risk Conference and our Construction Practice.