CAGNY MeetingMay 29, 2002

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What is “Suretyship”?

Suretyship is essentially an extension of credit by the surety on behalf of the principal. Suretyship is designed to protect the Obligee from exposures to loss.

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What are “Surety Bonds”?

A surety bond is a written agreement providing for monetary compensation or satisfactory completion of an obligation by the surety. A surety bond is a three-party agreement whereby the surety is bound, with the principal to the Obligee.

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There are two broad categories of Surety

Contract Surety – a contract bond guarantees the performance of the principal under a written contract to build or supply goods and services.

Commercial Surety (also known as non-contract or miscellaneous bonds) – a commercial surety bond guarantees the principal will honor obligations to pay certain sums of money under defined agreements or statutory terms.

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Industry Results for Contract and Commercial Surety - 1987-1998

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Industry Results for Contract and Commercial Surety - 1999-2001

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Top 25 Writers of Surety Bonds in 1999

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Top 20 Writers of Surety Bonds in 2000

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Top 20 Writers of Surety Bonds in 2001

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Primary Market Changes from January 2000 –December 2001

- Consolidation through acquisition Travelers/Reliance St. Paul/USF&G/Seaboard Zurich/F&D

- Reduction through insolvency Fireman’s Fund (Surety Operation) Frontier Amwest First Indemnity of America

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Reinsurance MarketChanges from January 2000 – December 2001

- Calendar year 1999-over 25 active reinsurers with a total market capacity exceeding $250,000,000- December 2001 – 12 active reinsurers with a total market capacity at approximately $90,000,000 (excluding New Bermuda markets)- Between September and December we lost FolksAmerica, St. Paul Re and Gerling. Post January 1, 2002 Odyssey Re and Arch Re emerged as new markets.

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Loss Activity (Contract & Commercial Surety)

Contract Surety- Loss activity over the past 5 years has increased in both frequency and severity- Gross vs. Net Results- Reinsurers share of the industry losses disproportionate

Commercial Surety- Historically very profitable- Over the past 5 years: New product development • Growing number of high risk obligations

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Recent Claim Activity

- Contract Surety losses over $50 million are now common- Loss over $200 million is in the market; Freide Goldman Halter (two sureties involved)

- Commercial Surety losses are growing with the biggestclaim ever produced now in litigation.

• The biggest potential loss is Enron Corp.• Another potential large loss is Kmart

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Enron

US Surety Market & Exposures Market participants Primary companies: Chubb Safeco St. Paul AIG Liberty Bond CNA Surety Travelers Hartford Fireman’s Fund F&D Surety Kemper Atlantic Mutual

Total = $2,488,000,000

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EnronUS Surety Market & Exposures Market participants Reinsurance companies: Transatlantic Re Gerling Global Swiss Re American Re Gen Re Nac Re/XL Re Partner Re St. Paul Re Folksamerica Zurich Re C.N.A. Re Hanover Re Employers Re Everest Re SCOR Re Berkley Group London

Total = $750,000,000

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What Do We Know About Enron Corporation?

Corporate Headquarters – Houston, Texas

Advanced Energy Trading Business

Divested (sold) most fixed assets from 1990-1998

Early 2001 market capitalization topped $88 billion

Leader in its market

Darling of Wall Street

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Account Underwriting

Corporate Financial Statement

Value Line/S&P Rating Etc.

Very Limited Client Contact

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Surety Involvement

Contract Surety - Performance Bond / Payment Bonds - Operations and Maintenance Bonds

Commercial Surety - Advance Payment Bond - Premium Payment Bond - Financial Guarantee Bond

Domestic Business Interests

International Business Interests

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Where Are The Losses

Contract - most likely from the international business

- Argentina exposure most tenuous

- estimate $25-$200 million

Commercial - paid losses to date exceed $265,000,000

- A.P.E.A. Bond

- Winterthur Bond

- NEPOOL Bonds

- Mahonia Bonds

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A.P.E.A. Bond

Paid loss $250,000,000

Structure of the deal Foreword sale agreement J.P. Morgan/Chase A.P.E.A. End Users Enron

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Mahonia

Who/What is Mahonia

Six Open Bonds Guarantee Advance Payment

Total Amount On Six Bond claims - $1.1 Billion

Current Litigation

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Kmart

Commercial Surety Loss Workers’ Compensation/Self Insurers Bond Lease Bonds License and Permit Bonds

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QUESTIONS