State of the State of the Surety IndustrySurety Industry

AGC Building Contractors ConferenceThe HomesteadHot Springs, VAJune 11, 2009

Todd LoehnertNASBP PresidentWells Fargo Insurance Services of Kentucky

Reflections from 2008Reflections from 2008

AccomplishmentsAccomplishments Financial ResultsFinancial Results New TalentNew Talent Technology Technology

AdvancementAdvancement OutreachOutreach Underwriting Underwriting

DisciplineDiscipline Talent DevelopmentTalent Development

ChallengesChallenges PeoplePeople Risk EnvironmentRisk Environment

ContractsContracts Bond FormsBond Forms Judicial SystemJudicial System

Strengthening Strengthening RelationshipsRelationships

Expense ControlExpense Control Reinsurance RenewalReinsurance Renewal

TOP 10 WRITERS TOP 10 WRITERS OF SURETY BONDS—2008*OF SURETY BONDS—2008*

CompaniesCompanies Direct Premium Written (Millions Direct Premium Written (Millions $)$)Travelers BondTravelers Bond $991.6$991.6Liberty Mutual Ins. GroupLiberty Mutual Ins. Group $832.8$832.8Zurich Insurance Group Zurich Insurance Group $482.3$482.3CNA Insurance GroupCNA Insurance Group $434.3$434.3Chubb & Son Inc. GroupChubb & Son Inc. Group $297.3$297.3Hartford Fire & Casualty GroupHartford Fire & Casualty Group $210.6$210.6HCC Surety GroupHCC Surety Group $148.8$148.8International Fidelity Ins. Co.International Fidelity Ins. Co. $118.8$118.8ACE Ltd. GroupACE Ltd. Group $109.1$109.1Arch Capital GroupArch Capital Group $105.9$105.9

*Includes contract and commercial surety*Includes contract and commercial surety

Source: The Surety & Fidelity Association of America (SFAA), “Top 100 Writers of Source: The Surety & Fidelity Association of America (SFAA), “Top 100 Writers of Surety Bonds—United States & Territories & Canada,” 2008 (Preliminary); Surety Bonds—United States & Territories & Canada,” 2008 (Preliminary); www.surety.orgwww.surety.org

Market Conditions and OutlookMarket Conditions and Outlook

Outlook 2009Outlook 2009

Outlook 2010Outlook 2010

Market Conditions and OutlookMarket Conditions and Outlook2009 – Take One2009 – Take One

Looks Like a Profitable Year – MostLooks Like a Profitable Year – Most

Revenue Projections – DownRevenue Projections – Down

Tightening or Softening – Split DecisionTightening or Softening – Split Decision

Leveraged Contractors – Great ConcernLeveraged Contractors – Great Concern

Backlogs – DisappearingBacklogs – Disappearing

Bidder Lists – GrowingBidder Lists – Growing

Market Conditions and OutlookMarket Conditions and Outlook2009 – Take Two2009 – Take Two

Marketshare Mentality – ConcernMarketshare Mentality – Concern

Maintain Underwriting Discipline – ConcernMaintain Underwriting Discipline – Concern

Losses and Defaults – IncreaseLosses and Defaults – Increase

Inflation & Interest Rates – Likely IncreasesInflation & Interest Rates – Likely Increases

Private Sector Work – Little/Dried UpPrivate Sector Work – Little/Dried Up

Bank Stability – Large/Regional/CommunityBank Stability – Large/Regional/Community

Market Conditions and OutlookMarket Conditions and Outlook2010 and Beyond2010 and Beyond

Outlook 2010Outlook 2010

Not GoodNot Good BadBad UglyUgly ArmageddonArmageddon

Outlook 3 to 5 YearsOutlook 3 to 5 Years

““Too Foggy to Tell”Too Foggy to Tell”

Market Conditions and OutlookMarket Conditions and Outlook20102010

Surety Premiums – DownSurety Premiums – Down

Tightening – Yes-Yes-Yes-Yes…………Tightening – Yes-Yes-Yes-Yes…………

Claim Frequency and Severity – YesClaim Frequency and Severity – Yes

Expense Management – A MustExpense Management – A Must

Obligee Default – ConcernObligee Default – Concern

Bank Lines – Will They Be There?Bank Lines – Will They Be There?

Business Issues and ChallengesBusiness Issues and Challenges

Surety CompaniesSurety Companies ContractorsContractors

Business Issues and ChallengesBusiness Issues and ChallengesSurety CompaniesSurety Companies

Subcontractor Default InsuranceSubcontractor Default Insurance

Impact on Underwriting PhilosophyImpact on Underwriting Philosophy

Bid Qualification LettersBid Qualification Letters

Claim ActivityClaim Activity

Risk Management ToolRisk Management Tool

Surety CompaniesSurety CompaniesSmall and Emerging ContractorsSmall and Emerging Contractors

Percentage of Construction ClientsPercentage of Construction Clients Participate in the SBA programParticipate in the SBA program Company Program for Small and Emerging Company Program for Small and Emerging

ContractorsContractors Perceived Lack of AvailabilityPerceived Lack of Availability Contract BundlingContract Bundling Inadequate Government Procurement WorkforceInadequate Government Procurement Workforce

Surety CompaniesSurety CompaniesJumbo ProjectsJumbo Projects

$1 billion+ building and infrastructure projects$1 billion+ building and infrastructure projects Outstripping of single project bond capacityOutstripping of single project bond capacity Co-suretyCo-surety Less than 100% performance and payment bondsLess than 100% performance and payment bonds Legislative solutionsLegislative solutions

Business Issues and ChallengesBusiness Issues and ChallengesContractorsContractors

Plan and Act StrategicallyPlan and Act Strategically Secure “Profitable Work”Secure “Profitable Work” Retain Key PersonnelRetain Key Personnel Manage Overhead and ExpenseManage Overhead and Expense Manage Unknown RisksManage Unknown Risks Beware of Unregulated/Unlicensed SuretiesBeware of Unregulated/Unlicensed Sureties Maintain Solid Banking RelationshipMaintain Solid Banking Relationship Communicate-Communicate-CommunicateCommunicate-Communicate-Communicate

Producers’ PerspectivesProducers’ PerspectivesMarket ConditionsMarket Conditions

Ease of Obtaining Surety BondsEase of Obtaining Surety Bonds

Surety Capacity – Next Thee YearsSurety Capacity – Next Thee Years

Bond Availability by Contractor Size – Contract Bond Availability by Contractor Size – Contract BundlingBundling

Construction Market – Public & PrivateConstruction Market – Public & Private

Surety Market OutlookSurety Market Outlook

20092009 20102010

Ease of Obtaining Surety BondsEase of Obtaining Surety Bonds

ExtremelyExtremely

EasyEasy EasyEasyBusinessBusiness

As UsualAs Usual DifficultDifficultVeryVery

DifficultDifficult

A Year AgoA Year Ago 10%10% 40%40% 36%36% 13%13% 2%2%

TodayToday 3%3% 17%17% 55%55% 22%22% 3%3%

A YearA Year

From NowFrom Now2%2% 9%9% 26%26% 46%46% 18%18%

Outlook for Surety CapacityOutlook for Surety Capacity(Next Three Years)(Next Three Years)

20092009 20072007 20052005

IncreaseIncrease 12%12% 65%65% 32%32%

Remain the Remain the SameSame 35%35% 19%19% 30%30%

DecreaseDecrease 45%45% 12%12% 34%34%

Don’t Know/NoDon’t Know/No

OpinionOpinion 8%8% 4%4% 4%4%

Public Construction MarketPublic Construction MarketAssessmentAssessment

ExtremelyExtremely

EasyEasy EasyEasyBusinessBusiness

As UsualAs Usual DifficultDifficultVeryVery

DifficultDifficult

A Year AgoA Year Ago 6%6% 37%37% 44%44% 10%10% 3%3%

TodayToday 1%1% 6%6% 29%29% 46%46% 18%18%

A YearA Year

From NowFrom Now1%1% 6%6% 16%16% 55%55% 22%22%

Private Construction MarketPrivate Construction MarketAssessmentAssessment

ExtremelyExtremely

EasyEasy EasyEasyBusinessBusiness

As UsualAs Usual DifficultDifficultVeryVery

DifficultDifficult

A Year AgoA Year Ago 4%4% 32%32% 42%42% 18%18% 4%4%

TodayToday 2%2% 7%7% 12%12% 26%26% 53%53%

A YearA Year

From NowFrom Now1%1% 6%6% 6%6% 41%41% 46%46%

Market ConditionsMarket Conditions

SofteningSofteningRemainingRemaining

The SameThe Same TighteningTightening

Don’tDon’t

Know/Know/

No OpinionNo Opinion

20092009 2%2% 30%30% 68%68% N/AN/A

20102010 3%3% 18%18% 74%74% 5%5%

Advice to Help Clients MeetAdvice to Help Clients MeetBonding NeedsBonding Needs

Weighted Weighted AverageAverage

Prepare Proper Financial StatementsPrepare Proper Financial Statements 4.704.70

Communicate Potential Problems EarlyCommunicate Potential Problems Early 4.574.57

Use CPA with Construction AccountingUse CPA with Construction Accounting 4.564.56

Produce Interim Financial StatementsProduce Interim Financial Statements 4.384.38

Reduce Overhead ExpensesReduce Overhead Expenses 3.993.99

Important Criteria for ObtainingImportant Criteria for ObtainingSurety BondsSurety Bonds

Weighted Weighted AverageAverage

Strength of Balance SheetStrength of Balance Sheet 4.624.62

EquityEquity 4.474.47

Financial Statement PresentationFinancial Statement Presentation 4.464.46

Track Record of ProfitabilityTrack Record of Profitability 4.334.33

Experience in Type of ProjectExperience in Type of Project 4.284.28

Important Financial Measures in Important Financial Measures in Evaluating a Contractor’s CapacityEvaluating a Contractor’s Capacity

Weighted Weighted AverageAverage

Amount of Working CapitalAmount of Working Capital 4.554.55

Backlog LevelsBacklog Levels 4.124.12

History of Consistent EarningHistory of Consistent Earning 4.114.11

Debt to Equity RatioDebt to Equity Ratio 3.963.96

Working Capital RatioWorking Capital Ratio 3.943.94

Maintaining and/or Obtaining Bank Maintaining and/or Obtaining Bank Lines of Credit Compared to Last YearLines of Credit Compared to Last Year

2%

62%

35%

1%

Don't Know

More Difficult

About theSame

Easier

Questions?Questions?