Surety Outlook Willis 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

YEAR HISTORY Written Surety Premium Surety 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 5 th 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 CNAChubbChartis (formerly AIG) ZurichTravelersLibertyXLHartfordArch EXTENDED SURETY CAPACITY (IN MILLIONS) $5.5B

PRICE CURVE # OF SURETIES $500M-$1B$1B$100M-$500M$10M-$100M$10M CONTRACTORS - AGGREGATE SURETY CAPACITY

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.