1. 1 Understanding International Surety Placement We’re Not in Kansas Anymore Presented by Nate Zangerle and Nicholas Kim Liberty Mutual Surety April 8, 2014

2. 22 PRESENTERS’ BIOGRAPHIES Nate Zangerle, Nate Zangerle, Chief Underwriting Officer for International and National Accounts at Liberty Mutual Surety responsible for business planning, organizational resources, and underwriting. His unit underwrites international reverse flow, foreign/foreign in the western hemisphere, U.S. publicly traded construction and homebuilding accounts. He joined Liberty Mutual Surety in 1998 as a Senior Underwriter. In 2009 and subsequent to the Safeco acquisition, he became the Midwest Regional Underwriting Officer for Core Contract prior to heading the newly created International and National Accounts unit in the fall of 2010. Mr. Zangerle maintains active memberships in the Associated General Contractors of America, Construction Financial Management Association, National Association of Surety Bond Producers and Surety & Fidelity Association of America. Nicholas Kim, Nicholas Kim, Underwriting Officer for International and National Accounts at Liberty Mutual Surety with responsibility for underwriting and managing surety programs for International Reverse Flow and U.S. Publicly Traded Construction and Homebuilding accounts. This responsibility extends to Latin America, where he is the underwriting point of contact responsible for the placement of foreign bonds for Liberty Mutual Surety accounts. Mr. Kim has over 7 years of international and domestic surety underwriting experience from Liberty Mutual and Zurich Surety. He has expertise on Latin America surety underwriting and fluency in Spanish, Korean, and English. He is located in LMS’s New York City office and is managing International and National accounts in 5 different field offices with surety programs ranging from $250 million to $1 billion. April 8, 2014

3. 33 Main Topics Overview of the global surety market Types of bonds Underwriting considerations Mechanics of foreign placement Setting expectations Q&A April 8, 2014

4. 44 Global Surety Market Overview USA/Canada: $5.5 billion Mexico: $480 million Latin America: $1.7 billion Europe: $1.8 billion Asia - Pacific: $1.3 billion ROW: $50 million Source: SFAA, SAC, PASA, Axco April 8, 2014

5. 55 Types of Bonds Performance Advance Payment Warranty Salaries Court Customs April 8, 2014

6. 66 Possible Scenarios 1. US based client working in Mexico for a public obligee 2. US based client working in Mexico for a private obligee 3. US based client working in Mexico for a US obligee April 8, 2014

7. 77 US Surety’s Experience and Pre-requisites Have you worked in this country before? Do you carry the appropriate licenses? (Direct writer vs. reinsurer) Do you have underwriters who can speak the language? Are you comfortable with the risk? April 8, 2014

8. 88 Contractor Capacity/Experience   Steep and expensive learning curve… Experience abroad Experience in the territory in question Do they understand the licensing and taxes? Ability to adapt Exit strategy / repatriation of funds Balance sheet size to absorb loss Experience working with obligee April 8, 2014

9. 99 Political Risk / Macroeconomics Political stability Economic stability Country credit ratings Regulatory and legal framework April 8, 2014

10. 1010 Owner/Beneficiary Public vs. private Reputation Payment terms Source of funds April 8, 2014

11. 1111 Project Specific Underwriting Considerations Scope of work? Size of work? Contract language? Local joint venture partner? Labor and sourcing of subs, equipment and suppliers? Geotechnical conditions? Onerous Bond forms? Dispute resolution? April 8, 2014

12. 1212 Bond Forms U.S. bond forms and standards don’t apply On-default (conditional) On-demand (or on-first-demand) – –Conditioned upon default – –Unconditional (mirrors Letter of Credit) Example of On-default countries: Mexico, Panama, Colombia, Brazil, Argentina Example of On-demand countries: Ecuador, Chile, Peru, Australia, Bolivia April 8, 2014

13. 1313 Rates, Fees, and Taxes All rates outside of the US are charged per annum based on the bonded amount Market rates vary from country to country On-default vs. On-demand Cannot assume that US rates will apply Additional fees and taxes April 8, 2014

14. 1414 Bond Closing Expiration date of the bond Evidence of closing – –Return of bond – –Letter from obligee – –Other types of evidence The bond is not always null and void after project completion or bond expiration April 8, 2014

15. 1515 Admitted vs. Non-Admitted Admitted - bond issued by a company licensed to do business where the insured/risk is domiciled Non-Admitted - bond issued in one country to cover exposures in another where the insurer is not licensed or authorized – –Stepped up enforcement by local regulators that view those exposures as under their supervision – –Brazil – penalty for an entity found placing non- admitted insurance abroad is equal to the sum insured or reinsured April 8, 2014

16. 1616 Admitted Reinsurance Two basic methods of reinsurance: – –Treaty Reinsurance - Reinsurer has a contract with ceding company that covers more than one insurance policy – –Facultative Reinsurance - Reinsurer and ceding company negotiate separately for each insurance policy reinsured April 8, 2014

17. 1717 Direct vs. Fronted Various ways to issue foreign bonds –direct or fronted (facultative basis) – –Direct basis through local broker and local market (no US involvement) – –Direct basis through local broker and local fronting partner or subsidiary (US involvement, but it may or may not need facultative reinsurance) – –Issued by local fronting partner or subsidiary and reinsured through US (direct, ceded and assumed) April 8, 2014

18. 1818 Issuing the Bond: Fronting Assumed transactions Local (fronting) company’s experience in the local surety market Local company’s experience in issuing bonds for the particular obligee/beneficiary Local company’s underwriting expertise (contract and bond form review) Local company’s claim handling capabilities Surety company vs. reinsurer April 8, 2014

19. 1919 Premium Flow for 100% Reinsured DirectCededAssumedNet Written Premium Local Fronting Partner or Subsidiary $1,000($1,000)$0 Assuming Reinsurer $0 $1,000 April 8, 2014

20. 2020 Premium Flow for 90% Reinsured DirectCededAssumedNet Written Premium Local Fronting Partner or Subsidiary $1,000($900)$0$100 Assuming Reinsurer $0 $900 April 8, 2014

21. 2121 Setting Expectations   We are not in Kansas anymore… Typically dealing with different language and culture Bond forms may or may not be standard Must adhere to local laws and regulatory framework Rates are per annum charged against bond amount Bond closing may be challenging Foreign exchange considerations Local fronting partner will control the claims process with consultation/collaboration from reinsurer April 8, 2014

22. 2222 Understanding International Surety Placement We’re Not In Kansas Anymore YOUR QUESTIONS? If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenters directly Nate Zangerle Liberty Mutual Surety Nate.zangerle@libertymutual.com 610-832-4596 Nick Kim Liberty Mutual Surety Nicholas.kim@libertymutual.com 212-719-7743 April 8, 2014