1. CAGNY Meeting May 29, 2002

2. 2 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.

3. 3 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.

4. 4 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.

5. 5 Industry Results for Contract and Commercial Surety - 1987-1998

6. 6 Industry Results for Contract and Commercial Surety - 1999-2001

7. 7 Top 25 Writers of Surety Bonds in 1999

8. 8 Top 20 Writers of Surety Bonds in 2000

9. 9 Top 20 Writers of Surety Bonds in 2001

10. 10 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

11. 11 Reinsurance Market Changes 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.

12. 12 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

13. 13 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 biggest claim ever produced now in litigation. The biggest potential loss is Enron Corp. Another potential large loss is Kmart

14. 14 Enron US Surety Market & Exposures Market participants Primary companies: ChubbSafeco St. PaulAIG Liberty BondCNA Surety TravelersHartford Fireman’s FundF&D Surety KemperAtlantic Mutual Total = $2,488,000,000

15. 15 Enron US Surety Market & Exposures Market participants Reinsurance companies: Transatlantic ReGerling Global Swiss ReAmerican Re Gen ReNac Re/XL Re Partner ReSt. Paul Re FolksamericaZurich Re C.N.A. ReHanover Re Employers ReEverest Re SCOR ReBerkley Group London Total = $750,000,000

16. 16 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

17. 17 Account Underwriting  Corporate Financial Statement  Value Line/S&P Rating Etc.  Very Limited Client Contact

18. 18 Surety Involvement  ContractSurety - 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

19. 19 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

20. 20 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

21. 21 Mahonia  Who/What is Mahonia  Six Open Bonds  Guarantee Advance Payment  Total Amount On Six Bond claims - $1.1 Billion  Current Litigation

22. 22 Kmart  Commercial Surety Loss  Workers’ Compensation/Self Insurers Bond  Lease Bonds  License and Permit Bonds

23. 23 QUESTIONS