1. CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2010

2. Surety Losses & Profitability

4. Surety in the Early 1990s  Strong economy  Excess capacity in surety market  Low premiums  Relaxed underwriting  Commercial surety expansion

5. Surety in the Early 2000s  Sagging economy  Significant commercial losses  Heavy contract surety losses  Increased failure rates

6. Surety in the 2000s Source: BizMiner Building, heavy/highway, and specialty trade contractors In BusinessSurvivorsFailure Rate 20022004 853,372610,35728.5% 20042006 850,029649,60223.6% 20062008 1,155,245919,84820.4% 20072009 1,424,124969,93731.9%

7. Contract Surety Premiums & Losses Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (1999-2010) Surety Countrywide (Preliminary)”

8. Top 15 Writers of All U.S. Surety

9. Construction Activity All ConstructionPublicPrivate Total Construction-8.0%-2.9%-10.7% Nonresidential-15.2%-3.7%-24.8% Lodging-62.1%--63.6% Manufacturing-31.4%--31.8% Public Safety-14.4%-13.4%- Power-5.7%-24.2%-2.7% Educational-18.6%-17.4%-24.7% Transportation+13.8%+21.9%-10.9% Amusement/Rec-17.7%-11.2%-26.4% Office-33.8%-11.1%-41.9% Highway/Street+5.6%+5.5%- Health care-14.6%-7.0%-14.6% Commercial-31.8%-37.4%-31.4% www.census.gov/const/www/c30index.html U.S. Census Gains May 2009-May 2010

10. Outlook for 2010 & Beyond  Increased risk for owners, contractors & sureties caused by current economy  Continued disciplined underwriting, exposure management & project analysis  Stabilized capacity & restored profitability  Growth in nonresidential construction expected in late 2010, early 2011

11. Outlook for 2010 & Beyond  Optimism about surety capacity & demand  Small, mega markets may remain tight  Surety available for best contractors  Marginal contractors difficulty obtaining bonding  More competition, fewer projects  Tightened operations for contractors  Increase in contractor failures

12. Underwriting The 3 Cs:  Capital  Capacity  Character 4 and 5:  Continuity  Contracts

13. Underwriting  Capital  Financial statements  Indemnity  Working capital  Work-in-progress

14. Underwriting  Capacity  Resumes  Contingency plan  Business plan  Equipment

15. Underwriting  Character  Reputation  Relationships  References

16. Bond Premiums Type of Construction Geographic Area Contractor Size Still a Bargain Pennies on the dollar Premium

17. Capacity Small ( < $50 M) SBA Program Medium ($100 M) Competitive Surety Market Jumbo ( > $500 M) Multiple sureties Joint ventures Partial bonds

18. Capacity Medium ($100 M) Competitive Surety Market Jumbo ( > $500 M) Multiple sureties Joint ventures Partial bonds Small ( < $50 M) SBA Program

19. Claims Severity & Frequency of Claims

20. Advice for Today’s Contractors  Know rights & responsibilities  Stay within capabilities  Manage growth & overhead  Learn why contractors fail

21. Advice for Today’s Contractors  Communicate  Prepare for economic recovery

22. Advice for Today’s Contractors  Contract terms  Bond forms  Construction CPA  Adjust overhead  Bank line of credit  Conserve capital  Bond subcontractors  Qualify the surety

23. Advice for Today’s Contractors Underwriter Producer Contractor

24. Advice for Today’s Contractors Underwriter Producer Contractor

25. For More Information Surety Information Office (SIO) www.sio.org | sio@sio.org SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).