Surety Outlook

1. Surety Outlook Willis Construction Risk Management Conference April 19-21, 2011 Dallas, TX

2. 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

3. $1.17T $831B $788B 12 YEAR HISTORY Billions $8 $7 $6 $5 $4 $3 $2 $1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Written Surety Premium Surety Losses (Contract & Commercial) Value Of Construction Put In Place

4. 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 What a difference a decade makes!

5. Today’s Surety Market • 5th 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).

6. 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 Underwriting Trends

7. $10.8B $5.5B EXTENDED SURETY CAPACITY (IN MILLIONS) 3500 2002 2010 3000 2500 2000 1500 1000 500 0

8. 25 23 20 16 2010 12 11 10 8 7 4 PRICECURVE # OF SURETIES 2007 25 2010 2007 15 10 0 $10M $10M-$100M $100M-$500M $500M-$1B $1B CONTRACTORS - AGGREGATE SURETY CAPACITY

9. 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.

10. Reinsurance Program • Quota ShareExcess of Loss XOL 2/3 RET 2/3 Q 1/3 RET 1/3

11. 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.

12. 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.

13. 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

14. 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.

15. 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.