Paul Healy Willis-Surety Outlook

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

12 YEAR HISTORY

Billions $8 $7

$1.17T

$6 $831B

$5

$788B

$4 $3 $2 $1

1999

2000

2001

2002

2003

2004

2005

2006

2007

Written Surety Premium Surety Losses (Contract & Commercial) Value Of Construction Put In Place

2008

2009

2010

What a difference a decade makes! Top 10 Sureties & Written Premium (2000)

Top 10 Sureties & Written Premium (2010)

Travelers

$388,872,000

Travelers

$867,822,000

St. Paul

$387,649,000

Liberty

$751,166,000

CNA

$285,528,000

Zurich

$512,317,000

Zurich

$206,922,000

CNA

$406,463,000

AIG

$160,025,000

Chubb

$256,920,000

Liberty

$141,603,000

Hartford

$177,157,000

ACE

$125,781,000

HCC

$176,126,000

Safeco

$124,739,000

IFIC

$143,273,000

Chubb

$120,138,000

ACE

$109,531,000

Fireman’s Fund

$106,144,000

NAS

$104,845,000

Total:

$2,047,401,000*

Total:

$3,505,620,000*

*Approx. 59% of all surety premium

*Approx. 67% of all surety premium

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).

Underwriting Trends 2006

2011 & Beyond

• Managing Capacity

• Subcontractor risks

• Managing Work

• Contract Terms

• Finding Quality People to Perform

• Expanding “strike zone”

• Over-extended subcontractors

• Margin Compression • Project/owner financing • Credit Relationships

EXTENDED SURETY CAPACITY (IN MILLIONS)

3500 2002 2010

3000

$10.8B 2500

2000

$5.5B 1500 1000

500

0

CNA

Chubb

Chartis (formerly AIG)

Zurich

Travelers

Liberty

XL

Hartford

Arch

PRICE CURVE # OF SURETIES

2007 2010

25 25 23 20

2007 15

16

2010

12

10

11 10 8

7 4

0 $10M

$10M-$100M

$100M-$500M

$500M-$1B

CONTRACTORS - AGGREGATE SURETY CAPACITY

$1B

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

XOL Q

RET

1/3

2/3

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.