1. CONTRACT SURETY BONDS: UNDERSTANDING TODAY’S MARKET 2014

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% 20092011 897,602702,61821.7% 20112013 986,057735,15925.4%

7. Contract Surety Premiums & Losses Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (2002-2013) Surety Countrywide (Preliminary)”

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

9. Construction Activity All ConstructionPublicPrivate Total Construction+8.2%+2.1%+10.9% Nonresidential+8.6%+2.5%+14.1% Lodging+16.0%-+16.2% Manufacturing+23.9%-+24.7% Public Safety+9.6%+8.8%- Power+25.7%+4.4%+29.3% Educational-1.2%+0.6%-8.0% Transportation+2.2%+2.7%+0.8% Amusement/Rec+12.0%+21.2%+2.2% Office+20.0%+8.3%+23.0% Highway/Street+2.7%+3.0%- Health care-6.0%-13.5%-3.1% Commercial6.9%-27.3%+6.9% www.census.gov/const/www/c30index.html U.S. Census Gains July 2013 – July 2014

10. Outlook for 2014 & Beyond  Optimism about surety capacity & demand  Increase in contractor failures and losses as economy recovers  Continued disciplined underwriting, exposure management & project analysis  Surety available for best contractors  Marginal contractors have difficulty obtaining bonding  Public investment in infrastructure unlikely; potential uptick in private investment

11. Underwriting The 3 “C”s:  Capital  Capacity  Character 4 and 5:  Continuity  Contracts

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

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

14. Underwriting  Character  Reputation  Relationships  References

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

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

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

18. Claims Severity & Frequency of Claims

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

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

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

22. Advice for Today’s Contractors Underwriter Producer Contractor

23. Advice for Today’s Contractors Underwriter Producer Contractor

24. 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).