Surety and Insurance Market Forecast for 2008

1. Surety and Insurance Market Forecast for 2008 AGC Audio Conference at the AGC Surety Bonding and Construction Risk Management Meeting Longboat Key, Florida February 6, 2008 ●2:00 to 3:30 PM Eastern Time

2. Surety Bond UnderwritingAnd Availability Presenters Michael Herrod, Aon Sarah Finn, IMA of Colorado, Inc.

3. Top Ten Surety Writers 1992 Company Name Premiums Mkt. % • St. Paul/Seaboard Group $148,894,821 6.7% • Fidelity & Deposit $137,305,805 6.1% • Reliance Insurance Group $128,056,603 5.7% • United States F&G Group $119,502,476 5.3% • Aetna Life & Casualty Group $102,973,652 4.6% Top 5 Companies $636,733,357 28.4% • American International Group $98,210,281 4.4% • Continental Insurance Companies $93,303,961 4.2% • Fireman’s Fund Companies $83,943,008 3.8% • CNA Insurance Companies $81,472,867 3.6% • Safeco Insurance Companies $77,857,712 3.5% Second 5 Companies $434,787,829 19.5% Top 10 Companies $1,071,521,186 47.9% Total of All Other Writers $1,163,037,549 52.1% Total All Companies $2,234,558,735 100%

4. Top Ten Surety Writers 2005 Company Name Premiums Mkt. % • St. Paul Travelers $943,790,727 21.6% • CNA Insurance Companies $367,851,912 8.4% • Zurich Insurance $331,399,319 7.6% • Safeco Insurance Companies $292,915,692 6.7% • Chubb & Sons Inc. $211,886,708 4.8% Top 5 Companies $2,147,844,358 49.1% • Liberty Mutual Group $200,529,432 4.6% • Hartford FS Group $169,365,597 3.9% • Arch Capital Group $98,699,435 2.2% • HCC Surety $89,828,925 2.0% • International Fidelity $83,872,124 1.9% Second 5 Companies $642,295,513 14.6% Top 10 Companies $2,790,139,871 63.7% Total of All Other Writers $1,589,230,676 36.3% Total All Companies $4,379,370,547 100%

5. Surety Association of America 9-30-07 Results (As compiled by the Surety & Fidelity Association of America)

6. Market Overview • Profitable results through the first 9 months of the year continued through the 4th Quarter and into the 1st Quarter of 2008. • Results confirm the markets competitive trends with strong profitability for most of the leading participants. • FYE 2007 could set a single year earned premium record with a loss ratio between 18% - 20%. • Impact of Subprime issues and the downturn in the homebuilding industry will most likely impact 2008 in regards to growth and potential loss ratio.

7. Market Conditions for Small to Medium Contractors • Average Annual Revenues < $300,000,000 • Recent market conditions • Many surety companies target this business

8. Market Conditions for Large/National Contractors • Average Annual Revenues > $300,000,000 • Recent market conditions • Available capacity • Market niche is dominated by the Top 6-7 surety carriers • Co-surety arrangements among three or four of the major surety companies very common for those contractors requiring in excess of $1 Billion in ongoing surety capacity. • These major markets have increased their maximum aggregate capacity thresholds in certain cases as the size of individual large projects continue to increase.

9. Conclusion • What is next? • US Economy–Where is it going and what impact will it have? • Sub Prime Issues • Downturn in the residential construction market • Recession Fears • Election Outcome • Historically, a significant economic decline has a negative impact on surety results over an extended period of time. • Consolidation in the insurance industry – How will that impact surety capacity in 2008? • Although results for the industry are very strong, the outlook for new capital entering the market still appears unlikely.

10. Current Market Conditions and Future Trends for Each of the Major Lines of Insurance Coverage, and for Project Policies Presenters Paul Becker, Willis Scott Nissen, Allied North America Karen Reutter, Lockton Joanie Schneider, Marsh

11. Current Market Conditions and Future Trends for Major LinesOf Insurance Coverage Presenters Paul Becker, Willis Scott Nissen, Allied North America Karen Reutter, Lockton Companies Joanie, Schneider, Marsh USA

12. Insurance Market Overview • 2007 Observations • Strong commercial and civil marketplace in construction • Extremely difficult residential/habitational market • Carrier results appear to be strong (Again) • Lack of catastrophes • Exposures basis continue to grow • Loss trends seem favorable • Overall underwriting results positive but clear signs of softening market in the numbers • III* expects little to now premium growth in final ’07 numbers but terrific operating profitability (93.8) • Rate trends show clear signs of competitive landscape • Coverage issues continue in some lines but others more flexible

13. Insurance Market Overview • 2008 Observations • More interest in the market to look at commercial construction • Many carriers interested in looking at new opportunities • Market tends to be regional for small and middle market contractors • Competitors vary by territory due to state by state profitability and regional carrier impacts • Larger accounts will have more options relative to deductibles and retentions • Coverage flexibility returning in some areas as carriers look to differentiate offerings • Carriers feeling better about key issue of TRIA renewal-Allows support in key Metropolitan areas for new building with Terrorism backstop in place

14. Insurance Market Overview • 2008 Observations- Key Issues for Contractors • With the changing market contractors should focus as always on fundamentals • Safety • Claims management • Contract management • Relative rates anticipate 60% plus losses so these are the key over time

15. Insurance Market Overview • Changing markets forces need to be understood as risks change over time • Privatization trend (PPP,PFI)- How much will this impact? • Soft Insurance Market Trends- How Long? • Construction defect and business risk • Potential impact of BIM • Construction industry slow down and tight credit markets • Impact of inflation on exposures basis • Project specific placements and impacts on core insurance programs

16. General Liability • Commercial / Industrial Contractors – Generally “soft” market in terms of pricing. Still some push-back on important coverage issues. • Residential Construction • Size Matters… • Restrictive terms, exclusions, etc. or rating surcharges • Difficult for Subcontractors to provide coverage in compliance GC terms. • GL Wrap-Up’s – Still prevalent, Pricing / Retentions Down

17. Workers’ Compensation • In general, readily available for most classes. • Some States remain very Competitive - CA, TX, NY, etc. • Contractor Loss Experience and Class of Workers major driving factors

18. Builder’s Risk • Market continues to “soften” for projects not exposed to Windstorm, California Earthquake and Flood (i.e. Cat Perils) • For “Cat” exposed projects, lower rates / premiums and deductibles. • Substantial increase in overall capacity

19. Excess Liability Coverage • Great capacity, new markets • Premiums can be significantly down (exposure absorption); competition (E&S markets) • Not necessarily follow form • Have exposures underwritten; information needs

20. Contractors’ Professional Liability Coverage • Contractors’ professional carefully underwritten and closely watched • Not as competitive as A/E professional • Not necessarily “soft” • Some forms provide coverage for agency CM only; not intended to cover agency at-risk • Amend form to provide coverage for agency at-risk, at least by project

21. Contractors’ Professional Liability Coverage (Cont’d) • Amend coverage form to provide excess coverage over project specific form • Usually claims from projects covered under other policies are excluded • Punitive damages • Amend to provide coverage where allowed by law • May need to amend an exclusion as well as definition of damages

22. A/E Professional • A bit softer than contractors’ professional; flat to small rate decreases • Most forms cover Agency CM • Same issue regarding CM at-risk as under Contractors’ professional • Equity interest exclusion • Amend this exclusion to provide coverage for up to 49% ownership • Delete portion of exclusion related to officer or director

23. A/E Professional (Cont’d) • Product design excluded • Amend to allow for software sold or supplied by insured to customers in connection with the providing of professional services

24. Contractors’ Pollution/Environmental Coverage • Rates flat to moderately down • Occurrence based forms are available for renewals/new business • Carrier will require Claims Made Microbial Matter endorsement. • CIP policies available • Multi-year terms are becoming available • Increasing Capacity, new markets

25. Contractors’ Pollution/Environmental Coverage (Cont’d) • Residential exclusions: have exposure underwritten, not just excluded • Exterior Insulation Finishing System coverage available • Watch for Silica and Mold exclusions in the GL, pick up coverage with the CPL

26. Final Thoughts • This soft market is different than past soft markets • Continued underwriting discipline • Casualty lines are driven more by coverage issues than pricing, today • Need to have program strategy prior to marketing and negotiating

27. Final Thoughts (Cont’d) • Need to review/enhance risk management processes • Subcontractor selection and management • Understanding of professional liability and its relationship with general liability • Legal trends (anti-indemnity; business risk doctrine) • Contract requirements: what’s fair, equitable and achievable • Consider your budget for risk management expenses and consider spending wisely • Don’t allow the softening of rates to relax your safety and loss control efforts

28. Project Programs • Conventional Controlled Insurance Program aka Wraps-ups • These programs continue to be used for single and multiple projects • Are sponsored by the General Contractor/Construction Manager or the Owners/Developer • Include coverage for General Liability, Workers Compensation and Excess Liability • Typically requires a single project in excess of $100MM or multiple projects in excess of $150MM to be feasible. • Coverage is extended to all contractors enrolled in the programs along with the Owner and Developers Interests.

29. Project Programs • General Liability and Excess Liability Programs • Although started with the Residential surge and contractors having a difficult time obtaining coverage for the residential exposures, they have become increasingly popular on all types of projects. • Two types of project coverage are available • Owners and/or General Contractors Interest Only. This program provides coverage for the General Contractor or Owner only. Coverage is excess to any subcontractors coverage available as required by the contract. • Full General Liability Wrap - Covering all contractors and subcontractors on site just like a conventional wrap-up, but limited to General Liability coverage only. Also includes the interests of the Owners/Developer.

30. Project Programs • Reasons for a Project Policy (other than the conventional wrap-ups) • For Contractors • Contractually contractors have been required to provide dedicated limits to a project. • Carries are reluctant to add Joint Ventures and LLC’s to the policies • Project policy provide an avenue to insure the project at lower deductible/SIR levels without collateral requirements • For Owners • Many non-construction carriers do not want to pick up the construction risk associated with an Owner/Developer who have construction arms. • Some do not want a potential Construction losses to adversely effect their corporate insurance programs by either depleting available limits or negatively impact their loss experience • For Both • The “Lean” approach to construction Contracts

31. Project Policies • Major Coverage Improvements under the Project General Liability Policies • The Project General Liability policies can be endorsed to include premise liability coverage for Repair/Warranty work, thus covering a potential gap in coverage i.e. wrap-up exclusion. • Coverage is provided during the course of construction and is extended through the Statute of Repose (up to 10 years) • Guaranteed Costs/low deductibles are obtainable alleviating the collateral and project closeout issues. (WC can also be obtained on a Guaranteed Cost basis as well) • Capacity has improved and pricing and coverage terms have become very competitive

32. Project Coverages • Other Coverages Available on a Project Basis • Builders Risk, Delay in Start-up etc. • Environmental Coverage including Mold • Professional Liability • Contractors Default Insurance (aka Subguard)

33. Market Forecast for 2008 Comments or questions?