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The State of Suretyship and US Economic Issues

September 26th, 2013Bob BubnickSenior Account ExecutiveZurich Surety, Credit and Political Riskbob.bubnick@zurichna.com330.241.7150

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Presentation Overview

The 3 C’s of SuretyMarket TrendsCurrent Economic IssuesConclusions

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The State of Suretyship

The 3 C’s of Suretyship

– Capital– Capacity– Character

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Capital

Status of Accounts Receivable

– Collection issues derived from overall economy – Owners are having issues therefore slow to pay– Verification of financing becomes critical

– Other receivables being evaluated so as to determine collectability and intent.– Shareholder Receivables…..are they equity or an item

that should have been expensed?

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Capital

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Capacity

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Capacity

Sophistication level of the Contractor

– Internal accounting capabilities– Reliability of the statements and supporting schedules.

– Stretching job size and program. 2X’s rule.

– Contingency plans– Bank letter’s of credit– Subordinated Debt– Funded Buy/Sell Agreement

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Communication

The 4th Communication

– Give credit to Stan Kucinski, Westfield field manager for 25 years.

– Annual meetings with clients to develop rapport– Interim financial data to compare projections and develop

forecast going forward.– Agency calls to follow up and push needed items– Think 3 steps ahead

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Marketplace Trends

Top 15 Surety Carriers

–Written Premium–Market Share–Loss Ratio

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Top 15 Surety Writers and Written Premium 1990

SFAA as Source1. F&D of Maryland (Now Zurich) $137,737,7072. USF&G (Now Travelers) $122,339,3873. Reliance (Now Travelers) $121,028,2014. Aetna Life and Casualty (Now Travelers) $115,421,7815. Fireman’s Fund (Now Kemper) $ 96,630,5116. Seaboard Surety (Now Travelers) $ 96,022,1927. Continental Corporation (Now CNA) $ 96,004,8368. CNA Insurance Group $ 83,827,0809. AIG (Now Chartis) $ 74,836,63210.Safeco Insurance Group (Now Liberty) $ 74,612,10111.Hartford Group $ 70,647,15912.Chubb Group $ 62,406,52513.St. Paul Group (Now Travelers) $ 58,475,04514.Cigna Group (Now ACE) $ 55,883,21215.Amwest Insurance Group (Out of Business) $ 54,280,637

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Top 15 Surety Writers and Written Premium 2012

SFAA as Source1. Travelers $754,242,2812. Liberty Mutual Group $725,674,4033. Zurich $462,515,5144. CNA Insurance Group $411,159,9845. Chubb Group $198,597,5076. International Fidelity $161,354,9577. HCC Surety Group $160,568,1638. Hartford Fire and Casualty Group $159,703,9139. ACE Ltd. $129,113,58810.RLI Insurance Group $110,619,40711.Great American Insurance Companies $104,178,30412.Lexon Safeguard Insurance Companies $100,935,48313.Hanover Insurance group $ 85,681,21414.North American Specialty Surety Group (NAS) $ 78,159,66215.Merchants Bonding Company $ 72,803,822

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Top Surety Writers

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Current Economic Issues

Profit Margins By Market Sector

Gasoline Prices

New Home Starts

GDP

Debt Levels

Federal Funds Rate

100 Year Stock market Trends

Unemployment Rates

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Current Economic IssuesYahoo.com business as source

Industry 2004 2005 2006 2007 2008 2009 2010 2011 2012

General Contractors -.03% 1.7% 1.5% 3.2% 3.0% 2.0% 3.1% 1.6% 3.8%

Heavy Highway 1.2% 1.5% 2.5% 4.2% 4.5% 3.3% 3.1% 2.0% 2.2%

Residential 8.0% 8.8% 9.3% -.01% -18.1% -24.5% -3.8% -4.2% 6.4%

Engineering 3.7% 1.9% 3.0% 3.1% 3.6% 2.7% 3.4% 4.0% 4.1%

P&C Carriers 2.1% 6.4% 7.2% 12.5% 8.2% -16.5% 7.0% 8.7% 9.1%

Surety -26.9% -.05% 4.8% 7.2%

Net Profit Margins

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Gasoline PriceszFacts as Source

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Drill, Baby, Drill!!Drilling quadruples, Exports triple

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New Home StartsCalculated Risk as Source

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US GDP Growth Tradingeconomics.com as source

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GDP to Total DebtMacrotrends.net as Source

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Historical US Federal Funds RateSource: federalreserve.gov

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Dow Jones 100 Year TrendRydex/SGI as source

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Dow Jones 100 Year TrendRydex/SGI as source

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20 Year Unemployment RateMacrotrends.net as source

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Conclusions

Surety The National sureties hold a larger market share and have enjoyed better loss

experience.

The top 15 sureties are poised to capture even more when the market turns.

Public funding is still decreasing and new project starts are down by 5% year over year.

Those contractors that are still standing today are leaner and more efficient.

Credit cases have thinned out due to economic downturn.

Many small to medium contractors will face the dilemma of having cash flow stress when programs pick up; They have the capacity to do the work but not the capital.

Sureties will have to make smart bets.24

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Conclusions

Economy Economic recovery is ongoing and sluggish at best as evidenced by GDP and unemployment

rates.

Gross margin for market sectors has returned, but confidence is weak.

Still a large inventory of homes remaining from 2008 recession effecting new home starts.

Gas prices remain high relative to a recovery period.

Prolonged Bear Market continues in spite of Quantitative Easing/Digitizing by the FED and historically low interest rates.

Unemployment continues to be at record highs following a recovery period.

Overall, small to medium sized entrepreneurs continue to sit on the side lines because of poor business climate and uncertainty.

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