suretytoday Bill Cheatham President, Surety

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1 How has the surety market evolved over the last 24 months? Probably the most significant change is the limited number of active surety companies willing to participate with uncompleted aggregate bonded exposures above $250 million. How limited is the number? THREE! Zurich is one of these three companies. As a producer, you understand the importance of supporting the surety companies responding to the surety capacity needs of construction companies. The remaining large surety account underwriting companies have made a capital commitment and developed expertise for this specific segment of the market. They incur material corporate exposures internally and pay for major reinsurance coverage to maintain the high limits to support the ENR 400. Bill Cheatham In this issue: Commercial Surety s strategy a success Paperless Bonds new challenges in the electronic world Why is this high limit capacity necessary? It responds directly to the legislated bond requirements of the Miller Act. You can make a strong argument that these three companies, whether you have business with them or not, are your real surety carrier partners. Zurich remains a solid resource for large, mid-market and small accounts. Best regards, Zurich reports 93 percent net income increase to $1.44 billion Bill Cheatham President, Surety

2 Zurich continues to execute the commercial surety strategy formulated in home office level. So we accomplished the following measures: Established a dedicated field force with an autonomous management structure and separate P&L responsibility Expanded the product line s management team by creating four regional manager positions Maintained a disciplined approach to underwriting Became more account-driven by leveraging our capabilities as part of the Zurich organization Developed automation to drive down the cost of handling transaction-driven business Commercial surety s strategy a success Zurich continues to execute the commercial surety strategy formulated in Back then, we realized that to profitably grow in a specialized area such as commercial surety, the product line had to be segregated from traditional surety both in the field and at the Our strategy has worked! By early 2004, Zurich s commercial surety segment has grown by 100 percent. We have evolved into a leadership position within the commercial surety marketplace, with 2003 annual volume exceeding $70 million. By pursuing various customer segments within the commercial surety marketplace, Zurich has positioned itself to better manage exposures, thus leading to a record of improved profitability during the difficult financial cycle of the past 2-3 years.

3 Underwriting management The recent growth of the commercial surety portfolio necessitated expanding and enhancing the product line s management team. Within Zurich s seven regions, a staff of 22 field underwriters is responsible for both marketing and underwriting all commercial surety business. The account executives report to regional managers who are responsible for underwriting and general management of all commercial surety business within their respective regions. The recent growth of the commercial surety portfolio necessitated expanding and enhancing the product line s management team. The commercial surety management team includes: Dan Carlson, based in Chicago John Bruno, based in Hartford Eric Barnes, based in Baltimore Steve Moxley, based in Baltimore Melinda Coleman, based in Baltimore Commercial surety environment While Zurich has grown over the past five years, several major sureties have opted out of the commercial surety product line entirely due to both the severity and frequency of some high profile losses, while other markets have decided to focus primarily on the commercial transactional segment. Consequently fewer than a handful of sureties possess the ability to offer significant capacity for commercial surety accounts and many large commercial accounts must now rely on multiple sureties or have resorted to bank ILOCs to meet their bonding needs. Business strategy Zurich continues to build on the foundation of commercial surety business long affiliated with F&D s traditional court bond expertise. While we maintain a strong court bond book through long-term agency relationships in the New York City, Boston and Los Angeles markets, we have also expanded our relationships with national brokers who control most of the Fortune 1000 accounts. Generally, we have focused on large market locations such as New York, Chicago, Dallas/Houston, Los Angeles, San Francisco and Atlanta.

4 Many of Zurich s new account opportunities are a direct result of other sureties electing to reduce or eliminate their positions. And, just as importantly, selectively pursuing existing customers within the Zurich enterprise continues to play an increasing role in current marketing initiatives. Ever a conservative underwriting company, we have maintained a disciplined approach that includes: Focusing on credit ratings Meeting with the CFO and/or risk manager annually Using adequate pricing Achieving a favorable mixture of non-hazardous bond exposure for each account Responding quickly to adverse underwriting developments Commercial surety will leverage the Zurich Surety Express operating platform as phase II is deployed. The processing system will reduce our processing costs and allow us to manage and grow the transactional segment more efficiently, particularly since Zurich already maintains a substantial foundation of transactional business. Commercial surety management biographies Ted Martinez, senior vice president, has 20 years experience in the surety industry; joined Zurich in Eric Barnes, assistant vice president, has acquired 17 years experience in the surety industry with Zurich. John Bruno, CPCU, regional manager, joined Zurich in He has worked in the surety industry for 19 years. He holds an MBA from Pepperdine University. Dan Carlson, AFSB, regional manager, has 17 years in the surety industry; joined Zurich in Paperless bonds? New challenges for surety in the electronic world. The past three years have seen a surge of interest at the state level in electronic bonding systems. Originally conceived as a natural addition to electronic bid package systems such as BidExpress, the concept is now being extended to final bonds and even the commercial bonding markets. Several states now mandate that all of certain bond types be submitted electronically. Others are piloting programs and/or make electronic bonds optional while several more are actively considering joining the e-club. Unfortunately for producers and sureties, no common direction has emerged, resulting in fragmentation, as each obligee puts its own twist on the methods or systems to be used. In some cases the agent/producer is the only party using the system, while in others, the contractor, producer and the surety must all interact with the new system to complete the bond transaction. For certain obligees an existing bond issuance system can be modified to meet the requirements for electronic submission. However the use of a specific third party system or proprietary obligee system is a more prevalent trend. Melinda Coleman, senior underwriting officer, has been with Zurich for 19 years. Steve Moxley, senior underwriting officer/ regional manager, has been with Zurich for 22 years. He holds a doctorate of jurisprudence.

5 ZSE Release 2 delayed Thanks to our many Producers who have helped make the initial release of Zurich Surety Express (ZSE) a success. We believe that you will be even happier with ZSE Release 2, offering even easier-to-use new business functionality, as well as the ability to endorse, cancel, rewrite and renew your bonds. During our internal launch this spring, we discovered several areas where we think we can do better. So that we can provide you with the best possible experience, we delayed our agency launch of ZSE Release 2, which had been scheduled for April. A new date will be available soon. Stay tuned for more information and for the location of a introductory Training Session near you. How does a paperless system with electronic submission differ from electronic authorization? Some of the systems in question continue to produce familiar documents such as the bond form and power of attorney, but do so as Adobe Acrobat PDF documents allowing them to be routed and submitted electronically. More sophisticated versions allow a digital signature to be affixed by each party in the transaction to provide further security, authentication and nonrepudiation. A separate interaction with BidExpress or an obligee system will record the bond. Under the electronic authorization approach, document facsimiles may never exist, with the bond recorded only in a database and represented by an electronic authorization number. Zurich Surety will continue to support our agents and contractors as required, by participating in these programs wherever possible, while working to urge a consistent approach that meets the needs of all parties to the surety transaction. What does it all mean to you? First, is awareness. You must be aware of any special requirements for each state in which you do business, and be prepared to comply. Different workflows may apply for certain types of bonds and/or obligees. In some cases, all you will need is a connection to the internet and a web browser such as Internet Explorer, while in others, special software and/or a usage fee may be required. In all cases, registrations, legal agreements, changes in workflow and authorization from your surety(ies) are required, so early preparation is key. If obligees that your customers work with are considering implementation of electronic bonding, please let your Zurich Surety account representative know, so that we can determine whether the process meets the necessary legal standards to be supported by Zurich. If you will be doing business under an established program, again it is important that you contact your Zurich Surety account representative early to make the necessary arrangements and preparations. Typically, Zurich Surety must authorize what amounts to an electronic power of attorney in the relevant system(s) for each individual producer who will issue electronic bonds. Training for both agency staff and contractors may be required.

6 e-bonds are here to stay Electronic bond submissions are here to stay. Due diligence, early preparation, staff training and partnering with your Surety can help you make the transition. Zurich reports 93 percent net income increase to $1.44 billion Highlights of Zurich s operating performance as reported on August 19, 2004 include the following: Net income of $1.448 billion in the first half of 2004 compared with $752 million in the same period of 2003, up 93 percent and generating an annualized return on equity (ROE) of 16.8 percent. Earnings per share (diluted) of CHF 12.67, an increase of 78 percent. Business operating profit (BOP) of $1.948 billion, up 47 percent from 2003; annualized BOP ROE after tax of 15.1 percent. Gross written premiums in General Insurance of $ billion, up 6 percent from 2003; the combined ratio improved by 2.1 percentage points from 98.8 percent to 96.7percent. Gross written premiums and policy fees in Life Insurance decreased by 10 percent to $5.676 billion in line with measures to reduce the Group's exposure to underperforming businesses, while new business profit margin improved by 1.5 percentage points to 9.7 percent. Net income at Farmers Management Services of $344 million, up 10 percent from 2003; BOP of $539 million, up 5 percent. The Group's high-quality portfolio benefited from low claim frequencies, absence of large catastrophes, and the strong rate increases achieved in prior years. The Life Insurance segment showed further progress on its path to recovery as a result of focusing on more profitable businesses, expense reductions, and the better alignment of products and services with current investment yields. The Group net investment result rose by 20 percent to $3.859 billion. James J. Schiro, Chief Executive Officer of Zurich Financial Services, said: "Zurich's recovery continues. Success is coming from the sharp focus on core businesses, financial discipline and sound underwriting. While the Group exceeded its targeted return on equity, it also further strengthened its balance sheet. Zurich is positioned to leverage its global capacity in order to continue to benefit from attractive markets." Performance highlights Comparisons refer to the first half of 2003 (restated) unless noted otherwise. Interim results are not necessarily indicative of full year results. General Insurance The performance in General Insurance is underscored by the more than threefold increase in the net underwriting result from $158 million to $487 million and the improvement in net income to $981 million, an increase of 25 percent. The segment's business operating profit rose by 37 percent to $1.302 billion. Gross written premiums and policy fees grew to $20.6 billion, an increase of 6 percent (1 percent in local currency). Growth was driven by a mixture of rate and volume increases as well as favorable exchange rate movements. Excluding divestments and foreign exchange impacts, premium growth was approximately 2 percent, while net earned premiums, benefiting from the strong rate increases in prior years, rose by 12 percent (6 percent in local currency) to $14.6 billion. Disciplined underwriting and the geographically well-balanced portfolio

7 contributed to the sizeable 2.1 percentage point improvement in the combined ratio from 98.8 percent to 96.7 percent. Net reserves for losses and loss adjustment expenses increased 4.1 percent to $38.5 billion, with prior year reserve strengthening amounting to $656 million. As a result of the Group's focus on operational efficiency the expense ratio remained constant at 24.6 percent. In 2004, the Surety unit of Zurich in North America collaborated with our agents and brokers, stuck to its underwriting principles and experienced positive results, including these: generated 15 percent + growth in GPW year over year established underwriting/marketing relationships with two global brokers in Puerto Rico added several large (i.e. ENR Top 100) contract accounts increased distributors use of Zurich Surety Express continued to expand and strengthen professional staff in key markets About Zurich Zurich Surety specializes in contract bonds for the construction industry, environmental surety bonds and a wide range of commercial surety products, including license, permit, miscellaneous, judicial and public official surety bonds. Zurich Financial Services ( is an insurance-based financial services provider with a global network that focuses its activities on its key markets in North America and Europe. Founded in 1872, Zurich is headquartered in Zurich, Switzerland. Through its offices in more than 50 countries, 62,000 Zurich employees serve clients in more than 120 countries. In North America, Zurich ( is a leading commercial property-casualty insurance provider serving the large global corporate, middle market and small business sectors. This information is intended as a general description of certain types of insurance and services available through Zurich in North America. It is not an insurance contract. Coverages underwritten by member companies of Zurich in North America, including Zurich American Insurance Company. Your policy is the contract that specifically and fully describes your coverage. The description of policy provisions gives a broad overview of coverages and does not revise or amend the policy. Coverage may not be available in all states. Certain coverages may be written on a nonadmitted basis.

8 (07/04) Zurich 3910 Keswick Road Baltimore, Maryland Publisher: Zurich Editor: Judith Samuelson Designer: Jeff Behrenhauser Marketing Contact: Maria Adamski Zurich Financial Services ( is an insurance-based financial services provider with a global network that focuses its activities on its key markets in North America and Europe. Founded in 1872, Zurich is headquartered in Zurich, Switzerland. Through its offices in more than 50 countries, 62,000 Zurich employees serve clients in more than 120 countries. In North America, Zurich ( is a leading commercial property-casualty insurance provider serving the large global corporate, middle market and small business sectors Zurich American Insurance Company