1

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Current $ Real $

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

PREMIUMSGrowth in P/C NPW Highly Cyclical

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1985-87: 14.5%

2001-03F: 8.8%

1975-78 1985-87 2001-03

*2003 figure is estimate on first half result.

2

CAPACITYExcess Liability Market Capacity is

Cyclical, Like Other Segments

Source: Marsh, 2003 Limits of Liability Report, III

$1.425$1.575

$1.710

$2.045$1.941$2.011

$1.721

$1.405$1.334

$1.432

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bil

lio

ns Capacity has dropped 30% since peaking in 2000

3

95

100

105

110

115

120

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

PERFORMANCEP/C Industry Combined Ratio

Highly Cyclical2001 = 115.7

2002 = 107.2

2003First Half = 99.8

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.7

2000s: 111.0

Sources: A.M. Best; ISO, III *Based on First Half 2003 results.

4

Interest Rates and Underwriting Profits

Assumptions:No risk, no inflation, no expense loadingReal rate is 1.25%Policy pays off $100 one year from now

Premium= $100/1.0125 = $98.77

Underwriting profit= $98.77-100 = -$1.23

Underwriting profit ratio = -.012

5

Interest Rates and Underwriting Profits

Assumptions:Same but now 3% inflation

Loss= $100*1.03 = $103

Discount rate = 1.0125*1.03=1.043

Premium= $103/1.043 = $98.77

Underwriting profit= $98.77-103 = -$4.23

Underwriting profit ratio = -.043

6

-5%

0%

5%

10%

15%

20%

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

*

*First Half 2003Source: Insurance Information Institute; ISO, III

PROFITSP/C ROE Volatile but is it

Still Cyclical?

7

$ Billions, Calendar Year Basis

$2.3 $2.2 $1.2

($8.5)

($1.5)

($7.5)($6.7)($10.0)

$22.7

$0.3

($3.7)($0.3)

$9.9

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

90 91 92 93 94 95 96 97 98 99 00 01 02

RESERVE DEVELOPMENT:Why is Reserve

Development Cyclical?

*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, III

Adverse reserve development of about $23 billion accounted for most of the

industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion

increase in earned premiums

8

PERFORMANCELine-Specific Cyclicality (WC)

Source: A.M. Best, NCCI, III

*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI

Workers CompensationCalendar Year vs. Ultimate Accident Year

Countrywide—Private Carrier*

123 122

109

101

97100

122

110

121

102

107

121

129

137

125

107

101

108

115117 118

9795

100

112

133

90

95

100

105

110

115

120

125

130

135

140

90 91 92 93 94 95 96 97 98 99 00 01 02

Pe

rce

nt Calendar YearAccident Year

2.9 pts due to 9/11

9

INSOLVENCIESP/C Company Insolvency Rates

are Cyclical

Source: A.M. Best; Insurance Information Institute

1.20%

0.58%

0.21%0.28%

0.79%

0.60%

0.23%

1.02% 1.03%

1.33%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%

•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%

383030

10-yr Failure Rate

= 0.72%

10

RATINGSAre P/C Insurer Ratings Cyclical?

-30

-25

-20

-15

-10

-5

0

5

10

1998 1999 2000 2001 2002

Upgrades / Downgrades: North America

Source: Moody’s, III

11

$0

$50

$100

$150

$200

$250

$300

$350

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 0203*

CAPITALP/C PHS Exhibiting Cyclicality

Source: A.M. Best, Insurance Information Institute, III *First Half

$ B

illi

ons

Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.5% ($52 billion) to $284.3 billion at year-end 2002 (a trough?)

•Surplus during the first half of 2003 rose by $28.2B or 9.9% to $312.5B

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

$47 Billion

12

Non-Life Betas by Country, 1978-1998

0.75

0.85

0.95

1.05

1.15

1.25

1.35

1.45

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

US UK Switzerland France Germany

INTERNATIONALCyclicality Exists Internationally in

Investor Perceptions

Source: Kielholz, Walter, “The Cost of Capital for Insurance Companies,” The Geneva Papers on Economic Activity, v 25, no. 1, January 2000, III

13

14

%

11

% 13

%

16

%

19

%

22

%

28

%

31

%

31

%

28

% 30

% 32

% 33

%

28

% 29

% 30

% 32

%

30

%

27

%

25

%

28

%

22

%

18

%

18

%

17

%

10%

15%

20%

25%

30%

35%

Ju

l-0

1

Au

g-0

1

Sep

-01

Oct

-01

No

v-0

1

Dec

-01

Ja

n-0

2

Feb

-02

Ma

r-0

2

Ap

r-0

2

Ma

y-0

2

Ju

n-0

2

Ju

l-0

2

Au

g-0

2

Sep

-02

Oct

-02

No

v-0

2

Dec

-02

Ja

n-0

3

Feb

-03

Ma

r-0

3

Ap

r-0

3

Ma

y-0

3

Ju

n-0

3

Ju

l-0

3

Source: MarketScout.com, III

PRICINGCommercial Premium Rate Changes Highly Cyclical

Pricing cycle appears to be alive and well

Is moderation due to realization of performance and profit goals, increasing capacity/capital, or market share strategies?