2001 CAS ANNUAL MEETING

1. 2001 CAS ANNUAL MEETING The Rating Agency’s View Eric Simpson, Moderator (SVP & CFO – DICO, American Re) Matt Mosher, Panelist (GVP – P/C, A.M. Best Company) Karen Davies, Panelist (Senior Analyst, Moody’s Investors Service)

2. Post – WTC Issues for the P/C Insurance Industry • Industry Capacity to Absorb Mega Terrorist Losses and Ongoing Cat, Reserve, & Investment Risks • Ultimate WTC Losses & Likely Market Implications • Analytical Approach for Identifying & Downgrading Weakened (Re) insurers • Market Outlooks for Product Lines/Sectors Most Affected by WTC Disaster

3. Post – WTC Issues for the P/C Insurance Industry • Key Drivers of a Company’s Rating; Significant Changes in Rating Criteria • Impact on Rating Agency Capital Adequacy & Earnings Analysis • Additional Risk Management Considerations Posed By Rating Agencies • Implications to VAR & DFA Modeling

4. CASUALTY ACTUARIAL SOCIETY Annual Meeting The Rating Agency’s View Matthew C. Mosher Group Vice President A.M. Best Company

5. Best's Rating Categories Secure Ratings A++, A+ Superior A, A- Excellent B++, B+ Very Good Vulnerable Ratings B, B- Fair C++, C+ Marginal C, C- Weak D Poor E Under Regulatory Supervision F In Liquidation Financial Strength

6. Best’s Rating Components BusinessProfile OperatingPerformance Balance-SheetStrength

7. Best’s Rating Components Balance-SheetStrength Capital is the cornerstone of any viable insurance organization and the bedrock of any secure Best’s Rating. Balance sheet strength is a key factor delineating Vulnerable from Secure companies.

8. Balance Sheet StrengthRating Evaluation • Leverage / capitalization • Capital structure / holding company • Quality & appropriateness of reinsurance program • Adequacy of loss reserves • Quality and diversification of assets • Liquidity • Risk-adjusted capital (BCAR)

9. Balance Sheet StrengthCapitalization Inflows Equity Value of Reserves for: Catastrophe, Loss, Asset Revaluation & Others Retained EarningsCapital IncreaseCapital Injection RevolvingCredit Line Capitalization Liability GuarantyStop Loss Surplus Relief Net Worth Guaranty

10. Best’s Rating Components OperatingPerformance Demonstrated profitability combined with capital strength are fundamental to long-term financial strength, and therefore to policyholder security.

11. Operating PerformanceRating Evaluation • Profitability • Revenue composition • Management experience & objectives • Ability to meet plan

12. Best’s Rating Components BusinessProfile The ability to maintain distinct competitive advantages drives current and future operating performance and determines long-term financial strength and policyholders’ security.

13. Business ProfileRating Evaluation • Market risk • Competitive market position • Spread of risk • Event risk • Regulatory risk

14. Business ProfileCompetitive Position • Position in its chosen markets relative to direct competitors • Advantage or barrier to continued growth • Influences ability to respond to: • Market challenges • Economic volatility • Regulatory change • Influences ability to compete effectively long term • Relationship with distributors • Diversity of business among different distributors

15. A.M. Best Rating Perspective BusinessProfile OperatingPerformance Balance SheetStrength Balance-sheet strength holds the highest weight across all rating levels; however, as the rating levels increase so does the emphasis on operating performance and business profile.

16. Rating ConsiderationsSuccess Factors Management Distribution/Customer Measurement Operating Performance Business Profile Enterprise Financial Strength

17. Best’s WTC Rating Perspective • Rating actions to date mostly one notch adjustments. • Phase one—stress test. • Emphasis on capital. • Beyond phase one. • Continue to assess companies with direct & indirect exposure. • Identify those companies with less obvious exposures. • Emphasis on additional factors. • E.G., liquidity, cash flow, earnings capacity. • Assess impact of deepening economic crisis on individual companies’ balance sheet.

18. Best’s WTC Rating Perspective • Despite losses, rating actions have been minimal because of excess capital cushion… which no longer exists. • Slippage into vulnerable category not likely. • Third-quarter results. • Overall, industry will meet its obligations. • Caveat—no additional terrorist attacks or major cats. • As in any crisis, opportunities exist for those insurers that can differentiate themselves from the competition. • Regardless of scale.

19. Additional Observations • Events of September 11 changed the insurance industry fundamentally. • Many industry trends accelerated, others altered: • Market hardening significantly and rapidly, but prospects for adequate margins unlikely until 2003. • Operating performance adversely effected by volatile and declining financial markets. • Commercial Lines’ excess capital cushion is gone. • Pace of industry consolidation and global financial services convergence will slow.

20. Additional Observations • Price hardening, particularly for reinsurance & commercial lines’ coverages. • Aviation most affected. • W.C., Property & B.I.—rate increases, reduced capacity, tighter underwriting standards & changed contract wording. • Liability—major questions. • Diminished reinsurance capacity? • Re-evaluation of risk definitions. • Retro cover contraction or disappearance.

21. Additional Observations • Pace of convergence & consolidation— • Will slow in near term. • Expected to pick up pace next year. • Market withdrawals will accelerate. • New capital enters

22. Rating Agency’s View CAS Annual Meeting November 12, 2001 Karen Davies VP/Senior Analyst

23. Topics • Introduction • Moody’s P&C Insurance Ratings • Credit Risk in P&C Insurance • Update on Impact of Terrorist Attacks • Outlook for Ratings of P&C Insurers

24. Introduction • Recent events have insurers and reinsurers under a spotlight and under a microscope • Against backdrop of past few years’ market turmoil • Pre Sept 11th issues: industry structure and cycle • Post Sept 11th: PV of opportunity vs. risk state • Power of ratings is growing in all markets

25. Topics • Introduction • Moody’s P&C Insurance Ratings • Credit Risk in P&C Insurance • Update on Impact of Terrorist Attacks • Outlook for Ratings of P&C Insurers

26. Moody’s P&C Insurance Ratings Nature of Ratings Coverage • Ratings coverage and active relationships with virtually all major market participants • No limits on types of insurers we will rate • Often have a dialogue with firms without public ratings • Indicative ratings / right of refusal

27. Moody’s P&C Insurance Ratings Meaning of the Ratings • Debt and preferred: investor orientation - speak to both default frequency and loss-given-default • Financial strength: policyholder orientation - speak to ability to pay, considering recovery value • Rating horizon, long-term (3-5 years) • Financial strength ratings do not speak directly to likelihood or timing of claim payments • Ability Vs. Willingness

28. Moody’s P&C Insurance RatingsDifferentiation Among Rating Agencies • Moody’s debt and IFS ratings are intended to be consistent with each other and with other sectors • Rating definitions are different (A  A  A) • Quantitative benchmarks are different (Moody’s E(L) table based on 90+ years of historical data) • Recent spate of insurer defaults: No one company ever had investment grade debt rating

29. Topics • Introduction • Moody’s P&C Insurance Ratings • Credit Risk in P&C Insurance • Update on Impact of Terrorist Attacks • Outlook for Ratings of P&C Insurers

30. Credit Risk in P&C Insurance State of the Market Pre 9-11 • Years of intense competition, soft pricing broadening coverages eroded financial health • Earnings weak, propped up by finite risk covers • Balance sheets weakening, reserve deficiencies, more aggressive investments • Legitimate turnaround in pricing had begun in commercial lines, reinsurance

31. Credit Risk in P&C Insurance Key Credit Risks - Primary Insurers • Financial statements are unreliable indicators of financial health and economic performance • “Hidden” leverage: e.g., reserves and reinsurance exposure, as well as high excess business • Incentives exist for weak firms to expand instead of contract, inviting spectacular reversals of fortune • Because a firm’s position is clear only in retrospect, market perception can sustain or cripple

32. Credit Risk in P&C Insurance Key Credit Risks - Reinsurers • All comments about primary insurers apply, but to a greater degree • As a derivative market, reinsurers face less stable demand function, more capital market competition

33. Credit Risk in P&C Insurance Recent Reversals of Fortune • New Cap Re • ReAC • Reliance • Frontier • Superior National • HIH • Independent

34. Topics • Introduction • Moody’s P&C Insurance Ratings • Credit Risk in P&C Insurance • Update on Impact of Terrorist Attacks • Outlook for Ratings of P&C Insurers

35. Update: Impact of Terrorist Attacks General Observations • Unprecedented event in terms of coverages that will respond and total size of the loss • Magnitude of the industry loss will vary depending on resolution of a number of uncertainties • Huge gap between estimates of industry loss and aggregation of ground-up company reports (2-3x) • Large gap between gross and net loss estimates raise issues of reinsurance recoverable, liquidity

36. Update: Impact of Terrorist Attacks Ratings Placed Under Review • Syn #2488 • Syn #2020 • Syn #2001 • Syn #1007 • Syn #1212 • Markel • Munich Re • Partner Re • PMA • ACE • American Re • Chubb • Copenhagen Re • CNA • Hartford (debt) • Hannover Re • Legion • Liberty Mutual • PXRE • Royal & Sun • St.. Paul • Swiss Re • Trenwick • XL • Zurich • Zurich Re

37. Update: Impact of Terrorist Attacks Focus of Rating Reviews • Magnitude of losses reported, both gross and net, relative to capitalization, fixed charges, cash flows, and core earnings. • Uncertainty surrounding current estimates of loss, including the prospect for disputes about the extent to which reinsurance will respond. • The extent to which, following the recent attacks, the profile of risk within the insurance industry has changed, at least for some period of time.

38. Update on Legislative/Legal Initiatives • Three primary areas of activity • Insurance/reinsurance dynamics • Initiatives addressing legal liability • Host of other matters impacting losses

39. Update on Legislative/Legal Initiatives Insurance/reinsurance dynamics • Widely anticipated reinsurers to carve out terrorism on January 1 renewals • Primary companies substantially less flexibility - change in risk profile? • Coverage crisis, no coverage, will lenders lend? • Govt: Competing Bills in the House and Senate

40. Update on Legislative/Legal Initiatives Initiatives addressing legal liability • Air Transportation Safety and System Stabilization Act • Limits liability to limits of insurance coverage • Cap on liability and exemption from punitive liability for 6 mos • Centralizes all claims in the So. District Court of NY Host of additional matters, legislative and legal • One Vs. Two Events

41. Topics • Introduction • Moody’s P&C Insurance Ratings • Credit Risk in P&C Insurance • Update on Impact of Terrorist Attacks • Outlook for Ratings of P&C Insurers

42. Ratings Outlook for P&C Insurers and Reinsurers • Pre Sept 11: Moving from Negative to Stable • Key issues: earnings quality, reserve adequacy, fallacy of excess capital (at existing rating levels) • Terrorist attacks could signal shift in stance over near term • Over medium term, cyclical upturn vs. possible change in nature of risk