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Mark W. Callahan, FCAS SVP, Underwriter XL Financial Solutions

Capital Adequacy. CAS Annual Meeting. – November 2002. Mark W. Callahan, FCAS SVP, Underwriter XL Financial Solutions. The material presented in no way represents the views or outlook of XL Capital or the panel. Please disregard any uninformed or irrational opinions of the presenter.

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Mark W. Callahan, FCAS SVP, Underwriter XL Financial Solutions

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  1. CapitalAdequacy CAS Annual Meeting – November 2002 Mark W. Callahan, FCAS SVP, Underwriter XL Financial Solutions

  2. The material presented in no way represents the views or outlook of XL Capital or the panel. Please disregard any uninformed or irrational opinions of the presenter.

  3. Issues Affecting Capital Adequacy • Liabilities • Investments • Bad Management

  4. Where is the Industry from an Investment Perspective?

  5. Notable Credit Events • Bond Defaults in 1st Half of 2002 • 21 defaults > $1B • 89 defaults = $76.7B • 4 defaults = $4B within 12 months of IG • Disclosure • Clash • Financial Guaranty • Surety • E&O Source: Moody’s

  6. Higher Losses Source: Moody’s

  7. Default Rates Source: Moody’s

  8. Historical Recovery Rates Source: Moody’s

  9. Corporate Debt Load Source: contraryinvestor.com

  10. Industry Confidence in Reserves

  11. Liabilities - Who Cheats? Percentage of College Students Who Report Having Cheated 75% - 98% Source: Educational Testing Service

  12. Who’sGuilty • 3,259 A.M. Best Rated U.S. P/C Companies • 334 Rated B++ and B+ • 518 Rated A- • 107 Publicly Traded Companies • Long Tail Lines or Latent Liabilities Source: A.M. Best, CNN Money

  13. Coming to a Theater Near You... Asbestos • 6000 Named Defendants • Increased Claims Activity • Reform • $45-70B Unreserved (Not Anytime Soon) Source: Asbestos: A Moving Target (Bhagavatula, Moody, Russ); AM Bests

  14. Inflation on Long Tail Lines • Medical • Litigation • US Workers Compensation • $35B Gross Reserve (00 & 01) • $62B Gross Reserve (99 & Prior) • $372B Total Industry Reserves Source: U.S. Department of Labor Bureau of Labor Statistics

  15. Actuarial Bias?

  16. Public Perception

  17. Surplus Source: Best’s Aggregates and Averages

  18. Rating Migration in 2002 Source: Standard & Poor’s

  19. Top 15 Reinsurance GroupsBased on Net Reinsurance Premiums Written - 2002 Source: Standard & Poor’s

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