Investment Principles – Session with the CAS Investment Committee

1. Investment Principles – Session with the CAS Investment Committee 2005 CAS Spring Meeting – Phoenix, AZ Curtis Gary Dean, Distinguished Professor, Ball State University François Morin, Principal, Towers Perrin Todd Rogers, Director – Finance and Operations, CAS

2. Agenda • Background • CAS Investment Policy • Recent Activities • Basic Investment Principles for Personal Investing

3. Background

4. Background • CAS functions as a non-profit organization under section 501(c) (6) of the Internal Revenue Code of 1954 • Per CAS Constitution, “Funds of the CAS shall be devoted exclusively to advance the body of knowledge of actuarial science applied to property, casualty and similar risk exposures.”

5. Background – cont’d • February 1986 – Board approves Investment Policy • U.S. Treasury Notes only • Maturity not to exceed five years • 1995 – Finance Committee reviews policy and makes following recommendations • Split funds into Operating Expenses and Surplus • Allow investments in commercial paper/bonds • Recommendations are not approved • Board approves increased investment term to 10 years

6. Background – cont’d • April 2000 – Finance Committee presents a series of modifications to Executive Council • Split assets into 3 funds (Operating, Short-Term, Long-Term) • Allow broader variety of instruments • Obtain services of an advisor for asset allocation • Board approves the allocation of some portion of the Long-Term Fund into equities and commercial bonds • Board opts for a low-cost option of index funds instead of hiring investment professional • Finance Committee charged with allocation between funds

7. Background – cont’d • CAS Investment Committee formed in late 2000 • Manage CAS investments within prescribed policy • Recommend changes for consideration by Board • Committee reports to VP – Administration

8. Committee Roster • Curtis Gary Dean (Vice Chair) – Ball State University • Richard Meuret – America First Insurance • François Morin – Tillinghast • Paul LeStourgeon – Towers Perrin Reinsurance • Nathan Schwartz – Benfield • Rich Zatorski (Chair) – Guard Insurance • Deborah Rosenberg (ex officio) – New York Ins. Dept. • Todd Rogers (Staff Liaison) – CAS

9. CAS Investment Policy

10. CAS Investment Policy • Operating Fund • The purpose of this fund is to provide sufficient cash to meet the normal financial obligations of the CAS over the next 12 months. • Short-Term Fund • The purpose of this fund is to meet CAS expenses expected to occur between 12 and 24 months. • Long-Term Fund • The purpose of this fund is to meet the CAS expenses occurring as the result of unanticipated activities, to improve the return on funds held for expenditure over the next two to ten years, and to manage investment risk.

11. CAS Balance Sheet as of September 30, 2004

12. Split of Assets Between the Funds • CAS Surplus • 80 % of minimum of current or next 2 years’ projected CAS Surplus in Long-Term Fund • Remainder in Short-Term Fund • Remaining Investable Assets • 40% in Short-Term Fund • 60% in Operating Fund • Operating Fund • Balance must be greater than 20% of current year’s operating expenses (approx. $1 million)

13. Asset Allocation – Constraints by Class

14. Positions as of March 31, 2005

15. Rebalancing Rules • CAS follows a dollar-cost averaging process • Potential that target mix will get out of line because of capital appreciation • Long-Term Fund Rebalancing Rules • 75% equities/25% bonds • Rebalance when equities outside of 70%-80% • Equities should be 87.5% domestic/12.5% foreign • Rebalance when domestic outside of 85%-90% • Active rebalancing can be delayed by up to three months if current result is thought to be temporary

16. Recent Activities

17. Asset Allocation for Long-Term Fund • Investment Committee wanted to confirm that the asset mix that had been implemented for the Long-Term Fund was optimal • Used an optimizer to determine the efficient frontier for the portfolio given the constraints specified by the CAS Investment Policy • Performed in July 2003 • Concluded that current mix (70% domestic equities, 10% international equities, 20% bonds) was appropriate

18. Asset Allocation for Long-Term Fund – cont’d

19. Asset Allocation for Long-Term Fund – cont’d

20. Which Index for International Equities? • In 2001, Investment Committee diversified its portfolio by investing in international equities • At the time, the selected index was the Vanguard European Index Fund • Limit exposure to Japan due to perceived risks in the banking sector • Rising Euro (general consensus at the time) might provide hedge for European equities when translated back to dollars • In 2003, Investment Committee revisited these assumptions and explored the possibility of investing into a broader index

21. Which Index for International Equities? – cont’d • Concluded that the Vanguard Total International Fund provides greater diversification • Even though the Total International Fund has substantial exposure to Japan (about 19%), investment limits imposed by our asset allocation model drops our exposure to Japan to only 2.4% of our overall equity allocation (7/8 US and 1/8 International) • Investment Committee decided the best approach would be to exit the European fund entirely, and enter the Total International Fund all at once

22. Which Index for Domestic Equities? • In 2001, the Vanguard S&P 500 Index Fund was chosen as the index to invest in domestic equities • In 2004, the Investment Committee had discussions to start using a broader index for domestic equities • Philosophically, it makes sense that we should be investing in the broader market to diversify risk • Data to support this statement is difficult to obtain • In October 2004, the Investment Committee approved an initial investment into the Vanguard Total Stock Market Index

23. Revised Split between Funds • In early 2004, the Committee researched alternative investment strategies with the intention of increasing the yield on assets in the Operating Fund and the Short-Term Fund • Very few options available given the maximum investment maturity of 2 years in the Operating Fund • Committee recommended a change in the distribution of invested assets between the two funds • Short-Term Fund now includes 40% of remaining investable assets • Approved by the Board, effective with the 2005 fiscal year

24. Investment Strategy for theShort-Term Fund and the Operating Fund • The Committee recently had discussions about the feasibility of developing an asset allocation model for the Short-Term Fund and the Operating Fund • The objectives of these two funds are dramatically different than the objective for the Long-Term Fund • Their objective consists of a balancing act of ensuring that sufficient cash is available to meet cash flow needs, while at the same time maximizing returns. • The Committee decided to continue its current process of managing these funds • Make decisions each meeting based on the yield curve and cash flow projections

25. CAS Cash Flow