How I Pick Stocks Jeff Thompson, Property Casualty Insurance Analyst Presentation to the UCONN School of Business

1. How I Pick StocksJeff Thompson, Property Casualty Insurance AnalystPresentation to the UCONN School of Business

2. Introduction/ Biography • Jeff Thompson is a Vice President of equity research at KBW, Inc. focusing on the property casualty insurance sector. Jeff has 14 years experience following the property casualty industry, beginning as a corporate finance specialist in 1990. • He has received three Wall Street All-star analyst rankings, placing in the top-five nationally for stock picking in both 1999 & 1997 and once for earnings estimate accuracy in 1995. • He has been interviewed on CNBC, Bloomberg television, Bloomberg radio, FCR Morning Report, and quoted in numerous newspaper and industry journals. KBW has ranked #2 in Institutional Investor for property casualty research in the last two years. • Prior to KBW, Jeff worked as an equity analyst at Conning & Company, Advest and Northington Partners. • He holds a bachelor degree with honors from Amherst College, where he concentrated his studies in Mathematics and English.

3. What is KBW? • Keefe, Bruyette & Woods (KBW) is the largest full-service investment bank that specializes exclusively in the financial services sector. • Founded in 1962 and 100% employee owned, our firm is recognized as a leading authority for financial services companies. KBW's focus includes banking companies, insurance companies, broker/dealers, mortgage banks, asset management companies and specialty finance firms. Our firm has established industry-leading positions in the areas of research, corporate finance, mergers and acquisitions and sales and trading for financial services companies. • KBW was directly involved in the 9/11 tragedy and lost 67 employees in Tower II of the World Trade Center. The firm has since rebuilt.

4. How Does KBW Make Money? • Equity research • Corporate Finance • Trading • Fixed Income

5. Why the P-C Insurance sector is overlooked • Mature, slow growth • Volatile earnings history/ Cats • Cyclical • Difficult accounting • Heavily regulated • Small percentage of the S&P • Asbestos, Tobacco, Torts • Insurance is boring

6. Quick Overview of Industry • As of 2001, the industry reported: - Premiums of $324 billion - Assets of $973 billion - Reserves of $385 billion • Surplus of $294 billion • Types of insurance organizations –stock, mutual, stock reciprocal, and brokers • By line of business as a % total of premium: - Personal Lines = 54%, - Commercial Lines = 40%, - Reinsurance = 6%.

7. Quick Terminology for P-C • Net written premium • Loss ratio • Expense ratio • Combined ratio • Investment Income • Reserves

8. A Universe of P- C Stocks Source: KBW estimates

9. My Principles of Investing • An investor should be able to answer two fundamental questions: • What will the world look like in 6-months? • How do I position myself to make money? Answering these questions forces the investor to form an opinion from both a top-down and bottom up analysis, a combination that leads to a sound, powerful prediction of stock performance.

10. 2004 Outlook for Property Casualty Insurance(or what the world will look like in 6 months) • Peak Pricing Achieved (Cyclical) • Peak ROEs Ahead • Valuations May Come Under Pressure • Top line Expansion to Slow: Focus on Book Value Growth • Favor Bermuda, Personal Lines, and Specialty Lines Companies • M&A to Start Weak but Gain Steam • Reserves (Balance Sheets) Still at Risk

11. Peak Pricing: Underwriting Cash Flow Indicates Weakening Rates but Strengthening Profits Property Casualty Industry Historical Cash Flow and Premium Growth Source: A.M. Best & KBW Estimates

12. Peak Pricing, Drivers of Competition • Pressure on Pricing: • Combined Ratios have been Stronger • Cash flow has improved • Aggressive New Capital • Improving Investment Returns? • But Some Offsets Remain: • Reserve Issues Remain (Asbestos) • Loss Trends Favorable • Interest Rates Still at Historically Low Levels

13. Book Value Growth: Entering Peak Profitability NWP Growth versus Return on Surplus Source: A.M. Best

14. Valuations: Multiples Under Pressure • Multiples may be under pressure Source: FactSet Source: FactSet Source: FactSet

15. Valuations: Multiples Under Pressure • Book Value Matters: Five-Year Book Value CAGR vs. Stock Performance CAGR Source: KBW Research

16. Impact of Rising Interest Rates • Investment income may turn more positive Property Casualty Industry Net Investment Income Source: A.M. Best and KBW Research

17. Impact of Rising Interest Rates • But stock performance may suffer Source: FactSet

18. Personal Lines • Competition may increase and rate increases may slow • But loss trends may stay favorable • Low frequency supported by growth of insured auto vs. growth of insured drivers. NWP Growth and Combined Ratios of Personal Lines Insurers Source: KBW estimates

19. Bermuda/Reinsurance • Bermuda in a secular growth mode • Despite better 2004 terms, 2003’s underwriting results will be tough to beat • Capital markets activity to remain high • M&A may pick up by late 2004 NWP Growth and Combined Ratios of Bermuda/Reinsurance Source: KBW estimates

20. Commercial Lines • Pricing competition returns, particularly for property lines commodity business. • Profitability rises as higher rates are earned NWP Growth and Combined Ratios of Commercial Lines Insurers Source: KBW estimates

21. Insurance Brokerage • Slowing organic growth • Acquisition activity continues • Profit margins at peak levels • Prefer brokers with non-cycle dependent long term growth prospects Insurance Brokers Revenue Growth and Operating Margin Source: KBW estimates

22. Insurance Brokerage Number of Insurance Brokerage Acquisitions 1997 - 2003 Source: SNL Financial

23. Capital Markets • Almost $12 billion* was raised in 2003 • More is needed to cover industry shortfalls estimated by A.M. Best to be impaired by over $240 billion. *Includes debt and trust preferred securities Source: KBW Research

24. Capital Markets • Continued IPO activity; but more secondary offerings • Dividend increases, some buybacks • M&A in second half: • Organic growth still acceptable • Weak currency • Slowing growth • More anxious sellers • Targets: MRH, MXRE, NYM, PNG, PRE, SAFC • Buyers: ACE, BER, SPC, XL M&A Activity by Total Deal Value Source: KBW Research

25. Reserve Risk • ’97-’01 accident years still at risk for adverse development • Asbestos – may get worse before it improves Industry Loss Ratio and Paid-to-Incurred Development Source: A.M. Best

26. What Stocks Do We Recommend(or how to position yourself to make $Money$) • Two stocks with a good investment rationale: Philadelphia Consolidated (PHLY) and Allstate (ALL). • ALL – upside in stock driven by improving profitability, increased emphasis on top-line growth initiatives, low relative valuation. • PHLY – upside driven by strong organic growth and profitability, by mixed marketing strategy and product innovation.

27. Forward Projections & Modeling

28. Allstate (Continued)

29. Summary Page for Allstate

30. Earnings Model for Philadelphia Consolidated

31. KBW Focus List Price Targets: 12/31/03 Upside to Target Price Source: KBW estimates

32. Job Interviews: What Employers Like to See • Demonstrated interest in area of job application – internships, courses, etc. • Success in life – good grades, test scores, good summer jobs, (non-athletic achievements). • Strong work ethic. • Broad intellect. • Good sense of reality.

33. Questions to include in an Interview Make sure you have questions! • What kind of employee typically outperforms at your firm? What are their characteristics? • What are your first year expectations? What happens if expectations are exceeded? • What is the opportunity for advancement? Where can I expect to be in 2 years? 5 years? These questions drive a view of eagerness and motivation, people who are not viewed as eager and motivated are often overlooked.