Property/Casualty Insurance Jay Cohen First Vice President Merrill Lynch 212 449-5206 jay_a_cohen@ml.com Refer to important disclosures at the end of this report. Analyst Certification on page 23. Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies in this report.

The Fundamental View Overview Price Increases Continuing Balance Sheet Strain Evident Commercial Lines/Reinsurance Turning Faster than Personal Lines Claims Inflation, Low Interest Rates, Reserve Issues Held Back Earnings Expect Earnings to Reflect Improving Environment in 2003 and 2004 Still Challenges Ahead

Balance Sheet Strain September 11th Losses Loss reserve issues Equity market declines Credit losses Rating Agency Pressures

Combined Ratio 1Q95-4Q02

Investment Income % of Premiums

Return on Surplus, 1Q95-4Q03

Management Changes St. Paul Horace Mann CNA (2x) Zurich SAFECO IPC Re Horace Mann Zurich Royal Sun Commercial Union Allianz Argonaut St. Paul CNA (2x) SAFECO Ohio Casualty Chubb PartnerRe Allmerica Financial

The Fundamental View Commercial Lines Premium Rates Rising in Most Lines 10%+ Expect Rates to Rise for Another 1-2 Years Margin pressure still evident Supply Constrained Reinsurance prices rising Increases for Standard Risks Decelerating Larger Risks/Specialty Seeing Bigger Increases Look for Earnings Growth in 2003-2004 Reserves Will Be an Issue for Some Insurers

“Anecdotes from Agents” The Fundamental View Commercial Lines (Cont.) “Anecdotes from Agents” Carriers looking for more (clean) business Underwriting standards have not changed Risk appetite is still limited No changes in terms/conditions Kemper an issue for smaller brokers Price increases staying ahead of claims Buyers seem prepared for more increases

The Fundamental View Reinsurance Prices began rising in early 2001 Earnings Deteriorated in 2001 and 2002 Reserve Shortfall Still An Issue Property Catastrophe Levelling Off Casualty Still Needs Improvement New Capacity Focused on Reinsurance Flight To Quality

The Fundamental View Personal Lines Margins Peaked in 1999 Claims Expenses on the Rise (Auto and Home) Prices Rising, and Now Exceeding Claims Inflation Distribution Issues Largely a Commodity

Challenges Loss Reserves The Alternative Market Dominance of Mutuals in Certain Lines Lower Investment Yields Increased Credit Risk Regulatory Constraints Price Increases relative to starting point Claims Inflation Capital Availability

Challenges Industry Structure Mature Industry Capital Intensive Little Control Over Distribution Little Product Differentiation Losses Slow to Emerge Pricing Tends to Lag Loss Costs

Challenges Capital Availability

What Moves the Stocks Fundamentals Interest Rates Pricing Earnings Higher rates bad for stocks (all else being equal)

Valuation Price Earnings Price/Book (see later slide) Earnings growth Earnings consistency Earnings sustainability Group discount to the market lower quality earnings Price/Book (see later slide)

Price/Book VS. 2004E ROE Sustainability of ROE Consistency of ROE Quality of Book Value Leverage Investment Portfolio

Historic P/E Ratios

Historic Price/Book Ratios