Midwest Actuarial Forum Aon Center March 26, 2002

I.Great Time To Be An Actuary II.Market Overview III.New World of Risk IV.Where the Industry is Headed

It Is A Great Time To Be an Actuary  Companies Looking for Ways To –Quantify Risk –Manage Risk/Reduce Volatility –Price Their Product to Achieve Adequate ROE’s

 Companies Looking for Ways To –Quantify Risk –Manage Risk/Reduce Volatility –Price Their Product to Achieve Adequate ROE’s  Rapid Growth in Model Development and Usage –DFA –Catastrophe Models –Workers Compensation (Overlaid With Property Exposures) –Finite Reinsurance Covers It Is A Great Time To Be an Actuary

 A Focus on –Innovation –Solutions –Is It Commercially Feasible? –Financial Actuaries

 A Focus on –Innovation –Solutions –Is It Commercially Feasible? –Financial Actuaries  Capital Management It Is A Great Time To Be an Actuary

Catastrophe Risk and Capital Management Overview Traditional Reinsurance Alternative Reinsurance Risk Transfer Securities Contingent Capital Exposure Swaps Captives Underwriting Strategies

 Underwriting Strategy  Risk Transfer  Capital Resources Management Overview

Is Volatility an Issue?

Earnings Per Share Quarterly Growth (Decline) Rate Current Quarter versus Same Quarter Prior Year P&C Large Cap Sector Actual Results Through Third Quarter, 2001 P&C Large Cap Sector Average Earnings Volatility Peer Analysis

Earnings Per Share Quarterly Growth (Decline) Rate Current Quarter versus Same Quarter Prior Year American International Group Earnings Volatility AIG American International Group Actual Results Through Third Quarter, 2001 P&C Large Cap Sector Average P/E AIG37 Earnings Volatility Peer Analysis

Earnings Per Share Quarterly Growth (Decline) Rate Current Quarter versus Same Quarter Prior Year CNA Financial Earnings Volatility CNA CNA Financial Actual Results Through Third Quarter, 2001 P&C Large Cap Sector Average P/E CNA7 Earnings Volatility Peer Analysis

Five Year Shareholder Value Volatility EPS Growth Rate P&C Large Cap Sector Earnings Volatility Peer Analysis

Market Overview Pre WTC WTC/Enron Aftermath New World Of Risk 9/113/31

 Worsening Results –Underwriting –Investment Pre – 9/11

Industry Pretax Operating Income Percent of NPE – Year % of NPE Source: Best’s Aggregates And Averages

Industry Pretax Operating Income Percent of NPE – Year % of NPE Source: Best’s Aggregates And Averages

Industry Pretax Operating Income Percent of NPE – Year % of NPE Source: Best’s Aggregates And Averages

 Worrysome Issues Beginning to Emerge –Pricing Trends –Adverse Development of Reserves –Coverage Issues –Mold, Cyber, Etc. –Lower Investment Yields Pre – 9/11 (Cont’d)

9/11 Aftermath  Initial Shock, Disbelief  Little Immediate Impact for Many Companies

 Initial Shock, Disbelief  Little Immediate Impact for Many Companies  Some Market Segments in Disarray –Losses Concentrated in Relatively Few Companies  WTC  Enron – Spread Through Reinsurance Mechanism 9/11 Aftermath

Combined Ratio Effects of Insured Catastrophe Losses on Industry Combined Ratios Year Source: Best’s Aggregates And Averages Hugo Andrew Northridge WTC Est.

 Initial Shock, Disbelief  Little Immediate Impact for Many Companies  Some Market Segments in Disarray –Losses Concentrated in Relatively Few Companies  WTC  Enron – Spread Through Reinsurance Mechanism  Dealing With the Terrorism Issue  New Capital Flows 9/11 Aftermath

New Capital Since 9/11

 Increased Focus on Security –Rating Agencies –Regulators –Customers –Reinsurance  Attempts to Better Manage Earnings Volatility  Improved Risk Selection 9/11 Aftermath

 Where Is the Rest of the WTC Loss?  Deteriorating Reserves  Ongoing Issues in –Asbestos and Environmental, Lead, Mold –Weather Volatility –Pricing –Regulation, Rating Agencies, etc. New World of Risk

 Terrorism  Permanent Change in –Evaluation of Risk –Some Lines of Insurance  Where Are the Terminated Risks Going? New World of Risk

 A Look Ahead –Capital Flows –Security Thresholds –Distribution  Retail  Reinsurance –Technology –Limiting Factors