Gimme some data… CM-22: Communicating with Wall Street Todd R. Bault, FCAS Senior Research Analyst Sanford C. Bernstein & Co., LLC Copyright 2002, Sanford C. Bernstein & Co., LLC, a subsidiary of Alliance Capital Management L.P. ~ 1345 Avenue of the Americas ~ NY, NY ~ 212/ All rights reserved. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This report is based upon public sources we believe to be reliable, but no representation is made by us that the report is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This research was prepared and issued by Sanford C. Bernstein & Co., LLC and/or Sanford C. Bernstein Limited for distribution to market counterparties or intermediate or professional customers. This report is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance. Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or one or more of its or their officers, directors, members, affiliates or employees, or accounts over which they have discretion, may at any time hold, increase or decrease positions in securities of any company mentioned herein. Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, or its or their affiliates may provide investment management or other services for such companies or employees of such companies or their pension or profit sharing plans, and may give advice to others as to investments in such companies. These entities may effect transactions that are similar to or different from those mentioned herein. To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this report in the United States and accepts responsibility for its contents. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. To our readers in the United Kingdom: This report has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44 (0) To our readers in member states of the EEA: This report is being distributed in the EEA by Sanford C. Bernstein Limited, which is regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Investment Services Directive.

Equity analysts’ hierarchy of need 1) What we really want 2) What we say we want 3) What we settle for 4) What we ought to demand

What we really want 5 years of quarterly earnings projections By segment and region while you’re at it Tells you something about our priorities

What we say we want 1) Pricing data 2) Pricing trends by line of business 3) Information on pricing across the country 4) Amount of pricing achieved 5) Some additional color on pricing 6) How much pricing did you get? 7) Will pricing last through this year? 8) Got pricing?

What we say we want (take 2) Pricing (really!) Growth Loss trends Changes in terms and conditions Retention rates Changes in reserve adequacy Color…lots of color! This is all fine, but how well do we use this data? How well can we use the data we receive?

A simple loss ratio model New loss ratio = (Old loss ratio - old cat ratio and large loss ratio - old changes in reserve adequacy) x (1 + loss trend) / (1 + price change) + expected cat and large loss ratio + expected change in reserve adequacy Small problem: No one does this consistently! No company provides the data to do it consistently!

What we settle for Pricing In inconsistent detail Not reconcilable to earnings Growth In rough ranges In arbitrary levels of detail Loss trends—maybe Changes in terms and conditions—qualitatively Retention rates—almost meaninglessly Changes in reserve adequacy—almost never Color…lots of color! We get this, almost as a distraction

The awful truth Premium growth and profitability projections are often disconnected Reserve adequacy impact on earnings not well understood Earnings growth often selected and other parameters picked to fit earnings Ranges of earnings estimate much too tight given the underlying uncertainty

What we ought to demand Annual Statement the starting point, not GAAP reporting Consistent level of detail Accident year detail Then need reconciliation of SAP to GAAP All schedules: income, balance sheet, cash flow Some trends in disclosure are bad for insurance: Cash flow: NOT a good measure of current results  Need to consider flows by accident year Reserves: Laypeople don’t understand the need for estimates, and the level of uncertainty therein

What we ought to demand Progressive: a model of disclosure Not perfect, but definitely the best of class Monthly underwriting results by segment Reconciliation of reserve changes quarterly In-force policies quarterly We will compare Progressive against my desired standards It does OK, and much better than other companies

What we ought to demand Additional items needed in the Annual Statement: Earned exposures Current range of reserve adequacy Full gross detail in Schedule P Schedule P detail for all foreign business Better quarterly updates Wishful thinking? Probably, but it’s what we need to do the job right State regulators could easily mandate this

What we ought to demand Earned exposures In line of business detail Matched against earned premiums to get earned price changes Should reflect all changes in retention and limits Mandate a standardized “statutory” exposure  e.g. use sales for Part H, no matter what the company really uses to price the business Could probably be “fudged” and thus reduce usefulness Progressive: does disclose in-force policies, but this isn’t good enough—need earned policies

What we ought to demand Current range of reserve adequacy At least in total, but by line would be good By accident year would also be good Open to range methodology, but should be as consistent as possible Current accident vs. all prior would be very useful  Reconcile to reported GAAP results Explaining ranges is problematic, and could be legal issues for general disclosure Progressive: discloses changes in reserve estimates, but not opinion of current adequacy

What we ought to demand Full gross detail in Schedule P Repeat Parts 2-4 with gross detail  Direct and assumed separately even better, but then would need ceded split as well Would allow better understanding of underlying business trends Would fully disclose company’s reliance on reinsurance Distortions still likely, and some users may over- analyze the gross Progressive: doesn’t disclose, but not as big a deal for them

What we ought to demand Schedule P detail for all foreign business Rationale is obvious Should be a requirement for all US listed companies Would allow a proper reconciliation to GAAP Particularly important for offshore companies Given state regulation, this seems very unlikely Progressive: not applicable, so does a great job here (vacuously)

What we ought to demand Better quarterly updates Current Quarterly Statements not good enough  Not consolidated  Not enough accident year detail Would prefer good half-yearly update instead of current quarterly update As many of the other demands included as possible

So what does this mean? Insurance is universally regarded as one of the hardest sectors for equity analysts to cover Investors have a difficult time understanding insurers And P/E multiples seem consistently depressed Rules of thumb and old wives’ tales abound: Too much capacity chasing too little business Cash flow drives the cycle State Farm ruins it for everyone Everything Warren Buffett says is right This is a great environment for me! Actuaries know how to deal with bad data Actuaries know how to do the projections properly Actuaries are good at separating signal from noise