Page 1 How I Pick Stocks Jeff Thompson, Property Casualty Insurance Analyst Presentation to the UCONN School of Business

Page 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 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 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.

Page 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.

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

Page 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

Page 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%.

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

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

Page 9 My Principles of Investing An investor should be able to answer two fundamental questions: 1)What will the world look like in 6-months? 2)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.

Page 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

Page 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

Page 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

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

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

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

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

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

Page 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

Page 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

Page 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

Page 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

Page 22 Insurance Brokerage Number of Insurance Brokerage Acquisitions Source: SNL Financial

Page 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

Page 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

Page 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

Page 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.

Page 27 Forward Projections & Modeling

Page 28 Allstate (Continued)

Page 29 Summary Page for Allstate

Page 30 Earnings Model for Philadelphia Consolidated

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

Page 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.

Page 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.