Mutual Funds - An Updated Underwriting Approach Shelia January Senior Vice President Zurich North America Specialties June 7, 2004

Presentation Agenda Historic Context & Risk IssuesHistoric Context & Risk Issues Current Market ConditionsCurrent Market Conditions Risk CharacteristicsRisk Characteristics Policy StructurePolicy Structure Underwriting InformationUnderwriting Information Current Regulatory/Litigation ClimateCurrent Regulatory/Litigation Climate Pricing ConsiderationsPricing Considerations Insurance MarketplaceInsurance Marketplace SummarySummary

Historic Context & Risk Issues Earliest Policies were written in response to insureds’ coverage needs as presented to the insurance industryEarliest Policies were written in response to insureds’ coverage needs as presented to the insurance industry Prior to 1988, limited offerings from the commercial insurance marketplacePrior to 1988, limited offerings from the commercial insurance marketplace ICI Mutual began offering coverage in 1988ICI Mutual began offering coverage in more insurers began offering insurance products more insurers began offering insurance products saw enormous growth in mutual fund assets from $1,000mm; $6,900mm by y/e saw enormous growth in mutual fund assets from $1,000mm; $6,900mm by y/e 2000

Historic Context & Risk Issues, cont. Traditionally, broad coverage was provided on policies written for limits of $10,000,000 to $100,000,000 (industry captive), with lower retentions than those offered to most financial institution risksTraditionally, broad coverage was provided on policies written for limits of $10,000,000 to $100,000,000 (industry captive), with lower retentions than those offered to most financial institution risks Low frequency of claimsLow frequency of claims Policy language written to coincide with regulatory definitions, functions, and requirementsPolicy language written to coincide with regulatory definitions, functions, and requirements

Current Market Conditions Currently 10 markets regularly writing coverage for Mutual Funds and Investment Advisers, with a few others occasionally providing some excess limitsCurrently 10 markets regularly writing coverage for Mutual Funds and Investment Advisers, with a few others occasionally providing some excess limits Approximately $300mm in available capacity for a single insured’s program utilizing all available sources, including Lloyds marketplaceApproximately $300mm in available capacity for a single insured’s program utilizing all available sources, including Lloyds marketplace Prices have generally doubled since 2000, with higher increases since September, 2003Prices have generally doubled since 2000, with higher increases since September, 2003 Retentions have increased by a minimum of 50%, and generally at least 100%Retentions have increased by a minimum of 50%, and generally at least 100%

Risk Characteristics Numerous entities to be covered under policies, basically the funds and all entities involved in the management and salesNumerous entities to be covered under policies, basically the funds and all entities involved in the management and sales Heavy regulatory involvement and enforcement without direct responsibility for ongoing oversightHeavy regulatory involvement and enforcement without direct responsibility for ongoing oversight Dependence on oversight of independent directorsDependence on oversight of independent directors Little direct influence of shareholders other than “voting with their feet”Little direct influence of shareholders other than “voting with their feet”

Policy Structure Single Limit of Liability, covering any or all of the following:Single Limit of Liability, covering any or all of the following: – Mutual Fund Errors & Omissions – Mutual Fund Fund Directors & Officers – Investment Adviser E&O – Service Provider E&O (service provided to mutual funds) – Investment Adviser D&O – Operational Failure (also called Cost of Corrections)

Underwriting Information ApplicationApplication Fund Prospectus(es)Fund Prospectus(es) Plan FinancialsPlan Financials Form ADVForm ADV Adviser FinancialsAdviser Financials Fund Statement(s) of Additional Information (SAI)Fund Statement(s) of Additional Information (SAI) Underwriting Visit with Fund &/or Adviser Officers - depends on insurerUnderwriting Visit with Fund &/or Adviser Officers - depends on insurer

Current Regulatory/Litigation Climate Beginning in September, 2003, increasing regulations and requirementsBeginning in September, 2003, increasing regulations and requirements SEC has increased the number and scope of auditsSEC has increased the number and scope of audits Increased state investigations and enforcement actionsIncreased state investigations and enforcement actions Increased costs to comply with more extensive regulationsIncreased costs to comply with more extensive regulations Previously accepted industry practices under attack and investigationPreviously accepted industry practices under attack and investigation Negative perception by investing publicNegative perception by investing public

Pricing Considerations Asset sizeAsset size Asset typeAsset type Entities coveredEntities covered Coverages includedCoverages included Retention levelsRetention levels Corporate GovernanceCorporate Governance Internal Control StructureInternal Control Structure

Insurance Marketplace Less support for Mutual Fund risks within some insurer organizationsLess support for Mutual Fund risks within some insurer organizations Less support for Mutual Fund risks in the reinsurance community, especially for the new capacity availableLess support for Mutual Fund risks in the reinsurance community, especially for the new capacity available Industry Captive is taking a hard line on pricing, terms & conditionsIndustry Captive is taking a hard line on pricing, terms & conditions Not clear as to how much of the current losses will be covered by insurance policiesNot clear as to how much of the current losses will be covered by insurance policies Pressure from Independent Directors to maintain high levels of D&O/E&O InsurancePressure from Independent Directors to maintain high levels of D&O/E&O Insurance

Summary Mutual Fund groups that have been insulated from the recent extreme fluctuations of the marketplace are now experiencing what other Financial Institutions have in the pastMutual Fund groups that have been insulated from the recent extreme fluctuations of the marketplace are now experiencing what other Financial Institutions have in the past Coverage and capacity are still availableCoverage and capacity are still available Insurers are developing tools to continue to refine their underwriting appetites and the correct risk pricingInsurers are developing tools to continue to refine their underwriting appetites and the correct risk pricing