Moderator: Robert F. Wolf, FCAS, MAAA Principal- Mercer Risk, Finance & Insurance Consulting Panelists: Todd Bault, FCAS, MAAA Senior Research Analyst- Institutional Research- Sanford C. Bernstein & Company Chet Szczepanski, FCAS, MAAA Chief Actuary- Pennsylvania Insurance Department Rating Agency View of Capital Adequacy: Are They on the Mark? 11 November 2002 Copies of presentations will be available for download at

2 Excerpts of April 22, 2002 National Underwriter Article Rating Agencies Are On The Mark, But Reserving Practices Are Way Off By Susanne Sclafane – “...It's hard not to read news about property-casualty insurers whose financial strength ratings tumble from "A" to "B" in a heartbeat, only to have their hearts stop beating soon after, without wondering what's going on….” – “ Debt ratings ultimately depend on the information provided by the issuer” – Are there E&O exposures? – Reliance on Ratings by  Brokers  Businesses  Individuals – Are rating agencies scapegoats for those not assessing the solvencies - auditors, actuaries, regulators?

3 Excerpts of April 29, 2002 National Underwriter Article …..“Stating the Obvious, it’s clear that, in many cases, the insurance company financial statements presented to regulators and rating agencies often “misstate” an essential item–the company’s loss reserves... ….“In some cases, three groups of people have evaluated the adequacy of those loss reserves for an individual insurer. Is it possible, or even likely, that the evaluations of the highly trained and talented professionals that make up the audit teams, the outside actuarial firms, and the internal actuarial staffs were all off the mark?” in referring to Enron rating, S&P quoted.. “we do not audit the auditors of the companies we rate”. The above points will be discussed in more depth in tomorrow’s session titled “ C20: Reserve Uncertainty; Truth or Deception” moderated by Pat Teufel. – Morgan Stanely (left) estimates a potential $120.0 Billion shortfall  $64.0 Billion excl asbestos  $55.0 Billion asbestos

4 Agenda Exploratory Questions on Rating Agency Cause and Effect Rating Downgrades and Events ­Do Rating downgrades prompt regulatory action or ­Does rating action affect insurer collapse (Where is the cliff?) or ­With ratings of B, A-, are companies in worse shape than ratings suggest? ­Are rating changes late in response to company conditions? ­Informational dysfunction - clean audit reports that shouldn’t be clean? ­Do Rating Agencies have to Worry about E&O? Other – Are capital adequacy measures working? – Can Enro-esque risks happen in our industry?

5 Agenda Last Item- Let’s Have a Socratic Dialogue Audience and Panel Question and Answer Session