1. The Unfulfilled Promise of DFA for P&C Insurance Companies 2001 DFA Seminar Bill Wilt, VP/Sr. Analyst Property & Casualty/Reinsurance Moody's Investors Service June 7 & 8, 2001

2. Moody's Investors Service The Unfulfilled Promise of DFA Discussion Points n The Case for DFA in P&C Capital Management n The Reality of DFA Use Among P&C Insurers n Barriers to Wider Adoption of DFA in P&C n Role of DFA in Rating Process

3. Moody's Investors Service The Case for DFA n Conclusion –Holds ‘great promise’ for insurers’ efforts to optimize use of capital –Although slow to evolve - optimism is warranted n Impetus for DFA –Among several…shareholder pressures

4. Moody's Investors Service The Case for DFA n Benefits of DFA –Among several….balance competing demands of security (PH), return/risk (shareholder) and mix of two (creditors n Challenges Related to DFA Modeling –Sophistication Vs. ease of use –Event Risk... “yeah, but what about…”

5. Moody's Investors Service The Reality of DFA Use n Use Among Specialty Mono-lines n A Growing Commitment to Study n Internal Development Yet to Translate into Broad Usage n Less Sophisticated Capital Management Approaches Still Hold Sway

6. Moody's Investors Service Barriers to Wider Adoption in P&C n Challenges Inherent in Building Models –Modest ambitions, evolve into complex models n Model Complexity Can Erode Confidence in Output n Significance of Underwriting Discipline to P&C –Competing resources, detractions from Job One n Precedence of Other Business Constraints –Regulatory, industry norms, rating agencies...

7. Moody's Investors Service Role of DFA in Moody’s Analytical Process n By all means…let’s discuss it –“…thoughtful, sophisticated and rigorous analysis on the part of business managers is always a good thing.” n Use of Models integral in ratings of –Monoline Cat reinsurers; Financial Guarantors; Finite Risk and Credit Insurers

8. Moody's Investors Service Role of DFA in Moody’s Analytical Process n Observations…Rating Process and DFA –Rating Process: »Industry Assessment »Company evaluation: n Where is the company today…look through financial statements n Where is the company going…quality of management, risk management process, risk appetite, etc. –DFA »Attempts to marry these concepts…this is a tall order

9. Moody's Investors Service Role of DFA in Moody’s Analytical Process n An Alternative… in the interim –Separate Past from Future »Consider use of existing tools to perform probability of ruin analysis on company »Separately…discuss proforma results, ranges of earnings estimates, capital consumption –Benefits »Immediate use of existing tools »Elevate familiarity with company tools and assumptions »Avoid being ‘bogged down’ in go-forward assumptions

10. Moody's Investors Service Role of DFA in Moody’s Analytical Process n Some Specifics –Discussion of process in creating model –Focus on Prob.(Default) and E(Severity Default) –Focus on assumptions, analysis of adverse outcomes –Discuss how used internally, has it had a meaningful impact on company’s business decisions or strategic plans? –Be prepared to discuss annually -- whether results are favorable or unfavorable