1. Capital Models and Their Relationship With Loss Reserving Joanne Balling, ACAS Director

2. Standard & Poor’s Capital Adequacy Ratio Underwriting Risk (C-3) Reserve Risk (C-4) Other Business Risk (C-5) Asset-Related Risk Charges (C-1) Total Adjusted Capital Credit- Related Risk Charges (C-2) -- 

3. Total Adjusted Capital Statutory Surplus Loss Reserve Deficiency +/- Time Value Of Money + Other +/-

4. Total Adjusted Capital n Surplus As Regards Policyholders1,636.5 n Adjustment For Redundancy / Deficiency Of(214.4) Reserves n Discount For Time Value Of Money32.8 n Analyst’s Adjustments (e.g. Surplus Notes)0.0 1996 Standard & Poor’s Total Adjusted Capital 1,454.9 ABC Insurance Group Capital Adequacy Model

5. Total Adjusted Capital n Surplus As Regards Policyholders1,636.5 n Adjustment For Redundancy / Deficiency Of(100.4) Reserves n Discount For Time Value Of Money25.8 n Analyst’s Adjustments (e.g. Surplus Notes)0.0 1996 Standard & Poor’s Total Adjusted Capital 1,561.9 ABC Insurance Group Capital Adequacy Model

6. Asset Risk (C-1) ABC Insurance Group Capital Adequacy Model Required Capital For: Unaffiliated Bonds64.2 Affiliated Bonds4.9 Mortgage-Backed Securities 12.7 Interest Rate Risk Unaffiliated Preferred Stock9.2 Unaffiliated Common Stock112.8 Affiliated Preferred & Common Stock92.4 Mortgage Loans3.0 Real Estate Holdings4.7 Collateral Loans0.0 Schedule BA4.0 Other Invested Assets4.4 Off-Balance Sheet Items1.2 Concentration Risk0.0 Additional Capital Needs For Asset 0.0 Risks Not Already Captured Required Capital For Asset Risk 313.4 Adjusted By Size Factor

7. Credit Risk Factors Reinsurance Recoverables Rating AAA AA A BBB BB B CCC U, N.R. S, R Factor 0.005 0.012 0.019 0.047 0.096 0.238 0.497 0.250 0.500 Credit Risk Factors

8. Credit Risk (C-2) ABC Insurance Group Capital Adequacy Model Total Required Capital For Credit Risk 59.6 Credit Risk For: Reinsurance Recoverables46.7 Other Non-Invested Assets10.9 Additional Capital Needs For Credit Risks 2.0 Not Already Captured

9. Credit Risk (C-2) ABC Insurance Group Capital Adequacy Model Total Required Capital For Credit Risk 53.6 Credit Risk For: Reinsurance Recoverables40.7 Other Non-Invested Assets10.9 Additional Capital Needs For Credit Risks 2.0 Not Already Captured

10. Underwriting Risk (C-3) ABC Insurance Group Capital Adequacy Model Premium Risk For: Homeowners / Farm Owners / Personal Auto76.8 Auto Liability5.0 Combined 2 Year Lines / International115.6 Commercial Auto Liability19.7 Commercial Liability69.1 Commercial Multiple Peril23.1 Workers’ Compensation78.4 Reinsurance0.7 Analyst’s Adjustment For Premium Risks0.0 Not Already Captured Total Required Capital For Underwriting Risk 388.4

11. Reserve Risk (C-4) ABC Insurance Group Capital Adequacy Model Reserve Risk For: Homeowners / Farm Owners / Personal Auto 62.1 Auto Liability4.0 Combined 2 Year Lines / International33.5 Commercial Auto Liability22.6 Commercial Liability100.8 Commercial Multiple Peril35.5 Workers’ Compensation75.6 Reinsurance0.9 Analyst’s Adjustment For Reserve Risks0.0 Not Already Captured Total Required Capital For Reserve Risk 335.0

12. Reserve Risk (C-4) ABC Insurance Group Capital Adequacy Model Reserve Risk For: Homeowners / Farm Owners / Personal Auto 62.1 Auto Liability4.0 Combined 2 Year Lines / International33.5 Commercial Auto Liability22.6 Commercial Liability80.8 Commercial Multiple Peril35.5 Workers’ Compensation70.6 Reinsurance0.9 Analyst’s Adjustment For Reserve Risks0.0 Not Already Captured Total Required Capital For Reserve Risk 310.0

13. Other Risk (C-5) ABC Insurance Group Capital Adequacy Model Business Risk & Other LOBs 47.5 Not Already Captured

14. ABC Insurance Group Capital Adequacy Ratio Capital Adequacy Ratio = Risk Adjusted Capital ÷ Required Capital 140% = 1,081.9 ÷ 770.9 Required Capital = Underwriting Risk + Reserve Risk + Other Risks 770.9 = 388.4 + 335.0 + 47.5 Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk 1,081.9 = 1,454.9 – 313.4 – 59.6 Implied Capital Adequacy: “A”

15. ABC Insurance Group Capital Adequacy Ratio Capital Adequacy Ratio = Risk Adjusted Capital ÷ Required Capital 160% = 1,194.9 ÷ 745.9 Required Capital = Underwriting Risk + Reserve Risk + Other Risks 745.9 = 388.4 + 310.0 + 47.5 Risk Adjusted Capital = Total Adjusted Capital – Asset Risk – Credit Risk 1,194.9 = 1,561.9 – 313.4 – 53.6 Implied Capital Adequacy: “AA”

16. COMPARISON OF RESULTS

17. Impact On Ratings n Model Is One Of Many Factors Assessed In Arriving At Opinion Of Capital n Capital Is One Of Many Factors Assessed In Arriving At Financial Strength Rating n Other Key Areas - Management & Corporate Strategy - Business Profile - Operating Performance - Financial Flexibility