2. 1 Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute PREMIUMS Growth in P/C NPW Highly Cyclical Real NWP Growth During Past 3 Hard Markets 1975-78: 8.6% 1985-87: 14.5% 2001-03F: 8.8% 1975-78 1985-872001-03 *2003 figure is estimate on first half result.

3. 2 CAPACITY Excess Liability Market Capacity is Cyclical, Like Other Segments Source: Marsh, 2003 Limits of Liability Report, III Capacity has dropped 30% since peaking in 2000

4. 3 PERFORMANCE P/C Industry Combined Ratio Highly Cyclical 2001 = 115.7 2002 = 107.2 2003First Half = 99.8 Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 2000s: 111.0 Sources: A.M. Best; ISO, III *Based on First Half 2003 results.

5. 4 Interest Rates and Underwriting Profits Assumptions:  No risk, no inflation, no expense loading  Real rate is 1.25%  Policy pays off $100 one year from now Premium= $100/1.0125 = $98.77 Underwriting profit= $98.77-100 = -$1.23 Underwriting profit ratio = -.012

6. 5 Interest Rates and Underwriting Profits Assumptions:  Same but now 3% inflation Loss= $100*1.03 = $103 Discount rate = 1.0125*1.03=1.043 Premium= $103/1.043 = $98.77 Underwriting profit= $98.77-103 = -$4.23 Underwriting profit ratio = -.043

7. 6 *First Half 2003 Source: Insurance Information Institute; ISO, III PROFITS P/C ROE Volatile but is it Still Cyclical?

8. 7 RESERVE DEVELOPMENT: Why is Reserve Development Cyclical? *Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, III Adverse reserve development of about $23 billion accounted for most of the industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion increase in earned premiums

9. 8 PERFORMANCE Line-Specific Cyclicality (WC) Source: A.M. Best, NCCI, III *Includes dividends to policyholders Accident year is developed to ultimate as 12/31/02; Note: CY figures from AM Best; AY figures from NCCI 2.9 pts due to 9/11

10. 9 INSOLVENCIES P/C Company Insolvency Rates are Cyclical Source: A.M. Best; Insurance Information Institute Insurer insolvencies are increasing 10-yr industry failure rate: 0.72% Failure rating for B+ or better rating: 0.49% Failure rate for D through B rating: 1.29% 3830 10-yr Failure Rate = 0.72%

11. 10 RATINGS Are P/C Insurer Ratings Cyclical? Upgrades / Downgrades: North America Source: Moody’s, III

12. 11 CAPITAL P/C PHS Exhibiting Cyclicality Source: A.M. Best, Insurance Information Institute, III*First Half $ Billions Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.5% ($52 billion) to $284.3 billion at year-end 2002 (a trough?) Surplus during the first half of 2003 rose by $28.2B or 9.9% to $312.5B “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations $47 Billion

13. 12 INTERNATIONAL Cyclicality Exists Internationally in Investor Perceptions Source: Kielholz, Walter, “The Cost of Capital for Insurance Companies,” The Geneva Papers on Economic Activity, v 25, no. 1, January 2000, III

14. 13 Source: MarketScout.com, III PRICING Commercial Premium Rate Changes Highly Cyclical  Pricing cycle appears to be alive and well  Is moderation due to realization of performance and profit goals, increasing capacity/capital, or market share strategies?