1. Mergers and Acquisitions in the (Re)Insurance Industry Casualty Actuaries in Reinsurance Seminar Boston, Massachusetts June 16, 2000

2. Presentation Overview 4Valuation m Overview m Critical Assumptions m Example ÝBalance Sheet ÝIncome Statement ÝTotal Value 4Merger consequences m Overview and Critical Assumptions m Example 4M&A market dynamics m Statistics m Conclusions 4Questions?

3. Valuation S

4. Valuation Overview The valuation is the sum of : 4The “true value” of the balance sheet (old business) 4The “true value” of the current and future business on an “as is” basis 4Marginal value to the buyer of intended use 4Are there other sources of value? m Option value m Intangibles Market Value Economic Value Price

5. Valuation Critical Assumptions Balance Sheet 4Reserves m Adequacy m Run-off pattern m Capitalization m Taxes 4Assets m Yields m Market values m Liquidity Income Statement 4Revenue (premium) 4Loss experience 4Expenses m Expected expense savings m Integration costs 4Cash flows 4Capitalization 4Taxes Cost of Capital 4Target ROE 4WACC

6. Valuation Balance Sheet

7. Valuation Income statement

8. Valuation Total Value Value of the Balance Sheet$890 Value of the Income Statement$60 Other sources of value$50 Total value $1,000 Per Share (1)$20 Ratios: Value/Market Price (2)111% Value/Book(3)111% Value/Earnings (4)18.0 (1):Based on 50 million shares outstanding (2):Current share price of $18 (3):Book value is $900 million (4):Pro-forma 2000 earnings are $56 million ($1.12/share)

9. Merger Consequences S

10. Merger Consequences Overview and Critical Assumptions 4Pro forma income statements and balance sheets of the buyer and the target combined, appropriately reflecting the deal structure 4Key considerations m Transaction financing m Restructuring the balance sheet ÝPreferred stock ÝOutstanding options ÝImpaired assets ÝTransition costs ÝConforming accounting m Impact on operating results ÝEPS ÝROE m Constraints ÝRBC ÝDebt/Capital

11. Merger Consequences Sample Analysis

12. M&A Market Dynamics S

13. Chart 1: Number of Deals vs. Statutory Surplus Source: Conning & Company

14. Chart 2: Number of Deals vs. P&C Index Source: Conning & Company

15. Chart 3: Aggregate Deal Size vs. P&C Index Source: Conning & Company

16. Chart 4: Average Deal Size vs. P&C Index Source: Conning & Company

17. Deal Pricing vs. P&C Index Not only is the quantity and size of deals impacted by relative stock prices, but evidence (albeit limited) shows that the price companies pay in a deal is also impacted by relative stock price… 4Over the past three years, the price paid in a transaction versus earnings has followed the P&C index both up in 1998 and down in 1999. 4Likewise, the price to book value has also followed the trend in the P&C index. Source: Conning & Company

18. Key Conclusions Our discussion of St. Paul’s valuation and merger consequences approaches, combined with our review of P&C merger and acquisition activity suggests the following… When market valuations are low: Ýsellers feel they are undervalued Ýbuyers stock is generally of low value Ýfuture earnings are poor Ýpremiums to market decline Ýfewer deals get done When market valuations are high Ýsellers feel the market has more appropriately valued their enterprise Ýbuyers have additional currency in the form of stock Ýfuture earnings are better Ýpremiums to market increase Ýmore deals get done Said another way, when market valuation decline, insurers are not necessarily the bargains they appear to be.

19. Questions? S