2. 1 Outline  Historical Results and Baseline  2005 and 2007 – A period of change  2007 and beyond – Insight and Perspective  Industry Issues  TRIA, OFC and Cat Fund.  Questions

3. 2 Supply Side Business  Insurance is classic supply & demand business model  Demand is more or less constant follows GDP  Market is supply driven  Supply = Capital = Surplus.  Capital Moves to returns and away from losses  Capital becomes variable creating hard and soft markets  Capital leaves: capital to reserves, losses, buy-backs and reduction of risk appetite.  Capital enters: net income, new capital models and new capital

4. 3 Underwriting Gain (Loss) 1975-2006 Source: A.M. Best, Insurance Information Institute $ Billions Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only the second since 1978. Despite the 2006 underwriting profit, the cumulative underwriting deficit since 1975 is $419 billion.

5. 4 Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute. Treasury Yields – Federal Reserve 2007 figures for ACE based on 2007 forecast. 1999 NWP for ACE was adjusted to include 12 months of premium from the CIGNA acquisition (as if it was acquired on Jan. 1, 1999 instead of July 2, 1999. Cyclical Growth Rate for P&C Insurance Industry* and Historical Interest Rates 1975-78 1984-87 2001-04 Hard Market Soft Market

6. 5 U.S. Policyholder Surplus: 1975-2006 Source: A.M. Best, ISO, Insurance Information Institute. $ Billions Capacity as of 12/31/06 was $487.1B (est.), 14.4% above year-end 2005, 71% above its 2002 trough and 46% above its 1999 peak. $285.4 M

7. 6 Average Commercial Rate Change by Line: 4Q99 – 1Q07 Source: Council of Insurance Agents & Brokers Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated post-Katrina

8. 7 Ten Lowest P/C Insurance Combined Ratios Since 1920 Sources: Insurance Information Institute research from A.M. Best data. The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949 The industry’s best underwriting years are associated with periods of low interest rates

9. 8 Highlights: Property/Casualty, 2006 vs. 2005 Item20062005Change Net Written Prem.443,778425,500+4.3% Loss & LAE283,700311,624-9.0% Net UW Gain (Loss)31,232(5,612)N/A Net Inv. Gain**55,56159,430-6.4% Net Income (a.t.)63,69544,155+44.3% Surplus*487,123425,760+14.4% Combined Ratio*92.4100.9 -8.5 pts. *Comparison is with year-end 2004 value. **Includes invest income and realized investment gains/losses. Source: ISO, Insurance Information Institute

10. 9 2006 Calendar Year by Accident Year

11. 10 * 2005/6 figures are return on average statutory surplus. Source: Insurance Information Institute from A.M. Best and ISO data. A 100 Combined Ratio Isn’t What it Used to Be

12. 11 Historical ROE For Property & Casualty vs. All Industries - 1987–2006 and Interest Rates Source: Insurance Information Institute; Fortune, Federal Reserve Average ROE5 Year10 Year US P/C9.0%7.6% All US13.3%13.4%

13. 12 2005 to 2007 - A Period of Change  2004 and 2005 – Natural Cat losses.  Model Changes  Rating Agency Changes  Bifurcated market: CAT and all else  New Capital Sources  Distribution – Finding balance  Casualty Pricing Pressure

14. 13 Why Property Prices Went Up… Historical results Cost and availability of reinsurance Portfolio Management RMS Model changes S&P and AM Best capital requirements Magnitude of supply imbalance.

15. 14 Commercial Property Calendar Year Results 1993-2005 NPW ($,BB) YOY Chg L/LAE Ratio Exp. Ratio PH. DV Ratio Comb. Ratio 2005$42.72.2%66.4%31.3%0.7%98.4% 2004$41.80.6%59.2%30.3%0.7%90.2% 2003$41.66.9%52.8%29.1%0.6%82.6% 2002$38.924.1%61.6%29.7%0.8%92.1% 2001$31.311.7%82.3%33.0%0.1%115.4% 2000$28.08.3%71.8%35.5%0.1%107.5% 1999$25.96.5%75.9%36.6%0.2%112.8% 1998$24.3-5.4%75.3%35.2%0.3%110.8% 1997$25.7-3.7%64.3%36.7%0.3%101.3% 1996$26.76.6%68.6%35.2%0.2%104.0% 1995$25.06.6%66.8%35.5%0.2%102.6% 1994$23.54.9%95.1%36.9%0.1%132.1% 1993$22.45.9%65.3%37.5%0.1%102.9% 93-'05$397.768.2%33.4%0.4%102.0% 02-'05$164.960.0%30.1%0.7%90.9%

16. 15 Average Commercial Rate Change by Line: 4Q99 – 1Q07 Source: Council of Insurance Agents & Brokers Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated post-Katrina

17. 16 Industry Track Record  During the period January 1, 1997 through December 31, 2005, the US P&C Industry experienced $35.2 Billion in adverse development: 1996 & prior AY’s $ 21.2 Billion 1997 - 2001 AY’s$ 58.7 Billion 2002 & subs. AY’s$(44.7)Billion Total$ 35.2 Billion Source Dowling IBNR Weekly  1996 & prior was primarily due to asbestos  Both the 1997 – 2001 period and 2002 – 2005 period are a function of mis-estimation. Actual experience proved to be quite different from expected

18. 17 Reserve Development Distorts Calendar Year Picture P & C Insurance Industry Prior Year Reserve Development* * Negative numbers indicate favorable development; positive figures represent adverse development. Source: A.M. Best, Lehman Brothers for years 2005E-2007F

19. 18 Industry Reserve Track Record Workers Compensation 1997 1998 1999 2000 2001 Initial L/R75.6% 79.5% 81.2% 79.5% 78.9% Current L/R 82.6% 91.9% 99.2% 96.2% 87.8%

20. 19 Industry Reserve Track Record General Liability 1997 1998 1999 2000 2001 Initial L/R 78.3% 77.6% 76.1% 76.2% 83.3% Current L/R 82.7% 95.2% 104.3% 100.6% 101.5%

21. 20 Industry Reserve Track Record Casualty Reinsurance 1997 1998 1999 2000 2001 Initial L/R 69.3% 78.6% 82.3% 81.6% 119.7% Current L/R 78.6% 109.5% 120.1% 118.7% 131.2%

22. 21 Reasons for US P/C Insurer Impairments, 1969-2005 *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005. 2003-2005 1969-2005