1. © 2005 Towers Perrin May 18, 2005 Investment Principles – Session with the CAS Investment Committee 2005 CAS Spring Meeting – Phoenix, AZ Curtis Gary Dean, Distinguished Professor, Ball State University François Morin, Principal, Towers Perrin Todd Rogers, Director – Finance and Operations, CAS

2. © 2005 Towers Perrin 2 Agenda Background CAS Investment Policy Recent Activities Basic Investment Principles for Personal Investing

3. © 2005 Towers Perrin Background

4. © 2005 Towers Perrin 4 Background CAS functions as a non-profit organization under section 501(c) (6) of the Internal Revenue Code of 1954 Per CAS Constitution, “Funds of the CAS shall be devoted exclusively to advance the body of knowledge of actuarial science applied to property, casualty and similar risk exposures.”

5. © 2005 Towers Perrin 5 Background – cont’d February 1986 – Board approves Investment Policy U.S. Treasury Notes only Maturity not to exceed five years 1995 – Finance Committee reviews policy and makes following recommendations Split funds into Operating Expenses and Surplus Allow investments in commercial paper/bonds Recommendations are not approved Board approves increased investment term to 10 years

6. © 2005 Towers Perrin 6 Background – cont’d April 2000 – Finance Committee presents a series of modifications to Executive Council Split assets into 3 funds (Operating, Short-Term, Long-Term) Allow broader variety of instruments Obtain services of an advisor for asset allocation Board approves the allocation of some portion of the Long-Term Fund into equities and commercial bonds Board opts for a low-cost option of index funds instead of hiring investment professional Finance Committee charged with allocation between funds

7. © 2005 Towers Perrin 7 Background – cont’d CAS Investment Committee formed in late 2000 Manage CAS investments within prescribed policy Recommend changes for consideration by Board Committee reports to VP – Administration

8. © 2005 Towers Perrin 8 Committee Roster Curtis Gary Dean (Vice Chair) – Ball State University Richard Meuret – America First Insurance François Morin – Tillinghast Paul LeStourgeon – Towers Perrin Reinsurance Nathan Schwartz – Benfield Rich Zatorski (Chair) – Guard Insurance Deborah Rosenberg (ex officio) – New York Ins. Dept. Todd Rogers (Staff Liaison) – CAS

9. © 2005 Towers Perrin CAS Investment Policy

10. © 2005 Towers Perrin 10 CAS Investment Policy Operating Fund The purpose of this fund is to provide sufficient cash to meet the normal financial obligations of the CAS over the next 12 months. Short-Term Fund The purpose of this fund is to meet CAS expenses expected to occur between 12 and 24 months. Long-Term Fund The purpose of this fund is to meet the CAS expenses occurring as the result of unanticipated activities, to improve the return on funds held for expenditure over the next two to ten years, and to manage investment risk.

11. © 2005 Towers Perrin 11 CAS Balance Sheet as of September 30, 2004

12. © 2005 Towers Perrin 12 Split of Assets Between the Funds CAS Surplus 80 % of minimum of current or next 2 years’ projected CAS Surplus in Long-Term Fund Remainder in Short-Term Fund Remaining Investable Assets 40% in Short-Term Fund 60% in Operating Fund Operating Fund Balance must be greater than 20% of current year’s operating expenses (approx. $1 million)

13. © 2005 Towers Perrin 13 Asset Allocation – Constraints by Class

14. © 2005 Towers Perrin 14 Positions as of March 31, 2005

15. © 2005 Towers Perrin 15 Rebalancing Rules CAS follows a dollar-cost averaging process Potential that target mix will get out of line because of capital appreciation Long-Term Fund Rebalancing Rules 75% equities/25% bonds —Rebalance when equities outside of 70%-80% Equities should be 87.5% domestic/12.5% foreign —Rebalance when domestic outside of 85%-90% Active rebalancing can be delayed by up to three months if current result is thought to be temporary

16. © 2005 Towers Perrin Recent Activities

17. © 2005 Towers Perrin 17 Asset Allocation for Long-Term Fund Investment Committee wanted to confirm that the asset mix that had been implemented for the Long- Term Fund was optimal Used an optimizer to determine the efficient frontier for the portfolio given the constraints specified by the CAS Investment Policy Performed in July 2003 Concluded that current mix (70% domestic equities, 10% international equities, 20% bonds) was appropriate

18. © 2005 Towers Perrin 18 Asset Allocation for Long-Term Fund – cont’d

19. © 2005 Towers Perrin 19 Asset Allocation for Long-Term Fund – cont’d

20. © 2005 Towers Perrin 20 Which Index for International Equities? In 2001, Investment Committee diversified its portfolio by investing in international equities At the time, the selected index was the Vanguard European Index Fund Limit exposure to Japan due to perceived risks in the banking sector Rising Euro (general consensus at the time) might provide hedge for European equities when translated back to dollars In 2003, Investment Committee revisited these assumptions and explored the possibility of investing into a broader index

21. © 2005 Towers Perrin 21 Which Index for International Equities? – cont’d Concluded that the Vanguard Total International Fund provides greater diversification Even though the Total International Fund has substantial exposure to Japan (about 19%), investment limits imposed by our asset allocation model drops our exposure to Japan to only 2.4% of our overall equity allocation (7/8 US and 1/8 International) Investment Committee decided the best approach would be to exit the European fund entirely, and enter the Total International Fund all at once

22. © 2005 Towers Perrin 22 Which Index for Domestic Equities? In 2001, the Vanguard S&P 500 Index Fund was chosen as the index to invest in domestic equities In 2004, the Investment Committee had discussions to start using a broader index for domestic equities Philosophically, it makes sense that we should be investing in the broader market to diversify risk Data to support this statement is difficult to obtain In October 2004, the Investment Committee approved an initial investment into the Vanguard Total Stock Market Index

23. © 2005 Towers Perrin 23 Revised Split between Funds In early 2004, the Committee researched alternative investment strategies with the intention of increasing the yield on assets in the Operating Fund and the Short-Term Fund Very few options available given the maximum investment maturity of 2 years in the Operating Fund Committee recommended a change in the distribution of invested assets between the two funds Short-Term Fund now includes 40% of remaining investable assets Approved by the Board, effective with the 2005 fiscal year

24. © 2005 Towers Perrin 24 Investment Strategy for the Short-Term Fund and the Operating Fund The Committee recently had discussions about the feasibility of developing an asset allocation model for the Short-Term Fund and the Operating Fund The objectives of these two funds are dramatically different than the objective for the Long-Term Fund Their objective consists of a balancing act of ensuring that sufficient cash is available to meet cash flow needs, while at the same time maximizing returns. The Committee decided to continue its current process of managing these funds Make decisions each meeting based on the yield curve and cash flow projections

25. © 2005 Towers Perrin 25 CAS Cash Flow