1 Loss Reserves and the Underwriting Cycle Meyer Shields, FCAS, MAAA November 16, 2004 All relevant disclosures and certifications appear on page 16 of this report.

2 Agenda Data Presentation The Analyst’s Perspective

3 The Underwriting Cycle Source: A.M. Best

4 The Reserving Cycle? Source: A.M. Best

5 Is There a Relationship? Source: A.M. Best, Legg Mason

6 Reserving Conservatism Source: A.M. Best, Legg Mason

7 Reserving Conservatism Source: A.M. Best, Legg Mason

8 Reserving Conservatism Source: A.M. Best, Legg Mason

9 Reserving Conservatism Source: A.M. Best, Legg Mason

10 Prior Period Adjustments Source: A.M. Best, Legg Mason

11 Prior Period Adjustments Source: A.M. Best, Legg Mason

12 "If the only tool you have is a hammer, you will see every problem as a nail." - Abraham Maslow

13 Correlation Does Not Imply Causation Several factors that lead to reserve increases can also be factors in a hardening marketplace. Changes in the legal environment Interest rates Unanticipated movements in frequency and/or severity

14 …But Let’s Not Kid Ourselves Anecdotally, several “other than actuarial” issues seem to also drive reserve development: Mergers and acquisitions Changes in senior management Catastrophic losses and the ‘kitchen sink’ quarter Sarbanes-Oxley?

15 One Last Pop Quiz In almost five years as an equity analyst, I have never had an investor respond to a reserve increase by quoting a prior actuarial opinion. This reflects: A) Widespread and sophisticated understanding of the uncertainty inherent in loss reserving; or B) Widespread and sophisticated skepticism of reserving

16 Important Disclosures and Certifications I, Meyer Shields, FCAS, MAAA, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Meyer Shields, FCAS, MAAA, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us and is not a summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. No investments or services mentioned are available in the European Economic Area to private customers or to anyone in Canada other than a Designated Institution. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Legg Mason Wood Walker, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Legg Mason Wood Walker, Inc. is a multidisciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agency for private transactions. Additional information is available upon request. Additional information is available upon request © Copyright 2004 Legg Mason Wood Walker, Inc.