1. 2005 Casualty Loss Reserve Seminar Loss Reserve Analysis and Statements of Actuarial Opinion Robert E. Farnam Senior Financial Analyst and Actuary A.M. Best Company

2. Presentation Outline Impact of Reserve Development on Financial Strength Ratings Reserve Analysis at A.M. Best Industry Trends Statements of Actuarial Opinion (SAO) –What’s Useful –Actuarial Reports –What Would Make SAO More Helpful

3. A.M. Best Mission Statement To perform a constructive and objective role in the insurance industry toward the prevention and detection of insurer insolvency

4. Primary Causes of P/C Impairments (1991 to 2002) Percentage breakout based on 257 of 390 companies in the period where a primary cause of impairment was identified. Sources: State Insurance Departments, A.M. Best

5. Rating Considerations Success Factors Balance Sheet Strength Operating Performance Business Profile Management

6. Reserve Development Impact of Reserve Changes on Financial Strength Rating –Balance Sheet Strength –Operating Performance –Management Credibility Deficiencies Have Significant Impact –Even Small Deficiencies Can Contribute to Downgrade –Can be Compounded by Growth Charges –Deficiencies Funded from Surplus Have Impact on Economic Surplus and Required Capital

7. Reserving Data Collected by A.M. Best 3108 Domestic P/C Insurers Annual Statement –Statement of Actuarial Opinion –Schedule P –Notes to Financial Statement Quarterly Statement Supplemental Rating Questionnaire Internal/External Actuarial Report Interaction with Company Management

8. A.M. Best Loss Reserve Model Six Separate Methods –Two Company-Specific Paid Loss Development –Two Company-Specific Case Incurred Loss Development –Industry Paid Loss Development –Industry Case Incurred Loss Development –If Volatile, Default to Fixed Loss Ratio Method Uses Schedule P - Can Be Distorted Starting Point for Analysis/Discussion

9. Incurred Loss/ALAE Ratios

10. Incurred Loss/ALAE Development ($ Billions)

11. CY 2004 Development by Line ($ Millions)

12. Development as a % of Surplus

13. Development as a % of Reserves

14. Market Impact Takedown of 2002 and 2003 AYs Cushion for Soft Market? More Favorable Reported Results Growing Pricing Pressures Looming Soft Market will be Shorter … But it will be No Less Damaging

15. Statement of Actuarial Opinion Credibility Issue –“Reasonable Provision” versus $50+ Billion Adverse Reserve Development over Last Four Calendar Years Largely Ignored by A.M. Best Analysts –A.M. Best Considered an Insider and has Access to Confidential Information –Can Review Actuarial Report Details if Necessary

16. What’s Useful in SAO Explains Potential Distortions to A.M. Best’s Internal Schedule P Analysis Commentary Sections Add Color –Risk of Material Adverse Deviation –Pools & Associations –Asbestos & Environmental Liability –Retroactive/Finite Reinsurance –Reinsurance Collectibility –Material Operational Changes

17. Actuarial Reports Review Analysis for –LDF Selections –Ultimate Selections –Expected Loss Ratios Used –Frequency/Severity Trends and Other Assumptions –Methods Used Compare Carried Reserves with Actuarial Range of Estimates

18. Helpful Exhibits in Actuarial Reports Historical Selected Ultimates/Runoff by AY Historical Net Retentions by AY Calculation of ELR –Earned Rate Changes –Frequency/Severity Trend Selections/Support Average Severity – Selected/Reported Triangles Average Case Reserves – Triangle Claims Closure Rates – Triangle Pure Premiums

19. What Would Make SAO More Helpful Proposed Actuarial Opinion Summary will Provide Insightful Details –Disclose Actuarial Range/Point Estimate –Carried Reserves versus Actuarial Range/Point Estimate –If 5% Adverse Development in Three of Last Five Years, Detail Contributing Factors

20. What Would Make SAO More Helpful Describe Scenarios/Underlying Assumptions that Drive Estimate Variability Quantify Risk of Material Adverse Deviation Reserve Adequacy by Schedule P Line of Business

21. What Would Make SAO More Helpful Regain Credibility of Actuarial Profession –Develop New Reserving Methods to Improve Estimate Consistency/Accuracy –Attend Company Rating Meetings –Road Show to Meet Analysts Face-to-Face –Educate Us