1

Outline

Historical Results and Baseline

2005 and 2007 – A period of change

2007 and beyond – Insight and Perspective

Industry IssuesTRIA, OFC and Cat Fund.

Questions

2

Supply Side Business

Insurance is classic supply & demand business model

Demand is more or less constant follows GDP

Market is supply drivenSupply = Capital = Surplus.Capital Moves to returns and away from lossesCapital becomes variable creating hard and soft

marketsCapital leaves: capital to reserves, losses, buy-

backs and reduction of risk appetite.Capital enters: net income, new capital models

and new capital

3

-55-50-45-40-35-30-25-20-15-10-505

101520253035

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

Underwriting Gain (Loss)1975-2006

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

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.

4

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Gro

wth

Rat

e

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Ten

Year

Tre

asur

y Yi

eld

P&C Industry

Ten YearTreasury

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

2001-04Hard

MarketHard

MarketHard

Market

Soft Market

5

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

Q2

07

E

U.S. Policyholder Surplus: 1975-2006

Source: A.M. Best, ISO, Insurance Information Institute.

$ B

illion

s

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.

$285.4M

7

87.6

91.2

92.1 92.3 92.4 92.4

93.1 93.1 93.393.0

85

86

87

88

89

90

91

92

93

94

1949 1948 1943 1937 1935 2006 1950 1939 1953 1936

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

2006 Calendar Year by Accident Year

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

CY 2006L&LAE

AY 2006L&LAE

AY 2005 AY 2004 AY 2003 AY 2002 AY 2001 AY 2000 AY 1999 AY 1998 AY 1997 Prior

Reserve Development as % of EP

10

97.5

100.6 100.198.3

92.7 93.0

100.9

9.4% 10.5%

15.3%14.3%

15.9%

9.4%

15.0%

80

85

90

95

100

105

110

1978 1979 2003 2004 2005:H1 2005 2006:H1

Co

mb

ine

d R

ati

o

6%

8%

10%

12%

14%

16%

18%

Re

tru

n o

n E

qu

ity

*

Combined Ratio ROE*

* 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

11

-5%

0%

5%

10%

15%

20%

ROE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Ten Y

ear Tre

asury

US P/C Insurers All US Industries 10 Year Treasury

Historical ROE For Property & Casualty vs. All Industries - 1987–2006 and Interest Rates

Source: Insurance Information Institute; Fortune, Federal Reserve

Average ROE

5 Year

10 Year

US P/C 9.0% 7.6%

All US 13.3%

13.4%

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

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.

14

Commercial Property Calendar Year Results 1993-2005

NPW($,BB)

YOYChg

L/LAERatio

Exp.Ratio

PH. DVRatio

Comb.Ratio

2005 $42.7 2.2% 66.4% 31.3% 0.7% 98.4%

2004 $41.8 0.6% 59.2% 30.3% 0.7% 90.2%

2003 $41.6 6.9% 52.8% 29.1% 0.6% 82.6%

2002 $38.9 24.1% 61.6% 29.7% 0.8% 92.1%

2001 $31.3 11.7% 82.3% 33.0% 0.1% 115.4%

2000 $28.0 8.3% 71.8% 35.5% 0.1% 107.5%

1999 $25.9 6.5% 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 $26.7 6.6% 68.6% 35.2% 0.2% 104.0%

1995 $25.0 6.6% 66.8% 35.5% 0.2% 102.6%

1994 $23.5 4.9% 95.1% 36.9% 0.1% 132.1%

1993 $22.4 5.9% 65.3% 37.5% 0.1% 102.9%

93-'05 $397.7 68.2% 33.4% 0.4% 102.0%

02-'05 $164.9 60.0% 30.1% 0.7% 90.9%

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

17

$0.3$2.2

$1.2

($8.5)($7.5)

($9.5)

($4.5)

$0.4

$10.8

$22.7

$13.9

$9.9$8.0

$5.0$2.0

($1.5)

$2.3

($6.6)

3.1

0.52.5 2.2

3.11.4

3.5

6.5

3.62.4 1.9

1.1 0.40.1

0.8

0.1 0.50.7

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

E

20

06

E

20

07

E

Res

erve

Dev

elo

pm

ent

($B

)

PY Reserve Development

Combined Ratio Points (on Total P&C)

Reserve Development DistortsCalendar Year PictureP & 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

18

Industry Reserve Track Record Workers Compensation

1997 1998 1999 2000 2001

Initial L/R 75.6% 79.5% 81.2% 79.5% 78.9%

Current L/R 82.6% 91.9% 99.2% 96.2% 87.8%

Re-estimation of AY Loss Ratios

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

1997 1998 1999 2000 2001

Initial Estimate Increase as of 12/31/05

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%

Re-estimation of AY Loss Ratios

60%

70%

80%

90%

100%

110%

120%

130%

140%

1997 1998 1999 2000 2001

Initial Estimate Increase as of 12/31/05

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%

Re-estimation of AY Loss Ratios

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

1997 1998 1999 2000 2001

Initial Estimate Increase as of 12/31/05

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.

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005

1969-2005Reinsurance

Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%