1

Loss Reserves and the Underwriting Cycle

Meyer Shields, FCAS, MAAANovember 16, 2004

All relevant disclosures and certifications appear on page 16 of this report.

2

Agenda

Data Presentation

The Analyst’s Perspective

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The Underwriting Cycle

A n n u a l N W P G ro w th - U .S . In d u stry

0 %

5 %

1 0 %

1 5 %

2 0 %

2 5 %

Source: A.M. Best

4

The Reserving Cycle?

Source: A.M. Best

Loss Reserve Growth

-5%

0%

5%

10%

15%

20%

25%

5

Is There a Relationship?

Source: A.M. Best, Legg Mason

Correlation Between NWP Growth and Reserve Growth

y = 0.7337x + 0.0407R2 = 0.4703

-5%

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25%

NWP Grow th Rate

Lo

ss

Re

se

rve

Gro

wth

Ra

te p-score 0.029602

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Reserving Conservatism

Source: A.M. Best, Legg Mason

Ratio of IBNR:NEP by Accident Year

0%

5%

10%

15%

20%

25%

30%

Accident Year

7

Reserving Conservatism

Source: A.M. Best, Legg Mason

Ratio of IBNR:NEP by Accident Year

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Accident Year

Workers Compensation Private Passenger Automobile Liability

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Reserving Conservatism

Source: A.M. Best, Legg Mason

Ratio of Paid to Reported Losses

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

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Reserving Conservatism

Source: A.M. Best, Legg Mason

Ratio of Paid to Reported Losses

30%

35%

40%

45%

50%

55%

60%

PPA Liability Workers Compensation

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Prior Period Adjustments

Source: A.M. Best, Legg Mason

Prior Period Reserve Strengthening/(Releases) - U.S. Industry, All Lines

0.1

(0.4)

3.6

9.2 9.5

6.3

3.3

(0.1) 1.0 (0.2)2.3

(2.0)

(8.5)

(2.5)

(6.7) (7.3)

(15.0)

(4.5)

(1.8)

11.1

21.2

14.0

(20)

(15)

(10)

(5)

0

5

10

15

20

25

$ B

illi

on

s

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Prior Period Adjustments

Source: A.M. Best, Legg Mason

Prior Period Reserve Strengthening/(Releases) - U.S. Industry, All Lines

(6)

(4)

(2)

0

2

4

6

$ B

illio

ns

PPA Liability Workers Compensation

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"If the only tool you have is a hammer,

you will see every problem as a nail."

- Abraham Maslow

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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 ratesUnanticipated movements in frequency

and/or severity

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…But Let’s Not Kid Ourselves

Anecdotally, several “other than actuarial” issues seem to also drive reserve development:Mergers and acquisitionsChanges in senior managementCatastrophic losses and the ‘kitchen sink’

quarterSarbanes-Oxley?

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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

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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.

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