Worshipping at the Altar of Shareholder Value John J. Kollar Insurance Services Office, Inc. November 15, 2000.

Worshipping at the Altar of Shareholder ValueJohn J. Kollar

Insurance Services Office, Inc.November 15, 2000

Worshipping at the Altar of Shareholder ValueJohn J. Kollar

Insurance Services Office, Inc.November 15, 2000

Information herein is believed to be reliable but J.P. Morgan does not warrantits completeness or accuracy. Opinions and estimates constitute our judgmentand are subject to change without notice. Past performance is not indicative offuture results. This material is not intended as an offer or solicitation forthe purchase or sale of any financial instrument. J.P. Morgan and/or itsaffiliates and employees may hold a position or act as market maker in thefinancial instruments of any issuer discussed herein or act as underwriter,placement agent, advisor or lender to such issuer. J.P. Morgan Securities Inc.is a member of SIPC. This material has been approved for issue in the UK byJ.P. Morgan Securities Ltd. which is a member of the London Stock Exchange and is regulated by the SFA. 2000 J.P. Morgan & Co. Incorporated. Clientsshould contact analysts at and execute transactions through a J.P. Morgan entityin their home jurisdiction unless governing law permits otherwise. For researchto private clients in the U.K.: The investments and strategies discussed hereinmay not be suitable for all investors, if you have any doubts you should consultyour investment advisor. The investments discussed may fluctuate in price orvalue. Investors may get back less than they invested. Changes in rates ofexchanges may have an adverse effect on the value of investments.

Information herein is believed to be reliable but J.P. Morgan does not warrantits completeness or accuracy. Opinions and estimates constitute our judgmentand are subject to change without notice. Past performance is not indicative offuture results. This material is not intended as an offer or solicitation forthe purchase or sale of any financial instrument. J.P. Morgan and/or itsaffiliates and employees may hold a position or act as market maker in thefinancial instruments of any issuer discussed herein or act as underwriter,placement agent, advisor or lender to such issuer. J.P. Morgan Securities Inc.is a member of SIPC. This material has been approved for issue in the UK byJ.P. Morgan Securities Ltd. which is a member of the London Stock Exchange and is regulated by the SFA. 2000 J.P. Morgan & Co. Incorporated. Clientsshould contact analysts at and execute transactions through a J.P. Morgan entityin their home jurisdiction unless governing law permits otherwise. For researchto private clients in the U.K.: The investments and strategies discussed hereinmay not be suitable for all investors, if you have any doubts you should consultyour investment advisor. The investments discussed may fluctuate in price orvalue. Investors may get back less than they invested. Changes in rates ofexchanges may have an adverse effect on the value of investments.

• Managing Director @ J.P. Morgan Securities, Inc.

– equity research of p/c, health, multiline insurers

• Senior Research Analyst @ Sanford C. Bernstein & Co, Inc.

• Fixed income Securities @ Moody’s Investors Service

• Commercial Banker @ Bank of America & Chase

• Auditor @ Peat, Marwick Mitchell & Co.

• Managing Director @ J.P. Morgan Securities, Inc.

– equity research of p/c, health, multiline insurers

• Senior Research Analyst @ Sanford C. Bernstein & Co, Inc.

• Fixed income Securities @ Moody’s Investors Service

• Commercial Banker @ Bank of America & Chase

• Auditor @ Peat, Marwick Mitchell & Co.

Weston M. HicksWeston M. Hicks

Weston M. Hicks (Cont’d)Weston M. Hicks (Cont’d)

• BS in Business & Economics from Lehigh University

• CFA, CPA

• First place for last 7 years on Institutional Investor’s All-American Research Team

• Top P/C Analyst in 2000 by Reuters & the Street.com

• Member of New York Society of Security Analysts

• Past President of Association of Insurance

& Financial Analysts

• BS in Business & Economics from Lehigh University

• CFA, CPA

• First place for last 7 years on Institutional Investor’s All-American Research Team

• Top P/C Analyst in 2000 by Reuters & the Street.com

• Member of New York Society of Security Analysts

• Past President of Association of Insurance

& Financial Analysts

David B. KelsoDavid B. Kelso

• Executive Vice President & Chief Financial Officer, @ The Chubb Corporation/Chubb & Sons, Inc.– applies broad corporate strategy to all financial

decisions and actions

• Member of Policy Committee - business planning, resource allocation, corporate finance, mergers & acquisitions, treasury, tax, accounting, internal audit, IT, actuarial

• Executive Vice President & Chief Financial Officer, @ The Chubb Corporation/Chubb & Sons, Inc.– applies broad corporate strategy to all financial

decisions and actions

• Member of Policy Committee - business planning, resource allocation, corporate finance, mergers & acquisitions, treasury, tax, accounting, internal audit, IT, actuarial

David B. Kelso (Cont’d)David B. Kelso (Cont’d)

• CFO & Head of Retail Banking @ First

Commerce Corporation

• Partner and Head of North American Financial

Service Practice of Gemini Consulting

• Corporate Lending Officer @ Chemical Bank

• BA from Princeton University

• MBA from Darden School, University of

Virginia

• CFO & Head of Retail Banking @ First

Commerce Corporation

• Partner and Head of North American Financial

Service Practice of Gemini Consulting

• Corporate Lending Officer @ Chemical Bank

• BA from Princeton University

• MBA from Darden School, University of

Virginia

Stephen P. LoweStephen P. Lowe

• Principal and Consulting Actuary @ Tillinghast - Towers Perrin

– manager of global product/ service development– actuarial analyses– – strategic planning – economic value measurement – stochastic models to measure and manage risk and capital – exposure management

• Principal and Consulting Actuary @ Tillinghast - Towers Perrin

– manager of global product/ service development– actuarial analyses– – strategic planning – economic value measurement – stochastic models to measure and manage risk and capital – exposure management

Stephen P. Lowe (Cont’d)Stephen P. Lowe (Cont’d)

• Casualty and corporate actuarial

departments @ Aetna

• BS in mathematics from Union College

• FCAS• Member of CAS Board • Active in CAS & AAA

• Casualty and corporate actuarial

departments @ Aetna

• BS in mathematics from Union College

• FCAS• Member of CAS Board • Active in CAS & AAA

Shareholder ValueShareholder Value

• Key components

• Property/casualty industry performance– review

– outlook

• Key components

• Property/casualty industry performance– review

– outlook

Property/Casualty Industry - Some Other considerationsProperty/Casualty Industry - Some Other considerations

• Cyclicality of results

• Regulation - solidity/solvency

• Mutuals/reciprocals

• Cyclicality of results

• Regulation - solidity/solvency

• Mutuals/reciprocals

Convergence of Financial Services IndustriesConvergence of Financial Services Industries

• Gramm-Leach-Bliley Financial Services Reform Act– removed legal barrier between insurers,

banks and securities firms

– regulation

• Gramm-Leach-Bliley Financial Services Reform Act– removed legal barrier between insurers,

banks and securities firms

– regulation

GlobalizationGlobalization

• Customers

• Insurers/reinsurers

• Free trade

• Customers

• Insurers/reinsurers

• Free trade

Property/Casualty Risk SecuritizationProperty/Casualty Risk Securitization

• General growth in derivative markets

• Catastrophe bonds/options

• Tokyo Disneyland catastrophe bonds sold directly to financial markets

• NAIC securitization studies

• General growth in derivative markets

• Catastrophe bonds/options

• Tokyo Disneyland catastrophe bonds sold directly to financial markets

• NAIC securitization studies

Information TechnologyInformation Technology

Risk Assessment

• Catastrophe models

• DFA models

Business to Business (B2B)

• Communication

• Information

• Viruses

Marketing/Distribution

• Internet

Risk Assessment

• Catastrophe models

• DFA models

Business to Business (B2B)

• Communication

• Information

• Viruses

Marketing/Distribution

• Internet

Risk is RiskRisk is Risk

• Enterprise Risk Management

• Capital management

• Enterprise Risk Management

• Capital management

“Worshipping At The Altar of Shareholder Value”

Weston M. HicksJ.P. Morgan Securities

November 15, 2000

“Worshipping At The Altar of Shareholder Value”

Weston M. HicksJ.P. Morgan Securities

November 15, 2000

OverviewOverview

• Shareholder value - what is it, why is it important?

• The scorecard: how is the property-casualty industry doing

• Industry review and outlook

• Shareholder value - what is it, why is it important?

• The scorecard: how is the property-casualty industry doing

• Industry review and outlook

What is meant by “shareholder value?”What is meant by “shareholder value?”

Shareholder value is the long-term (3-5 year) growth

in the value of the business

What shareholder value isn’tWhat shareholder value isn’t

Short-term earnings trends

Premium growth

Size of the company

Stature within the industry

Why shareholder value mattersWhy shareholder value matters

• Shareholder value drives share performance over time

• A rising share price allows a company to attract & retain talent

• Opportunities may arise that require low cost of capital

• Investors don’t have to invest in the property-casualty industry!

• Shareholder value drives share performance over time

• A rising share price allows a company to attract & retain talent

• Opportunities may arise that require low cost of capital

• Investors don’t have to invest in the property-casualty industry!

Annualized Total Return (11/95-10/00)Annualized Total Return (11/95-10/00)

20.98

11.48

0

10

20

30

S&P 500 S&P P&C

20.98

11.48

0

10

20

30

S&P 500 S&P P&C

Annualized Total Return (11/95-10/00)Annualized Total Return (11/95-10/00)

20.98

39.5036.75

28.73

0

10

20

30

40

S&P 500 MMC AIG HIG

20.98

39.5036.75

28.73

0

10

20

30

40

S&P 500 MMC AIG HIG

Annualized Total Return (11/95-10/00)Annualized Total Return (11/95-10/00)

20.98

28.86

23.47

16.4314.13

0

10

20

30

40

S&P 500 ACL XL SPC CB

20.98

28.86

23.47

16.4314.13

0

10

20

30

40

S&P 500 ACL XL SPC CB

Annualized Total Return (11/95-10/00)Annualized Total Return (11/95-10/00)

20.9817.82 16.64

11.78

-3.83-10

0

10

20

30

40

S&P 500 PGR ALL MCY SAFC

20.9817.82 16.64

11.78

-3.83-10

0

10

20

30

40

S&P 500 PGR ALL MCY SAFC

Year-to-Date AppreciationYear-to-Date Appreciation

59.13

47.49

-2.19

-20

-10

0

10

20

30

40

50

60

S&P 500 S&P P&C S&P Multiline

59.13

47.49

-2.19

-20

-10

0

10

20

30

40

50

60

S&P 500 S&P P&C S&P Multiline

Property Casualty Insurance Industry Trends

Property Casualty Insurance Industry Trends

Long Term Trends In CapitalizationLong Term Trends In Capitalization

1980 1990 2000

Premiums $94 $215 $300

Reserves 92 290 365

Surplus 52 136 330

($ billions)

1980 1990 2000

Premiums $94 $215 $300

Reserves 92 290 365

Surplus 52 136 330

($ billions)

Long Term Trends In CapitalizationLong Term Trends In Capitalization

1980 1990 2000

NPW/surplus 1.8x 1.6x 0.9x

Reserves/surplus 1.8x 2.1x 1.1x

Capacity utilization 95% 95% 50%

1980 1990 2000

NPW/surplus 1.8x 1.6x 0.9x

Reserves/surplus 1.8x 2.1x 1.1x

Capacity utilization 95% 95% 50%

Excess Capital is in Both Personal Lines and Commercial LinesExcess Capital is in Both Personal Lines and Commercial Lines

Personal Commercial

Adj premium 113 183

Adj capital 112 160

Req'd capital 57 112

Excess 55 38

Personal Commercial

Adj premium 113 183

Adj capital 112 160

Req'd capital 57 112

Excess 55 38

Industry Cash Flow is at a BottomIndustry Cash Flow is at a Bottom

0%

5%

10%

15%

20%

25%

30%

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Year

0%

5%

10%

15%

20%

25%

30%

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Year

Cash Flow as a Percentage of Premiums

% Change Net Written Premium

Paid to Incurred Ratios at All Time HighsPaid to Incurred Ratios at All Time Highs

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

inti

al p

aid

to

inc

urr

ed

ra

tio

Industry Personal Auto Workers Comp Comm'l Auto General Liability CMP

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

inti

al p

aid

to

inc

urr

ed

ra

tio

Industry Personal Auto Workers Comp Comm'l Auto General Liability CMP

Catastrophes are a Growth MarketCatastrophes are a Growth Market

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Insured Catastrophe Losses 10 Yr. Average

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Insured Catastrophe Losses 10 Yr. Average

Global Insured Catastrophe Losses in Current Dollars

Estimated ROI on 2000 Accident YearEstimated ROI on 2000 Accident Year

StandardComm'l

SpecialtyComm'l

PersonalAuto

CR 120% 106% 104%

InvestmentReturn

7.5% 7.5% 7.5%

Leverage 1.5x 1.0x 2.0x

ROI -0.2% 10.4% 5.4%

SummarySummary

• Yesterday’s strategy of holding strong capital position and waiting for “hard market” unlikely to work

• Companies that have found profitable growth opportunities have been the value creators (AIG and HIG in particular)

• Excess industry capital likely to cap the upside in current cycle

• Yesterday’s strategy of holding strong capital position and waiting for “hard market” unlikely to work

• Companies that have found profitable growth opportunities have been the value creators (AIG and HIG in particular)

• Excess industry capital likely to cap the upside in current cycle

“Worshipping at the Altar of Shareholder Value

David B. Kelso

Chubb Corporation and Chubb & Son

November 15, 2000

“Worshipping at the Altar of Shareholder Value

David B. Kelso

Chubb Corporation and Chubb & Son

November 15, 2000

1995 - 1999

Source: A.M. Best Company, company statements* 12-quarter average, weighted by NPW, ending 12/31/99

Agency Companies

Direct Writers

In the areas of profitability and growth, the P & C industry has shown mixed results

In the areas of profitability and growth, the P & C industry has shown mixed results

90

95

100

105

110

115

120

-10 -5 0 5 10 15 20 25

Travelers

CNA

St. Paul

Farmers

USAAHartford

State FarmSafeco

AIGAllstate

CHUBB

GEICO Progressive

0

2

4

6

8

10

12

14

16

18

-10 -5 0 5 10 15 20 25

CHUBB

Farmers

Progressive

GEICO

State Farm

USAA

Allstate

CNA

St. Paul

Travelers

Hartford

Safeco

AIG

NWP Growth (%) NWP Growth (%)

Op

era

tin

g R

ati

o (

%)

Co

mb

ine

d R

ati

o (

%)

Frontier (-43%)

Fremont (-61%)

Travelers

CNA (-50%)

Safeco

CHUBB

Torchmark

Selective

Trenwick (-32%)

Capital Re

St. Paul

UNUM (-48%)Lincoln

Enhance

Jefferson – Pilot

Transatlantic

Progressive

AIG (5.03)

Cigna

Protective

Conseco

Citigroup

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-10%0%10%20%30%40%50%

Market Value

Book Value

Net Income Growth(1990-1999 CAGR)

High Growth Low Growth

Value Migration in Insurance (1999)*

Stability

ValueInflow

ValueOutflow

Danger

Point

Earnings growth is a major driver of stock price

*1999 data used unless otherwise noted; Capital Re net income growth is 1990-1998 and MV/BV is based on 1998 figures. Net Income growth for Travelers and Fremont are from 1995 to 1999. Source: Compustat, Mercer analysis, Marketwatch.

Earnings stability is another, ...

EPS Growth Rates5Y 3Y 2Y

AIG

CV* of Growth Rates Market - To - Book5Y 3Y 2Y 1994 1996 1999

XL

Travelers

St Paul

Safeco

CHUBB

CNA

ACE

15.0%

16.2%

9.5%

17.4%

4.8%

-6.9%

-114.4%

380.4%

13.8% 12.9%

17.7% 9.7% 4.41 3.16 7.87

-21.3%

1.0% -6.8%

14.1%

-32.0%

-8.8%-1.8%

1.1-1.5 1.0-1.3

3.4-4.9

3.09

(3.55)

0.15

(7.10)

1.0-1.4

0.15 0.15

17.4%

(0.90)

871.0%

7.3%

10.4%

575.3% 2.16

(2.38)

0.62

0.8-1.3

1.57

0.90

0.70

23.62

1.5-2.0

0.70

1.8-2.5

(3.95)

1.1-1.5

0.8-1.2

(0.49)

1.2-1.7

1.3-1.9

1.4-2.3 1.0-1.7

0.8-1.1

0.22

0.90

1.90

(0.23)

N/A

0.9-1.8

1.4-1.7

0.6-1.2

0.6-1.0

0.9-1.3

0.9-1.4 0.9-1.6 0.7-1.8

1.2-2.2

*CV is the coefficient of variation for EPS growth rates.

Volatility of Earnings

. . . And return - on - equity is a third

CNA

Trenwick

UNUMProvident

Fremont

Frontier (-8.36)

Safeco

Capital Re

Selective

CHUBB

Enhance

Progressive

Lincoln

Conseco

Cigna

Transatlantic

St. Paul

Torchmark

United Healthcare

AFLAC

AIG

Countrywide

Travelers

Allstate

Wells Fargo

Jefferson – PilotProtective

B of AFirst Union

Citigroup

State Street

Chase Manhattan

American Express (7.37)Capital One (6.27)

Schwab (13.8)

First Data

T. Rowe Price

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Market Value

Book Value

Return Over Cost of Capital

(ROE/Ke)

Under Performers

Companies with Potential Unrecognized

Value

Innovative Business Designs

Reinventors

*1999 data used unless otherwise noted; Capital Re ROE is based on 1998 data. Frontier’s stock price hit a new 52 week low on 4/17/00.Note: The S&P cost of capital of 10% was used for all companies. Source: Compustat, Mercer analysis, Marketwatch.

Financial Services Value Map(1999)*

Growth alone does not create superior performance . . .

Implied Market-to-Book Ratio

11% 1.0 1.0 1.0 1.0 .9 .9 .8

13% 1.2 1.1 1.2 1.2 1.2 1.4 1.4

15% 1.2 1.3 1.3 1.4 1.6 1.8 2.0

17% 1.4 1.4 1.5 1.7 1.9 2.2 2.4

19% 1.5 1.6 1.7 1.9 2.2 2.7 3.1

0% 2% 4% 6% 8% 10% 12%

E.P.S. Growth Rate R.O.E.

Source: Benjamin Branch and Bradley Gale, “Linking Corporate Stock Price Performance to Strategy Formulation”; this study analyzed the drivers of market-to-book of 600 companies over 14 years.

. . . Particularly in an excessively overcapitalized industry

U.S. P&C Industry is Overcapitalized by Approximately 20-34%Economic Capital vs. Available Capital

$315 BN$353 BN

$422 BN

$0

$100

$200

$300

$400

$500BN

Economic Capital at "A” S&P

Solvency Standard

Economical Capitalat "AA” S&P

Solvency Standard

Available Capital

© 2000 Oliver, Wyman & Company, eRisks, and Risk Management Solutions, Inc.Note: Moody’s estimates, however, that the industry’s shortfall in reserves total $261 million, or 4.2%.

Stephen P. LoweTillinghast - Towers Perrin

November 15, 2000

Stephen P. LoweTillinghast - Towers Perrin

November 15, 2000

Worshipping at the Altar of Shareholder ValueWorshipping at the Altar of Shareholder Value

I will be covering three topics...I will be covering three topics...

Viewpoint on shareholder value

Why focus on shareholder value?

Trends in the use of shareholder value measurement

Viewpoint on shareholder value

Why focus on shareholder value?

Trends in the use of shareholder value measurement

1

2

3

Actual shareholder value

Proxy shareholder value

Shareholder value is a measure of the total value of an enterprise to its owners

Shareholder value is a measure of the total value of an enterprise to its owners

1

= Current equity

+ Present value of future free cash flows --distributable profits

= Current equity

+ Present value of future free cash flows --distributable profits

Future Future cashflows cashflows projected projected

using using “best “best

estimate” estimate” assumptioassumptio

nsns

Future Future cashflows cashflows projected projected

using using “best “best

estimate” estimate” assumptioassumptio

nsns

FUTURE EXPERIENCE

Projections Projections allow for allow for

regulatory regulatory & working & working

capital capital requiremerequireme

ntsnts

Projections Projections allow for allow for

regulatory regulatory & working & working

capital capital requiremerequireme

ntsnts

CAPITAL

1 Key characteristics of a PV-FCF proxy measure of shareholder value

Key characteristics of a PV-FCF proxy measure of shareholder value

Present Present values values

determinedetermined using a d using a market-market-

based risk based risk discount discount

raterate

Present Present values values

determinedetermined using a d using a market-market-

based risk based risk discount discount

raterate

DISCOUNT RATE

PV-FCF VALUE MEASURE

Actual shareholder value and proxy PC-FCF value can be relatedActual shareholder value and proxy PC-FCF value can be related

External Market

Market Value

• Observable in capital market

• Riskestimable

• Reflects external perceptions– About company– About sector– About market

External Market

Market Value

• Observable in capital market

• Riskestimable

• Reflects external perceptions– About company– About sector– About market

Internal EconomicEmbedded Value

• Existing customers

• Measured using validated assumptions

Franchise Value

• Future customers

• Inferred

Internal EconomicEmbedded Value

• Existing customers

• Measured using validated assumptions

Franchise Value

• Future customers

• Inferred

1

No conventional financial performance indicator explains shareholder value very well

No conventional financial performance indicator explains shareholder value very well

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Percentage of Enterprise Value Explained

%

EPSgrowth

Salesgrowth

Cash flowgrowth

EVA ROE

2

Source: Seabury analysis 10/98Sample data include all insurance (Life and General) companies analysed by Valueline

Value-based performance is critical when the business involves an up-front investment

Value-based performance is critical when the business involves an up-front investment• In property/casualty

– New business expense is higher than renewal

– Loss ratios improve as business “seasons”– Retention rates are key to value creation

• In property/casualty– New business expense is higher than

renewal– Loss ratios improve as business “seasons”– Retention rates are key to value creation

New Business is Initially Unprofitable

2

Alignment of the interests of management with the interests of shareholders

Alignment of the interests of management with the interests of shareholdersBehavioral Implications of Measures

2

• Improve ROE

• Focus only on highest ROE product line

• Forego growth that lowers average ROE

• Grow without regard to capital required

• No credit for balance sheet management

ROEEARNINGS

EVATOTAL SHAREHOLDER RETURN• Grow

earnings and minimize capital-- forego growth-- milk assets

• Ignore dividends

• Understand risk, return and growth

• Responsible for managing all factors

• Most useful for target setting and benchmarks

Current state of playCurrent state of play

Funds Life P/CManagement Insurance Insurance

M&A activities

Publication in accounts/analyst compendiums

Internal management

3

“The Times They Are A - Changin’ ”

- Bob Dylan

“The Times They Are A - Changin’ ”

- Bob Dylan