Mark W. Callahan, FCAS

SVP, Underwriter

XL Financial Solutions

Capital Adequac

yCAS Annual Meeting

– November 2002

The material presented in no way represents the views or outlook of XL Capital or the panel.

Please disregard any uninformed or irrational opinions of the presenter.

Issues Affecting Capital Adequacy

• Liabilities• Investments• Bad Management

Where is the Industry from an Investment Perspective?

Notable Credit Events

• Bond Defaults in 1st Half of 2002– 21 defaults > $1B– 89 defaults = $76.7B– 4 defaults = $4B within 12 months of IG

• Disclosure

Source: Moody’s

Clash•Financial Guaranty•Surety•E&O

Source: Moody’s

Higher Losses

Source: Moody’s

Default Rates

Historical Recovery Rates

Source: Moody’s

Source: contraryinvestor.com

Corporate Debt Load

Industry Confidence in Reserves

Liabilities - Who Cheats?

Source: Educational Testing Service

Percentage of College Students Who Report Having Cheated

75% - 98%

Who’s Guilty

• 3,259 A.M. Best Rated U.S. P/C Companies

• 334 Rated B++ and B+• 518 Rated A-• 107 Publicly Traded Companies• Long Tail Lines or Latent Liabilities

Source: A.M. Best, CNN Money

Coming to a Theater Near You...

Asbestos• 6000 Named Defendants• Increased Claims Activity• Reform• $45-70B Unreserved

(Not Anytime (Not Anytime Soon)Soon)

Source: Asbestos: A Moving Target (Bhagavatula, Moody, Russ); AM Bests

U.S. City Average Medical Care Consumer Price Index

0

50

100

150

200

250

300

Inflation on Long Tail Lines

Source: U.S. Department of Labor Bureau of Labor Statistics

• Medical• Litigation

• US Workers Compensation– $35B Gross Reserve (00 & 01)– $62B Gross Reserve (99 & Prior)

• $372B Total Industry Reserves

2001 Composite WC Averages

-

20

40

60

80

100

120

140

160

Prior 1992 1993 1994 1995 1996

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Gross Reserve Net Reserve 2001 Paid

Actuarial Bias?

Public Perception

Surplus

Source: Best’s Aggregates and Averages

Historical NWP/Surplus - Property/Casaulty Industry

0.0

0.5

1.0

1.5

2.0

2.5

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Am

ount

s in

$ M

illio

ns

Rating Migration in 2002

2 33

26

7

99

8

2

3

2

59

26

3

16

5

1

1

0

20

40

60

80

100

120

140

AAA AA A BBB BB B NR R

Num

ber of

Com

pani

es

AAA

AA

A

BBB

BB

Source: Standard & Poor’s

Top 15 Reinsurance GroupsBased on Net Reinsurance Premiums Written - 2002

Source: Standard & Poor’s

Reinsurance Group

Standard & Poor's Moody's

January 2002

October 2002

January 2002

October 2002

Munich Re Group AAA AAA Aaa Aa1

Swiss Re Group AAA AA+ Aaa Aaa

Berkshire Hathaway Re Group AAA AAA Aaa Aaa

Employers Re Group AAA AA+ Aaa Aaa

Hannover Re Group AA AA A2 A2

Lloyd's A A    

Gerling Global Re Group AA- BBB Aa3 Aa3

SCOR Re Group AA- A+ A1 A1

Allianz Re Group AA+ AA Aa3 Aa3

AXA Re Group AA AA Aa3 Aa3

Converium Re Group A+ A+ A1 A1

Transatlantic Re Group AA AA Aa1 Aa1

PartnerRe Group AA AA Aa3 Aa3

XL Re Group AA AA Aa2 Aa2

St. Paul Re Group AA- A+ Aa3 Aa3