CAS

Risk and Capital Management Seminar

Role of the asset manager and the Actuary

Stephen Philbrick

July 28, 2003

CON N I N G

2CON N I N G

Session Goal

Asset Management and the Actuary

Overview of Asset Management Process

Role of the actuary in this process

Overview

Investment Strategy

Investment Tactics

3CON N I N G

Investment Management

Strategy Tactics Overview

Investment Strategy

Investment Tactics

Horizon 3-5 years

Revisions annual,semi-annual

Horizon 0-12 months

Revisions monthly, daily

4CON N I N G

Discussion of ABC Company’s Investment Needs and Objectives

Overall Investment Strategy and Objectives

Relative importance of consistent income versus total return

Relative importance of ratings downgrade

Need for liquidity

Establish the appropriate risk/reward balance

Portfolio Structure

Allocate assets according to strategy

Refine investment policy and guidelines

Monitor and manage risk

Overview

Investment Strategy

Investment Tactics

5CON N I N G

Investment Strategy

Philosophy An effective investment strategy is based on the needs and risks of the client’s insurance business

Process Utilize a full range of quantitative tools, including a DFA model, to analyze the client’s operations, understand the key strategic and tactical business issues, and identify the implications for the portfolio

Goal A customized investment strategy that seeks to maximize enterprise value while maintaining a reasonable risk profile

Overview

Investment Strategy

Investment Tactics

6CON N I N G

Strategic Issues

Tax-exempt Capacity

Equity Allocation

Fixed Income Duration

Liquidity

Key elements of the investment strategy

Overview

Investment Strategy

Investment Tactics

7CON N I N G

Strategic Issues

Overview

Investment Strategy

Investment Tactics

Determined by:

Capital market considerations

External World

Risk tolerance

Individual company owners

Underlying business

Insurance Industry

8CON N I N G

Introduction to Dynamic Financial Analysis

Evaluation of Economy &

Capital Markets

Financial Statement

Projections

Underwriting Analysis

Asset Analysis

Financial Analysis &

Reports

Total company analysis

One set of inputs

Comparable outputs

Multi-year horizon

Economic assumptions

Business plan

Stochastic financial statements

Trends

Volatility

Considerations

Long-run economic value

Statutory results

GAAP results

Overview

Investment Strategy

Investment Tactics

9CON N I N G

Efficient Frontier Overview

Analyze current investment portfolio and underwriting operations

Identify alternative investment strategies

Evaluate risk and reward

Select strategies for further consideration

Begin Optimization

Ret

urn

Risk

x

y z

Ret

urn

Risk

Ret

urn

Risk

Efficient Frontier

Ret

urn

Risk

Alternative StrategiesCurrent Strategy

Overview

Investment Strategy

Investment Tactics

10CON N I N G

Probability Distribution Overview

Efficient Frontier

Ret

urn

Risk

Probability Distribution

+

Ret

urn

+ mean

90 - 95%75 - 90%50 - 75%25 - 50%10 - 25%5 - 10%

Efficient frontier shows expected risk and return for alternative strategies

Each strategy produces a range of outcomes

Overview

Investment Strategy

Investment Tactics

11CON N I N G

Distribution of 12/31/2002 Loss & LAE Reserves

Workers' Compensation

CMP

Personal Auto Liability

HomeownersAll Other Property

Comm Auto Liab

Other Liability Occ

Distribution of Projected 2003 Net Written Premium

Workers' Compensation

CMP

Personal Auto Liability

Homeowners All Other Property

Comm Auto Liab

Line of Business Assumptions

Assumptions based on Conning's analysis of ABC company's historical results

ProjLoss & LAE Standard

Line of Business Reserves Distribution DeviationComm Auto Liab 4,961 1.5% 1,269Workers' Compensation 118,457 35.8% 9,517CMP 111,966 33.9% 12,508Other Liability Occ 61,667 18.7% 6,000Personal Auto Liability 12,321 3.7% 1,682Homeowners 1,708 0.5% 406All Other Property 19,401 5.9% 3,883Total 330,481 100.0%

Proj 2003 Proj 2003 ProjNet Written Mean Loss Standard

Line of Business Premium Distribution &LAE Ratio DeviationComm Auto Liab 2,032 1.5% 87.9% 9.1%Workers' Compensation 52,664 39.2% 77.6% 7.0%CMP 65,084 48.5% 81.2% 12.7%Other Liability Occ - - - -Personal Auto Liability 5,351 4.0% 100.0% 15.0%Homeowners 1,452 1.1% 73.0% 19.9%All Other Property 7,742 5.8% 57.2% 16.0%Total 134,325 100.0%

Overview

Investment Strategy

Investment Tactics

12CON N I N G

ABC Efficient Frontier

Portfolio is close to efficient frontier

Portfolio is lower risk

No capacity for municipals (for period as a whole)

Add risk with longer duration bonds

Overview

Investment Strategy

Investment Tactics

13CON N I N G

Duration and Cash Flow Analysis

Positive net operating cash flow in most scenarios

Opportunity to reduce cash holdings

Percentiles

95th 2003 2004 2005

90th

75th

50th

25th

10th

5th

Distribution of Net Operating Cash FlowCurrent Asset Portfolio

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Overview

Investment Strategy

Investment Tactics

14CON N I N G

Loss Reserves and Cash Flows

Portfolio is slightly longer than underlying reserves

Run-off cash flows are concentrated in the next 10 years

Ultimate DiscountedMagna Carta's Reserves Paid Value Duration

Loss and LAE reserves $330,479 $279,723 3.67

Unearned premium reserve $46,507 $41,281 2.78

Total reserves $376,986 $321,004 3.56

(10)

0

10

20

30

40

50

60

$s in

Milli

ons

2003 2007 2011 2015 2019 2023 2027 2031 2035 2039 2043

Net Run-Off Cash Flows As of December 31, 2002

Overview

Investment Strategy

Investment Tactics

15CON N I N G

Leverage

High investment-to-premium ratio

RBCPremium Reserves Total Ratio Surplus Premium

ABC Insurance Co 0.7 2.0 2.8 525% 2.8 3.7

Peer BenchmarkAmerisure Companies 1.6 2.5 4.1 381% 3.9 2.4Argonaut Great Central Insurance Co 1.7 1.3 3.0 402% 2.9 1.7Atlantic Mutual Insurance Co 1.1 1.4 2.4 448% 1.8 1.6Centennial Insurance Company 0.9 1.1 2.0 792% 2.2 2.5Church Mutual Insurance Co 1.6 1.4 3.0 678% 2.9 1.8Florists Mutual Insurance Co 2.0 1.9 3.9 448% 2.9 1.4Frankenmuth Mutual Insurance Co 1.4 1.3 2.7 867% 2.4 1.7Greater New York Mutual Insurance Co 0.7 0.9 1.5 652% 1.8 2.7Harford Mutual Insurance Co 0.9 0.8 1.7 681% 1.8 1.9Pharmacists Mutual Insurance Co 1.4 0.6 2.0 1013% 1.8 1.3Society Insurance 1.7 1.0 2.7 907% 2.2 1.3Star Insurance Group 1.5 2.0 3.4 378% 2.8 1.9Utica Mutual Insurance Co 1.5 2.7 4.1 394% 3.8 2.6

Maximum 2.0 2.7 4.1 1013% 3.9 2.7 Weighted average 1.3 1.7 2.9 503% 2.7 2.1 Minimum 0.7 0.6 1.5 378% 1.8 1.3

A.M. Best's composites (2001)Property-Casualty Industry 1.1 1.3 2.4 NA 2.5 2.3Commercial Casualty Lines 1.2 2.0 3.2 NA 3.1 2.6

Insurance Leverage Invest. Leverage Overview

Investment Strategy

Investment Tactics

16CON N I N G

Profitability

Depend on investment income to offset underwriting loss

Loss LAE Expense Combined PH Div. Combined Inv. Inc. OperatingRatio Ratio Ratio Ratio Ratio w/ Dvd Ratio Ratio ROS

ABC Insurance Co 60% 26% 37% 122% 1% 124% 25% 99% 4%

Peer BenchmarkAmerisure Companies 65% 14% 25% 103% 3% 106% 8% 98% -2%Argonaut Great Central Insurance Co 54% 14% 35% 103% 0% 103% 6% 97% -7%Atlantic Mutual Insurance Co 58% 17% 35% 111% 1% 112% 11% 102% 0%Centennial Insurance Company 58% 17% 35% 111% 1% 113% 19% 94% 9%Church Mutual Insurance Co 63% 14% 24% 100% 1% 101% 9% 93% 6%Florists Mutual Insurance Co 65% 11% 27% 103% 0% 103% 6% 97% 2%Frankenmuth Mutual Insurance Co 63% 8% 28% 98% 1% 99% 8% 91% 9%Greater New York Mutual Insurance Co 56% 16% 30% 101% 2% 103% 14% 89% 2%Harford Mutual Insurance Co 61% 16% 31% 108% 1% 108% 7% 101% -3%Pharmacists Mutual Insurance Co 45% 16% 26% 88% 10% 97% 5% 93% 3%Society Insurance 47% 16% 26% 89% 7% 96% 7% 90% -12%Star Insurance Group 54% 20% 36% 110% 0% 110% 8% 101% 2%Utica Mutual Insurance Co 63% 17% 32% 112% 2% 113% 15% 98% 3%

Maximum 65% 20% 36% 112% 10% 113% 19% 102% 9% Simple average 58% 15% 30% 103% 2% 105% 10% 96% 1% Weighted average 60% 15% 30% 106% 2% 107% 11% 97% 2% Minimum 45% 8% 24% 88% 0% 96% 5% 89% -12%

A.M. Best's composites (2001)Property-Casualty Industry 75% 13% 27% 115% 1% 116% 12% 104% -2%Commercial Casualty Lines 77% 14% 28% 120% 1% 121% 16% 105% -3%

Overview

Investment Strategy

Investment Tactics

17CON N I N G

Percentiles

95th 12/31/2002 12/31/2003 12/31/2004

90th

75th

50th

25th

10th

5th

Distribution of Net Operating LossCurrent Asset Portfolio

0

10,000

20,000

30,000

40,000

50,000

Stochastic Tax Analysis

Likelihood of positive taxable income

Use of AMT and NOL carry forwards

Determine capacity for tax advantaged income

Percentiles

95th 12/31/2002 12/31/2003 12/31/2004

90th

75th

50th

25th

10th

5th

Distribution of AMT CarryforwardCurrent Asset Portfolio

0

1,000

2,000

3,000

4,000

5,000

6,000

Overview

Investment Strategy

Investment Tactics

18CON N I N G

Equities

Expected ending surplus increases over 3 year horizon

Volatility of ending surplus increases with larger equity allocations

Increased equities would reduce investment income

Percentiles

95th 10% Equity 20% Equity 30% Equity 40% Equity

90th

75th

50th

25th

10th

5th

Distribution of 2005 Statutory SurplusAlternative Equity Allocations

0

50,000

100,000

150,000

200,000

250,000

300,000

Overview

Investment Strategy

Investment Tactics

19CON N I N G

Asset Allocation

A conservative, income-oriented portfolio

A-AAA BBB High RealCash Bonds Bonds Yield Preferred Common Estate Other

ABC Insurance Co 1% 97% 1% 0% 0% 0% 0% 0%

Peer BenchmarkAmerisure Companies 5% 61% 13% 3% 10% 7% 1% 0%Argonaut Great Central Insurance Co 6% 75% 0% 0% 3% 13% 0% 2%Atlantic Mutual Insurance Co 0% 65% 8% 0% 0% 26% 0% 0%Centennial Insurance Company 1% 88% 9% 0% 0% 1% 0% 0%Church Mutual Insurance Co 0% 87% 2% 0% 0% 7% 1% 2%Florists Mutual Insurance Co 9% 60% 10% 2% 0% 2% 11% 5%Frankenmuth Mutual Insurance Co 0% 79% 7% 0% 0% 8% 5% 0%Greater New York Mutual Insurance Co 0% 100% 0% 0% 0% 0% 0% 0%Harford Mutual Insurance Co 4% 65% 0% 0% 0% 28% 3% 0%Pharmacists Mutual Insurance Co 15% 63% 4% 1% 0% 12% 4% 2%

Society Insurance 3% 76% 4% 0% 0% 14% 3% 0%Star Insurance Group 4% 86% 7% 0% 1% 0% 2% 0%Utica Mutual Insurance Co 1% 87% 5% 1% 0% 4% 1% 0%

Maximum 15% 100% 13% 3% 10% 28% 11% 5% Weighted average 2% 78% 7% 1% 2% 8% 1% 0% Minimum 0% 60% 0% 0% 0% 0% 0% 0%

Industry data from A.M. Best's:Property-Casualty Industry 1% 65% 8% 2% 1% 17% 1% 5%Commercial Casualty Lines -1% 85% NA NA 2% 8% 1% 5%

Overview

Investment Strategy

Investment Tactics

20CON N I N G

Bond Portfolio Quality Distribution

High quality bond portfolio

% of Bond PortfolioNAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Avg.

ABC Insurance Co 99% 1% 0% 0% 0% 0% 1.0

Peer BenchmarkAmerisure Companies 80% 17% 2% 1% 0% 0% 1.3Argonaut Great Central Insurance Co 100% 0% 0% 0% 0% 0% 1.0Atlantic Mutual Insurance Co 89% 11% 0% 0% 0% 0% 1.1Centennial Insurance Company 91% 9% 0% 0% 0% 0% 1.1Church Mutual Insurance Co 97% 3% 0% 0% 0% 0% 1.0Florists Mutual Insurance Co 84% 14% 2% 0% 0% 0% 1.2Frankenmuth Mutual Insurance Co 92% 8% 1% 0% 0% 0% 1.1Greater New York Mutual Insurance Co 100% 0% 0% 0% 0% 0% 1.0Harford Mutual Insurance Co 100% 0% 0% 0% 0% 0% 1.0Pharmacists Mutual Insurance Co 93% 6% 1% 0% 0% 0% 1.1Society Insurance 95% 5% 0% 0% 0% 0% 1.1Star Insurance Group 92% 8% 0% 0% 0% 0% 1.1Utica Mutual Insurance Co 93% 6% 1% 0% 0% 0% 1.1

Maximum 100% 17% 2% 1% 0% 0% 1.3 Weighted average 91% 8% 1% 0% 0% 0% 1.1 Minimum 80% 0% 0% 0% 0% 0% 1.0

Industry data from A.M. Best's:Property-Casualty Industry 87% 10% 2% 1% 0% 0% 1.2

Overview

Investment Strategy

Investment Tactics

21CON N I N G

Preliminary Observations and Recommendations

Preliminary Observations

Current portfolio is relatively low risk

High historical combined ratio offset by large investment income to premium ratio

High quality bond portfolio

Portfolio duration is slightly longer than reserves

Preliminary Recommendations

Investment income remains primary objective until underwriting results improve

Positive net operating cash flows mean less need for portfolio liquidity; extend excess cash and short term

Optimal portfolios on efficient frontier prefer interest rate risk to equity market risk, based on historical underwriting trends

Extending duration target to 5 offers best long-term risk/reward trade-off

Opportunities to enhance income with BBB-rated securities

High probability NOLs and AMT credits will be used in 2004; opportunity to add municipal bonds to enhance after-tax income

Overview

Investment Strategy

Investment Tactics

22CON N I N G

Investment Tactics

Individual Securities

Position in duration, liquidity and credit ranges

Achieve Duration targets through:

Bullet

Ladder

Barbell

Opportunistic purchases

Overview

Investment Strategy

Investment Tactics

23CON N I N G

Investment Process

• Capital Markets Meeting - review significant shifts in market conditions over previous week

• Credit Committee Meeting

Approve credits

Authorize sell recommendations

Examine portfolio issuers

Review Watch List

Weekly

• Risk management:

Optimal portfolio structures

Appropriate levels of risk

Monitor portfolio and performance analysis

Implement investment strategies

• Compliance

Ongoing

• Assess credit events, market tone and liquidity

• Post portfolio managers on new issues and opportunities

• Summarize portfolio manager tactical activities

Daily

• Review strategy assessments, economic outlook

• Revise strategy recommendations

Monthly

Continuous interaction between the portfolio management, credit research, trading and risk management functions.

Overview

Investment Strategy

Investment Tactics

24CON N I N G

Fundamental credit analysis drives the investment process

Macro top-down analysis in conjunction with a micro bottom-up analysis.

Frequent credit team meetings

– Daily review of the credit market

– Weekly as part of Corporate Global Credit Information Network

– Monthly discussion of fundamental sector outlooks

– Credit A.I.

– Event risk

– Management– Capital market conditions

– Peer comparison– Industry outlook

– Financial analysis– Economic review

Bottom-upTop-down

Credit Process

Overview

Investment Strategy

Investment Tactics

25CON N I N G

Sector Observations

Average portfolio quality of AAA is very high. ABC may want to consider taking on some additional credit risk.

Corporate exposure of 15% is low relative to peers but is offset by high taxable municipal bond weighting of 22%.

Book yield of 5.79% is significantly above current market level, contributing to unrealized gains of $44.7 million.

Taxable investments comprise 99% of portfolio holdings with income shielded by NOLs which are projected to last into 2004.

Portfolio holdings as of March 30, 2003, repriced using May 30, 2003 Bondedge prices

Sector Coupon Par Value Book Value Gain/Loss Effective Duration Book Yield Moodys Conv Market Value

Percent Portfolio

Cash 1.441 8,157 8,157 - 0.08 1.44 AAA 0.00 8,157 2%

US Agencies 5.993 83,903 84,226 13,148 5.91 5.94 AGY 0.22 98,589 19%

US Treasuries 6.262 2,125 2,275 331 7.56 5.28 TSY 0.48 2,641 1%

ABS 6.359 43,558 44,095 3,280 4.77 5.32 AAA 0.18 47,738 9%

MBS Pass-Thrus 6.369 33,563 33,665 3,392 0.39 5.70 AGY 0.04 37,229 7%

CMBS 6.528 46,763 47,834 3,354 4.01 4.87 AAA 0.13 51,401 10%

CMO 5.877 78,972 79,105 2,659 2.31 5.64 AGY -0.68 82,149 16%

Corporate 7.430 58,688 59,261 5,616 5.65 6.69 AA1 1.02 65,696 13%

International 6.332 7,575 7,676 584 6.13 6.33 AA3 1.11 8,363 2%

Munis 6.120 104,565 106,040 12,325 3.82 6.21 AAA 0.11 120,240 23%TOTAL 6.255 467,869 472,334 44,689 4.07 5.79 AAA 0.14 522,203 100%

Overview

Investment Strategy

Investment Tactics

26CON N I N G

Sector Observations: Treasurys and Agencies

US Agencies19%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

Cash1%

US Treasury1%

0

5

10

15

20

25

30

35

40

0 to1year

1 to 2years

2 to 3years

3 to 4years

4 to 5years

5 to 6years

6 to7years

7 o 8years

8 to 9years

9+years

Par Value

Treasury/Agency Maturity Scheduleas of 3/31/03

Treasury and Agency exposure are 0.5% and 19% of the portfolio, respectively.

The maturity structure of Treasury and Agency holdings are long relative to the total portfolio with 75% of maturities in the 7 to 9 year range.

Agencies can provide immediate liquidity to the portfolio. Due to the longer duration of portfolio holdings, liquidation could result in significant tax or surplus implications.

The portfolio allocation to Agencies can be reduced over time and reinvested into corporate bonds or municipals to add yield and total return.

mill

ions

Overview

Investment Strategy

Investment Tactics

27CON N I N G

Sector Observations: CMOs and MBS

Total MBS exposure of 23% is split between CMOs (16%) and pass-throughs (7%).

The portfolio has and will continue to experience high levels of principal returns due to mortgage prepayments resulting in a gradual reduction in mortgage exposure. High book yields will not be sustained.

CMOs can provide better cash flow stability than pass-throughs. However, high prepayment rates have eliminated much of the structural protection originally engineered into CMO holdings.

We recommend selective sales of short CMO positions, which are expected to begin rapid amortization.

US Agencies19%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

CASH1%

US Treasury1%

0%

10%

20%

30%

40%

50%

60%

70%

5% to 5.99% 6% to 6.99% 7% to 7.99% 8% to 8.99% 9% to 9.99%

MBS CouponDistribution

Overview

Investment Strategy

Investment Tactics

28CON N I N G

Sector Observations: CMBS

Most are diversified conduit structures with a variety of collateral types and good prepayment protection.

Deteriorating collateral performance in several AAA-rated issues should be monitored, but it is not expected to impact ratings at this time.

Two private issues (Criimi Mae and World Financial) totaling 0.6% of the total portfolio are lower rated and warrant further analysis.

We recommend maintaining an overweight position in AAA-rated CMBS, Small pick-ups in yield do not justify holding or moving down in quality or into issues with weak collateral.

US Agencies18%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

CASH1%

US Treasury1%

AAA94%

AA 1%

A 5%

Overview

Investment Strategy

Investment Tactics

29CON N I N G

Sector Observations: ABS

Total portfolio exposure of 9% with over 87% of ABS holdings in publicly-traded, AAA-rated issues.

The issues are backed by a variety of collateral types. Collateral performance in the home-equity, franchise, and equipment finance issues has been weak. Most are expected to retain their high ratings due to structural support or financial guarantees.

Most issues have fairly attractive book yields; the sector average is 5.32% As these run-off, higher yield and return opportunities may be available in other sectors, such as corporates.

Close monitoring of collateral performance is recommended. Future sales recommendations will be dependent on collateral performance and market valuations.

Relatively illiquid private issues, representing 12% of the ABS portfolio (1.2% of the total portfolio), warrant further analysis, as limited public information indicates poor collateral performance.

We currently recommend new investments be in the highest quality issuers as limited spread differences do not justify most “down in quality” trades.

US Agencies19%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

CASH1%

US Treasury1%

Cards 31%

Equipment 10%

Franchise Loans

4%

Rate Reduction 35%

AUTO4%

Home Equity

7%

CLO9%

ABS Holdings by Collateral Type

Overview

Investment Strategy

Investment Tactics

30CON N I N G

Sector Observations: Corporates

Corporate/International bond exposure is low at 14% of the total portfolio.

Combined corporate / International portfolio book yield is 6.65% with a duration of 5.70.

Overall quality is high at AA1 with no BBB exposure and 4% of corporate holdings (0.6% of total portfolio) rated below investment grade. MCC may want to consider additional credit risk.

Near-term credit stabilization and improved credit market condition may allow opportunistic sales of below investment grade holdings in American Greetings or Lucent. The private placement issue of Lucent may be very illiquid.

US Agencies19%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

CASH1%

US Treasury1%

0

10

20

30

40

50

60

70

AAA AA A BA CAA

3/31/03 Portfolio

3/31/03 Lehman

3/31/03 Corporate Quality

Overview

Investment Strategy

Investment Tactics

31CON N I N G

Sector Observations: Corporates

0

2%

4%

6%

8%

10%

12%

14%

16%

18%

Bank Broker Finance Telecom Food Consumer Int’l Electric Gas Technology

3/31/03 Portfolio

3/31/03 Lehman

3/31/03 Corporate Allocation

Industry and issuer diversification is limited with significant concentration in Financial Services.

Corporate exposure can be increased and diversification improved through selective swaps of existing issues and new purchases of investment grade issues.

Put bonds are nearly half of total holdings and most trade as long bonds. Subject to income and surplus implications, we recommend sales/swaps of selected issues to improve diversification and return potential.

Overview

Investment Strategy

Investment Tactics

32CON N I N G

Sector Observation: Municipals

US Agencies18%

Munis22%

Corporate13%

CMO16%

CMBS10%

International2% ABS

9%

MBS Pass-Thrus7%

CASH2%

US Treasury1%

High average portfolio quality with 85% of holdings insured and rated AAA with remainder rated AA- or better.

Financial guarantees are reasonably well diversified across the major providers.

Book yield is of 6.21% is significantly above current market levels.

95% of municipal holdings (22% of portfolio) are taxable.

Net operating loss carry forwards are forecast to shield income into 2004. A shift to tax-exempt income would be expected at that time.

Portfolio duration is 3.8 with approximately $28.5 million or 27% of the muni portfolio maturing in 2004 and 2005, allowing for reinvestment into tax-exempt securities

We do not recommend significant changes to the municipal portfolio at this time but expect to migrate to tax-exempt issues or corporates over time depending on tax position 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

MBIA AMBAC FSA FGIC NoGuarantor

Financial Guarantors

% o

f to

tal p

ortf

olio

Overview

Investment Strategy

Investment Tactics

33CON N I N G

Preliminary Observations & Recommendations

Portfolio quality is very high relative to broad based market index such as the Lehman Aggregate with no BBB exposure.

Over 20% of the AAA-rated issues are supported by financial guarantors. Monitoring of the guarantors is recommended, but Conning research staff does not see significant ratings risk at the present time.

The portfolio is overweight in the 5 to 10 year portion of the curve relative to a broad market index such as the Lehman Aggregate as well as the net reserve payout structure. We recommend improving the laddering of the portfolio, reducing this concentration. We will work with you to determine appropriate duration target.

0

5

10

15

20

25

30

35

40

45

50

TSY AGY AAA AA A BAA BA NR

PORT (%)

LBAG (%)

0

5

10

15

20

25

30

35

40

45

50

0.0 - 1.0 1.0 - 3.0 3.0 - 5.0 5.0 - 10.010.0 - 20.0 20.0 +

PORT (%)

LBAG (%)

Net Payout (%)

Quality Distribution

Effective Maturity

Overview

Investment Strategy

Investment Tactics

34CON N I N G

Preliminary Observations & Recommendations

High quality portfolio with no equity exposure reflective of conservative investment philosophy, however, about 5% of the portfolio could be considered as sale candidates.

Strategic asset allocation will help determine appropriate asset allocation and duration targets.

High book yields, operating results, NOLs, and expected change in tax position in 2004 suggest a gradual migration of sector weights over time rather than radical shifts.

Maintain overweight in the spread sectors; increase exposure to corporates while reducing exposure to the mortgage-backed and agency sectors.

Improve diversification of corporate sector; add BBB industries/issuers on a selective basis. Put bond swaps can be used to improve diversification and ten to thirty year portfolio structure.

Monitor collateral performance of ABS/CMBS holdings for further deterioration.

Current market conditions favor sales of marginal credit and ABS/CMBS holdings subject to economic, yield and surplus impact.

Overview

Investment Strategy

Investment Tactics

Portfolio Guidance Model: Credit A.I. Ratings

CON N I N G

The Credit A.I. Model allows our credit team to view a list of securities that exhibit signs of credit weakness (or strength) versus the rating agency ratings. This is an excellent screening tool for credit deterioration or improvement.

CAS

Risk and Capital Management Seminar

Role of the asset manager and the Actuary

Stephen Philbrick

July 28, 2003

CON N I N G