Quarterly Insurance Round Up 2q08

Jones Strategy Consulting, Inc.
402 Main Street, Suite 100-329
Metuchen, New Jersey 08840
Tel (732) 476-6387 • Fax (732) 692-8505

Quarterly Insurance Round-up: Second Quarter 2008
Author and company contact:
Jason A. Jones, (732) 476-6387; jjones@JonesStrategyConsulting.com

Publication date: August 8, 2008

Quarterly highlights and key issues

Earnings for most of the top U.S. P/C insurers weakened in the second quarter, but core underwriting
results remained strong. Investment losses and surprisingly high catastrophe losses hit the industry,
though on-going rate decreases in commercial insurance put further downward pressure on earnings.
AIG stood out in terms of the magnitude of its investment losses, which resulted in a $5.4 billion net loss
on the quarter, as it continues to deal with weakness in the U.S. housing and credit markets and related
investment losses.

Despite core underwriting results that were generally strong, earnings are down significantly from 2007
levels. Most companies should face continued pressure on earnings for the rest of 2008 and through
2009, as declining commercial rate adequacy and fewer reserve releases result in lower underwriting
income. Volatility could also be higher in the near term due to uncertain investment performance and
potential catastrophe losses during peak hurricane season in the next 2 months. Despite pressure on
profits, strong capital positions are allowing many companies to return capital to shareholders or make
acquisitions (AIG is a notable exception – it fortified its capital position with $20 billion of equity and
hybrid capital raised in the second quarter and intends to make no major acquisition in the near term).

Rates and terms/conditions (commercial lines weakened; personal lines doing fine). There were
continued rate declines and competitive pressures in commercial lines; though this was offset to some
extent by strong non-catastrophe results in personal lines. In personal lines, favorable trends in loss
frequency helped to offset higher loss severity, thus sustaining strong results. Among those companies
describing commercial rate trends, declines in the low to mid single digits were the norm, though there
is also pressure on insurers to broaden terms and conditions, and this adds uncertainty to the amount of
rate deterioration. Given weakening terms and conditions and indications from agents and brokers that
rate declines are greater than those indicated by carriers, rate trends could emerge worse than
expected, and this is the biggest current risk for most companies in my view.

Investments (significant investment losses, but not all flow through net income). AIG was most
affected by investment losses, though most companies were affected to some extent due to weakness
in housing and the economy more broadly. At many companies, the majority of investment declines
occurred as unrealized losses that flowed through other comprehensive income rather than net income,

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and a look at the change in shareholders’ equity and AOCI can help one appreciate the full impact of
investment performance. It’s quite possible that today’s unrealized losses will materially lower earnings
in future quarters, as other-than-temporary impairments or realized losses are made.

Global consolidation (major acquisitions announced): Two major acquisitions of U.S. insurers were
recently announced. Liberty Mutual announced its plan to acquire Safeco for $6.2 billion, and this
transaction is expected to close in third quarter. On July 23, Japanese insurer Tokio Marine Holdings
(formerly called Millea Holdings) announced its plan to acquire Philadelphia Consolidated for $4.7
billion. Both deals were made at significant premiums to the share prices that existed before they were
announced. In addition, there have been a number of small and mid-sized M&A deals, often involving
Bermuda or U.K. insurers. For example, Max Capital is acquiring the Lloyd’s operations from Imagine
Group, Tokio Marine Holdings is acquiring Kiln Ltd. and Tower Group is acquiring CastlePoint.

I believe that acquisitions are likely to be more common than average over the next year or so, because
insurers with excess capital will seek ways to deploy it. They will also find acquisitions a more viable path
to profitable growth than organic growth as the market continues to soften. The rise of sovereign wealth
funds, weakness in the dollar and foreign investor interest suggest there could be more acquisitions of
U.S. companies by foreign companies. The key challenges for acquirers will be to avoid over-paying and
managing integration risk.

Share repurchases (companies continue to return excess capital to shareholders): Many companies
continue to repurchase shares of common stock as a way of returning excess capital to shareholders.
Given the very strong capital positions that were built up at many companies in the recent hard market,
and fewer opportunities to deploy capital profitably in the softening market, share repurchases make a
lot of sense and are likely to continue in the near future. In my view, share repurchasing is often a more
attractive use of capital than making acquisitions. Since rating agency capital requirements are the
biggest constraint for most companies, those companies with the most capital in excess of rating agency
requirements will be in the best position to return shareholder capital.

Catastrophes (Losses from U.S. Midwest storms). It was one of the worst second quarters on record for
U.S. catastrophes due to storm losses. Companies with significant exposure to homeowners and
commercial property lines in the Midwest were hit hardest, as these lines of business often sustained
combined ratio increases of 10 points or more from catastrophes.

Review of top 10: The next several pages summarize second quarter results and key issues for the 10
largest GAAP filing U.S. P/C insurers: AIG, Allstate, Travelers, Berkshire Hathaway, Liberty Mutual,
Progressive, Hartford, Chubb, CNA, and Safeco. These companies account for 37% of the U.S. market
based on net premiums written. A few large companies are not included, since they do not report GAAP
financials or have more limited financial disclosure. For a list of the top 20 in the U.S., including the 10
described herein, see appendix 1.



AIG
($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06
P/C NPW 12,220 12,080 10,999 11,823 12,139 12,106 10,753 11,224
Chg in NPW 0.7% -0.2% 2.3% 5.3% 4.3% 7.6% 6.2% 8.8%
Combined 97.7% 96.9% 96.6% 90.2% 87.1% 87.5% 91.7% 89.1%
ratio
Net income (5,357) (7,805) (5,292) 3,085 4,277 4,130 3,439 4,224
Shareholders' 78,088 79,703 95,801 104,067 104,330 103,055 101,677 96,154
equity
ROE -27.2% -35.6% -21.2% 11.8% 16.5% 16.1% 13.9% 18.4%
Notes

• $5.4 billion net loss due to housing • Good P/C underwriting results
market and investment problems
• Robert Willumstad took CEO role in June • $20 billion of new capital raised

For the third consecutive quarter, AIG had a net loss ($5.4 billion) tied to difficulties in the housing and
credit markets and related investments. There was a $5.6 billion pre-tax charge from the super senior
credit default swap portfolio in AIG Financial Products Corp. (AIGFP), and $6.1 billion of pre-tax net
realized capital losses, mainly due to other-than-temporary impairments in the investment portfolio that
were due to severe declines in fair value of residential MBS and other structured securities.

In the midst of recent difficulties, Robert Willumstad took over the role of CEO in mid-June, while
retaining his role as chairman of the board that he had since 2006. Recognizing the need for change, Mr.
Willumstad said, “We are conducting a comprehensive review of all AIG’s businesses with the objective
of improving results, reducing AIG’s risk profile and protecting our capital base…We are considering all
options.” He promised that AIG would report on its progress in late September.

General Insurance, AIG’s property/casualty segment, had a $1.4 billion operating income before realized
capital losses, a 54% decline from the same quarter in 2007. The main factors accounting for the decline
were lower investment income, an increase in the operating losses at mortgage insurance subsidiary
United Guaranty Corp. (UGC) and a rise in the combined ratio in Commercial Insurance. Catastrophe
losses were very modest, as it was higher current accident year loss ratio combined with slightly
unfavorable reserve development that drove the weakening underwriting result.

AIG’s General Insurance segment is divided into the following sub-segments, which are reviewed in
greater detail below: Commercial Insurance (49% of General Insurance NPW), Personal Lines Insurance
(10%), Mortgage Guaranty (2%), Transatlantic Holdings (8%), and Foreign General (30%).

Commercial Insurance: The combined ratio rose to 93.7% versus 83% in 2q’07, as competitive pressure
in the commercial market continued. Prior accident year reserves developed unfavorably by $75 million,
compared with $65 million of favorable development in 2q’07. However, a greater amount of
deterioration was due to a rising loss ratio on current business. While the deterioration has been



notable, the underwriting result in Commercial Insurance was still good and comparable to that of some
other major insurers.

Personal Lines Insurance. The 103% combined ratio and $29 million underwriting loss were weak
compared with a 94.5% combined ratio and $63 million underwriting profit in 2q’07. Given the small size
of this part of General Insurance, the overall impact on results was modest.

Mortgage Guaranty (UGC). This business is taking the brunt of mortgage losses, as it exists to provide
credit enhancement on residential mortgages for Fannie Mae, Freddie Mac and other buyers of
mortgages. With underwriting losses rising to $562 million in 2q’08, it materially dragged down overall
results for General Insurance. Domestic first-lien and second-lien loans both performed poorly.

Transatlantic Holdings. Underwriting profits rose and were good, as the combined ratio declined to
94.4% from 95.0% in 2q’07. Premiums were flat, as international growth offset declining U.S. premiums.

Foreign General. This segment was the star and has been doing consistently very well. The combined
ratio was a solid 88.3% versus 85.4% in 2q’07. Premiums written grew nearly 15% from last year’s
second quarter. Foreign General is the second biggest part of General Insurance by premium, but the
biggest contributor to underwriting profits by a slight margin over Commercial Insurance.

In AIG’s substantial non-P/C businesses – Life Insurance & Retirement Services, Financial Services, and
Asset Management, there were mixed results, with strong profitability in some areas that helped to
offset the large investment losses cited earlier.

In Life Insurance & Retirement Services, 2q’08 operating income before net realized capital gains (losses)
was $2.6 billion, a 10% decline versus 2q’07. The $5.9 billion operating loss (before realized capital
losses) in Financial Services was driven by the previously mentioned $5.6 billion charge due to
unrealized losses in AIG Financial Products, partly offset by very strong results in aircraft leasing. Asset
Management had $150 million of operating income before net realized capital gains (losses) in 2q’08
versus $575 million in 2q’07. Other Operations had a second quarter operating loss of $745 million
compared to a $482 million loss in 2q’07, with the change due to higher interest expense from higher
borrowings and higher unallocated corporate expenses.

In May, AIG raised $20 billion of equity and equity-like hybrid capital to strengthen its financial position
and to offset erosion of capital from net losses and unrealized losses. AIG’s AA- financial strength rating
was left unchanged by Standard & Poor’s following AIG’s earnings release, though the rating remains on
CreditWatch negative. Standard & Poor’s said the second quarter loss was within its range of
expectation and that the rating will likely be lowered by one notch if earnings don’t stabilize in the third
quarter. If recoveries in value begin to emerge in AIG’s CDS and other investments and insurance profits
remain strong, Standard & Poor’s said it could revise the ratings outlook to stable.



Allstate Corp.
P/C NPW 6,803 6,514 6,560 7,075 6,939 6,609 6,604 7,123
Chg in NPW -2.0% -1.4% -0.7% -0.7% -1.9% -1.7% -0.8% -0.5%
Combined 94.4% 94.0% 95.9% 91.0% 87.6% 84.6% 85.7% 84.1%
ratio
Net income 25 348 760 978 1,403 1,495 1,213 1,158
Shareholders' 19,709 20,303 21,851 21,634 21,560 22,491 21,846 22,200
equity
ROE 0.5% 6.6% 14.0% 18.1% 25.5% 27.0% 22.0% 21.6%
Notes

• Net income sharply reduced by • Investment risk reduction programs
catastrophes and realized investment initiated
losses
• Management made favorable revision to • Continuation of share repurchases
its P/C underwriting outlook

Net income declined 98% in 2q’08 versus 2q’07, as investment losses and record second quarter
catastrophe losses offset otherwise strong results. Primarily due to $698 million of catastrophe losses,
the property/liability combined ratio rose to 94.4% versus 87.6% in the same quarter in 2007. Excluding
the impact of catastrophes and a very small amount of adverse prior year reserve development, the
combined ratio in the quarter was a strong 84.1% - unchanged from the same quarter in 2007.
Homeowners business took the brunt of the catastrophe losses, while standard and non-standard auto
did much better.

Realized after-tax capital losses of $788 million were driven by asset write-downs and realized losses on
dispositions of fixed income securities at Allstate Financial. As a result of management’s view that
pressures on the economy and investment markets will be prolonged, Allstate developed additional
investment risk mitigation and return optimization programs in the second quarter. These programs
include macro-hedging to protect the overall investment portfolio and potential future reductions in
certain real-estate and financial-related market sectors.

Allstate favorably adjusted its guidance for the property-liability underlying combined ratio (which
excludes catastrophes and prior year reserve development) to the 86.0 – 88.0 range for full-year 2008,
which would be a strong result and a one point improvement from the guidance provided in January.
This reflects better than previously expected profitability (excluding catastrophes) due to reduced claim
frequency and moderate severity.

With $434 million of share repurchases in the quarter, Allstate was able to continue its share repurchase
program without reducing capital levels materially. The company expects to complete the remaining
$1.4 billion of share repurchases available under its current authorization by the first quarter of 2009.



Travelers Companies, Inc.
P/C NPW 5,629 5,188 5,366 5,394 5,714 5,144 5,437 5,284
Chg in NPW -1.5% 0.9% -1.3% 2.1% 1.0% 7.8% 2.7% 3.7%
Combined 89.3% 87.6% 88.4% 84.4% 87.8% 89.2% 86.7% 87.2%
ratio
Net income 942 967 1,063 1,198 1,254 1,086 1,189 1,043
Shareholders' 25,923 26,388 26,616 26,307 25,322 25,357 25,135 24,747
equity
ROE 14.4% 14.6% 16.1% 18.6% 19.8% 17.2% 19.1% 17.5%
Notes

• Strong results in spite of catastrophes and • Strong performance in personal insurance
market softening
• Strong capital generation allows • Peak catastrophe risk exposure is well
significant share buy-backs contained
• Favorable reserve development

Underwriting results were strong in the second quarter of 2008, albeit slightly weaker than the same
quarter of 2007. Significant favorable development on prior year loss reserves more than offset higher
catastrophe losses from U.S. storms. Travelers’ catastrophe losses added 6.6% points to the combined
ratio – comparable to peers. The company’s catastrophe management and modest peak catastrophe
risk profile should help it contain catastrophe losses prospectively.

Despite softening in the broader commercial market, Travelers is doing relatively well on account of
stable and strong account retention and rates and premiums that are down only slightly overall. The
greatest competitive pressure was for large account new business.

Personal insurance results were weaker due to higher catastrophe losses, though personal insurance is
otherwise performing very well due to strong retention, higher new business volume and rate increases.

Pre-tax favorable reserve development was $526 million in the quarter, which lowered the combined
ratio by 9.8 points (versus 2.4 points of favorable impact in 2q’07). This reflected better than expected
loss experience, particularly for accident years 2004 – 2007 in commercial multi-peril, general liability,
property and commercial auto, partly offset by reserve strengthening in workers’ compensation.

Capitalization was strong and at or above target levels for all rating agencies. Debt-to-capital financial
leverage of 19.7% (excl. FAS 115) was slightly below the company’s 20% target. The company’s financial
strength ratings were recently upgraded to Aa2 by Moody’s.

Because of its strength in earnings and capitalization, Travelers has been able to make substantial
amounts of common share repurchases, with $750 in share repurchases in 2q’08, and a total of $5.8
billion in repurchases since 2q’06.



Berkshire Hathaway Inc.
P/C NPE 6,231 6,209 6,299 6,020 5,950 13,514 6,247 6,359
Chg in NPE 4.7% -54.1% 0.8% -5.3% 2.0% 144.7% 9.8% 10.0%
Combined 91.0% 95.5% 88.6% 87.5% 83.6% 93.1% 78.8% 77.6%
ratio
Net income 2,880 940 2,947 4,553 3,118 2,595 3,583 2,772
Shareholders' 117,994 119,372 120,733 119,903 115,272 109,891 108,419 102,244
equity
ROE 9.7% 3.1% 9.8% 15.5% 11.1% 9.5% 13.6% 11.1%
Notes: Equitas reinsurance deal in 1q’07 raised premium for that quarter by $7.1 billion.

• Good earnings despite investment • Strong 91% combined ratio in insurance
volatility and reinsurance
• Significant investments in credit • Strong capitalization
derivatives and structured products, but • Minimal catastrophe losses
Berkshire avoided troubled housing and
MBS sectors

Net income fell 8% in 2q’08 versus 2q’07 due to lower, but still strong underwriting income. Despite the
strong 91% combined ratio and stable earnings in other areas (investment and derivative gains,
investment income in the insurance operations, and non-insurance operating earnings), the ROE was
only 9.7%. While this is not bad, the ROE is depressed somewhat due to the strong levels of
capitalization maintained at Berkshire Hathaway.

Berkshire Hathaway often invests large positions in equities or sophisticated instruments such as 5 year
credit default swaps and even longer term equity index put options. While it has experienced
investment losses (mostly unrealized), it has fared better than many other financial institutions during
the recent volatility driven by housing and credit market problems. This partly reflects the fact that none
of Berkshire’s credit default contracts involve direct exposure to MBS, ABS or CDOs. Realized investment
gains and derivative gains were both positive in the second quarter and contributed $935 million of
revenue, while pre-tax unrealized losses of $6.7 billion showed up in AOCI and caused total
shareholders’ equity to decline slightly to $118 billion.

During the first half of 2008, the company acquired $6.5 billion of investment grade auction rate
securities and variable rate demand notes issued by states, municipalities and political subdivisions in a
period of significant displacement for these types of securities. While these securities are typically
insured by third-parties, the substantial majority of them had good underlying credit characteristics
based on the company’s analysis and about 80% of them had underlying ratings of A or higher.

Berkshire Hathaway’s insurance and reinsurance operations are reported in four parts – Geico, General
Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Insurance Group, which we review
sequentially below.



Geico. This private passenger auto insurer is Berkshire’s biggest insurance operation and produced a
little more than half of its total underwriting profit, with a $298 million underwriting profit on the
quarter. This is down slightly from $325 million on the same quarter in 2007 due to a slight rise in the
combined ratio to 90.4%. PIF grew 7.8%, while earned premium grew 5%.

General Re. Premiums were down 6% but underwriting profits fell by more than half versus 2q’07, as
this unit produced an underwriting profit of $102 million in 2q’08. The combined ratio was 93.1%. The
lower premium reflected competitive conditions in the reinsurance markets and Berkshire’s declining of
business when it considers the profitability inadequate. Berkshire expects further premium declines in
General Re in the remainder of 2008, as policy cancellations and non-renewals outpace new business.

Berkshire Hathaway Reinsurance Group. This part of Berkshire’s insurance operations saw the sharpest
decline in underwriting profits, with $79 million underwriting profit in 2q’08 versus $356 million in
2q’07. The combined ratio was 93.2% in 2q’08. Catastrophe and individual risk business declined sharply
due to increased price competition and fewer attractive opportunities. Premiums in the other multi-line
business increased 49%, reflecting new business from a 5 year 20% quota-share of Swiss Re’s business
that became effective on Jan. 1, 2008. Berkshire expects this large treaty to generate about $3 billion of
premiums for all of 2008. Berkshire’s new mono-line financial guarantee insurer, Berkshire Hathaway
Assurance Company was formed in Dec. 2007 and obtained AAA ratings and over $1 billion of capital by
June 30. It is focused on the muni bond part of the financial guarantee sector and generated $520
million of consideration in the first 6 months of 2008.

Berkshire Hathaway Primary Group. Declining underwriting gains in NICO Primary Group were more
than offset by increases from MedPro and US Liability and the inclusion of USBoat (acquired in August
2007). The net impact was an increase in underwriting profit to $81 million in 2q’08 versus $63 million in
2q’07. The combined ratio was 83.8% in 2q’08.



Liberty Mutual Group
P/C NPW 6,279 6,256 5,579 5,795 5,477 5,687 4,815 5,159
Chg in NPW 14.6% 10.0% 15.9% 12.3% 2.5% 7.1% 8.2% 13.5%
Combined 101.9% 100.7% 101.0% 99.0% 100.1% 101.1% 98.1% 98.0%
ratio
Net income 300 360 425 404 339 350 455 556
Shareholders' 12,265 12,434 12,366 12,055 11,228 11,318 10,895 10,006
equity
ROE 9.7% 11.6% 13.9% 13.9% 12.0% 12.6% 17.4% 23.7%
Notes

• Safeco acquisition expected to generate • Catastrophe losses in Personal Markets
continued growth added to the combined ratio
• Slight drop in shareholders’ equity due to • Rating agency pressures
unrealized investment losses

Liberty Mutual is growing at a strong clip mostly due to acquisitions. Net premiums written rose 14.6%
in second quarter 2008 versus the same quarter in 2007, reflecting the acquisition of Ohio Casualty in
third quarter 2007, though there was organic growth too. The recently announced acquisition of Safeco
Corp. would help Liberty Mutual grow even more if it closes as expected in the third quarter. Currently
ranked 6th in the U.S. P/C market by net premiums written, the company should easily move up to 4th
by the end of 2008.

In response to the announcement of the Safeco acquisition, Standard & Poor’s put Liberty Mutual on
CreditWatch Negative, Moody’s changed the rating outlook to negative from stable, and A.M. Best
affirmed the rating with a stable outlook. Concerns cited by S&P were a potential significant decline in
capital adequacy and uncertainties around the process of integrating Safeco. S&P and Liberty Mutual
have announced they expect to meet to discuss these issues. S&P says the rating would likely be
affirmed if its concerns are addressed and otherwise the rating could be lowered by one notch.

The combined ratio rose to 101.9% in the second quarter of 2008 due to higher catastrophe losses.
Catastrophe losses added 5.4 points to the combined ratio. The Personal Markets segment was most
affected, with catastrophes contributing 13.9 points to the combined ratio. Excluding catastrophes and
some slight favorable development on prior year reserves, the combined ratio would have been 98.0%
in the quarter.

Shareholder’s equity declined slightly since year-end 2007, as unrealized investment losses offset
growth in retained earnings. The raising of $1.25 billion of junior subordinated notes in May to help
finance the Safeco acquisition increased the company’s total capital and receives a high level of equity
treatment from rating agencies.



Progressive Corp.
P/C NPW 3,511 3,490 3,084 3,483 3,559 3,647 3,194 3,582
Chg in NPW -1.3% -4.3% -3.5% -2.7% -3.3% -0.8% -1.8% 0.7%
Combined 93.6% 94.6% 95.0% 93.7% 92.3% 89.5% 87.7% 87.3%
ratio
Net income 216 239 236 299 284 364 401 410
Shareholders' 4,806 4,750 4,936 5,344 5,503 6,931 6,847 6,714
equity
ROE 18.0% 19.8% 18.4% 22.1% 18.3% 21.1% 23.7% 24.9%
Notes

• Strong earnings • Modest losses from Midwest storm losses
• Shareholders’ equity grew slightly, • Small 1% drop in net written premiums
despite realized and unrealized
investment losses

Earnings in the second quarter were strong with a 93.6% combined ratio. This combined ratio includes
about 2 points from catastrophe losses, as Progressive had modest losses from the Midwest storms.
There were also higher losses in special lines (incl. motorcycle, boat and recreational vehicles) that
added about 2 points to the personal lines combined ratio, but this reflects a normal seasonal increase
in loss during the warm months.

Net premiums written declined 1.3% in 2q’08 versus 2q’07, while policies in force (PIF) grew 1% in
personal auto, 8% in special lines, and 4% in commercial auto. The opposite trends in NPW and PIF show
some decline in average premium per policy, but this was partly offset by benign loss cost trends in the
broader auto market that allowed profitability to remain strong. One reason that loss cost trends are
down is the lower loss frequency due to the fact that Americans are driving less due to higher gas prices,
though the sustainability of this trend is uncertain.

Investments showed some weakness, as $41 million of write-downs were made for other than
temporary declines in market value. There was also an increase in unrealized losses in the first half of
the year of $692 million that put downward pressure on shareholders’ equity (though it did not flow
through net income). Despite these issues, Progressive’s strong earnings allowed it to increase
shareholders’ equity in the second quarter from the March 31, 2008 level, though it is still down slightly
since Dec. 31, 2007. Third quarter could show some investment losses, as there were $406 million of
mark-to-market net losses in July, thought the total impact could change materially by the time the
quarter is finished.



Hartford Financial Services Group, Inc.
P/C NPW 2,585 2,586 2,513 2,630 2,675 2,622 2,625 2,699
Chg in NPW -3.4% -1.4% -4.3% -2.6% -1.3% -0.3% 2.3% 3.1%
Combined 95.8% 87.8% 91.1% 91.4% 91.7% 88.8% 88.9% 90.4%
ratio
Net income 543 145 595 851 627 876 783 758
Shareholders' 16,824 17,836 19,204 18,950 18,648 18,851 18,876 17,733
equity
ROE 12.5% 3.1% 12.5% 18.1% 13.4% 18.6% 17.1% 18.3%
Notes

• Strong core earnings in life operations • P/C results remain strong despite higher
than average catastrophe losses
• Management maintained guidance for • Shareholders’ equity down 12% due to
strong core earnings in 2008, but expects unrealized investment losses and share
life DAC unlock charge to lower net repurchases
income in 3q’08

Net income of $543 million in 2q’08 was down 13% from the same quarter in 2007, but was strong
enough to produce a respectable 12% ROE. Total shareholders’ equity was down 12% in the first 6
months of 2008, as share repurchases and more than $2 billion of unrealized losses more than offset
growth in retained earnings.

Written premiums were flat to down moderately in all P/C segments in 2q’08 versus 2q’07. The 1%
reduction in personal lines was largely due to non-renewals to help achieve the company’s planned
reduction of Florida property exposure, while reductions in commercial lines were primarily related to
competitive pressures and lower rates. The overall combined ratio of 95.8% was weakened by higher
than average catastrophe losses but 1.5 points of favorable development on prior year reserves partially
offset this weakness. Excluding catastrophes and prior year reserve development, the overall P/C
combined ratio was strong at 90.7% and relatively stable compared to recent quarters.

Life operations generated strong returns, as life core earnings grew 3% in 2q’08 versus 2q’07. A new
variable annuity (VA) product was launched in May in the U.S., though difficult equity market conditions
could make growth a challenge. In Japan, recent market conditions and increasing competition put
downward pressure on VA deposits, though Hartford management remains committed to the Japan
variable annuity market for the long-term.

The company will complete its annual life DAC unlock in third quarter and estimates there could be an
after-tax charge ranging from $330 to $640 million. However, the company believes it is well positioned
to weather the current market, as it has a cushion of $1.5 billion above the requirements to maintain AA
rating agency capitalization. Given its capital cushion, the Hartford was able to make common share
repurchases, with $888 million of repurchases in the first half of 2008 and $129 million in July.



Chubb Corp.
P/C NPW 3,047 2,936 3,009 2,938 3,058 2,867 2,974 2,994
Chg in NPW -0.4% 2.4% 1.2% -1.9% -0.7% -2.0% -4.0% -0.7%
Combined 88.5% 83.9% 83.8% 81.6% 82.7% 83.4% 83.1% 85.5%
ratio
Net income 469 664 650 738 709 710 654 604
Shareholders' 14,133 14,347 14,445 14,248 13,818 13,873 13,863 13,562
equity
ROE 13.2% 18.4% 18.1% 21.0% 20.5% 20.5% 19.1% 18.4%
Notes

• Strong quarter, though net income was • Management expects share repurchases
down to continue in second half of 2008
• Non-U.S. growth offset 3% premium • Favorable prior year reserve development
decline in U.S. resulted in about 8 points of combined
• Moderate margin pressures from rate ratio improvement
declines in commercial insurance

Chubb’s earnings remained strong in the second quarter in the U.S. and outside the U.S. However, net
income and ROE trended downward. U.S. storms in the quarter caused higher catastrophe losses,
especially in the commercial Property & Marine insurance line. One large Surety loss also contributed to
higher losses. Favorable reserve development caused a roughly 8 point improvement to the combined
ratio.

Chubb Personal Insurance (CPI) did very well in the quarter in both homeowners and personal auto
lines. NPW grew 4% and the combined ratio was a solid 81.9%, which included 4.5 point of catastrophe
losses. The catastrophe losses in CPI were modest when compared with the losses in the personal lines
business at many other companies.

Chubb Commercial Insurance (CCI) did well, but was not as strong due to rate pressures and catastrophe
losses. Average renewal rates in the U.S. were down 6%. The second quarter combined ratio for CCI was
93.7%, with catastrophes accounting for 9.2 points. Commercial multi-peril did very well.

Chubb Specialty Insurance (CSI) had a strong underwriting result, with an 89.3% combined ratio. NPW
was down 4%. Second quarter renewal rates in the U.S. were down 3% for the professional liability part
of CSI, but it still managed a solid 84.0% combined ratio. It was current quarter weakness in surety, due
to one large loss that caused CSI’s combined ratio to weaken from 75.6% in the second quarter of 2007.

Share repurchases continued in the second quarter, as Chubb repurchased $281 million of common
shares, bringing the total amount repurchased in the first half of 2008 to $863 million. The company
expects to continue share repurchases and complete its current repurchase authorization by about year
end.



CNA Financial
P/C NPW 1,708 1,619 1,630 1,639 1,773 1,731 1,687 1,796
Chg in NPW -3.7% -6.5% -3.4% -8.7% -0.8% -1.5% 1.9% 5.9%
Combined 109.2% 107.5% 111.2% 110.5% 105.2% 104.5% 111.3% 103.4%
ratio
Net income 181 187 164 174 217 296 329 311
Shareholders' 9,346 9,360 10,150 10,115 10,011 10,139 9,768 9,329
equity
ROE 7.7% 7.7% 6.5% 6.9% 8.6% 11.9% 13.8% 13.6%
Notes

• Non-core operations contributed to • Slightly declining premium and rising
weaker than average underwriting results combined ratio trends mirror the overall
commercial lines sector
• Minimal volatility from recent • Stable loss costs – favorable frequency
catastrophes and benign severity trends

Mirroring broader trends in its commercial insurance niche, CNA’s net income declined 17% in 2q’08
versus 2q’08, and property/casualty net written premiums declined 4%. Factors contributing to the
earnings decline were lower net investment income, decreased current accident year underwriting
profits, and higher catastrophe losses. Competitive pressures and rate reductions of 4% to 6% in its
major P/C segments were factors contributing to the premium decline.

Compared to insurers writing large amounts of homeowners or other property coverage, CNA had
minimal volatility from property catastrophe activity (contributing only 2.9 points to the combined
ratio.) It is the non-catastrophe underwriting results that continue to be the company’s weakness and
the main factor behind CNA’s weaker than average ROE of 7.7% and combined ratio of 109.2% in 2q’08.
Note that the combined ratio was 97.7% in Property & Casualty Operations, with the overall combined
ratio being higher due to P/C business written in Life & Group Non-Core and Corporate & Other Non-
Core, including CNA Re and asbestos and environmental pollution exposures.

The specialty lines segment remained the strongest contributor to earnings and standard lines was
second. In terms of net premium volume, these segments are about the same in size, but specialty lines
produced higher underwriting profits with a combined ratio of 92.9% versus 103.2% for standard lines.
Overall, the loss cost environment was relatively stable. Loss frequency trends have been favorable and
loss severity trends have been moderate.

The company is currently focusing on building a foundation of financial strength, disciplined
underwriting, and pro-active expense management. Share repurchases in the first half of 2008 were $70
million.



Safeco Corp.
P/C NPW 1,428 1,361 1,337 1,448 1,466 1,390 1,338 1,426
Chg in NPW -2.5% -2.1% -0.1% 1.5% 0.4% -2.0% -3.2% -3.8%
Combined 94.0% 93.0% 93.6% 92.5% 89.7% 89.8% 87.2% 88.7%
ratio
Net income 150 142 145 194 186 183 216 256
Shareholders' 3,385 3,332 3,393 3,689 4,015 4,084 3,928 4,270
equity
ROE 17.8% 16.9% 16.3% 20.2% 18.4% 18.2% 21.1% 24.9%
Notes

• acquisition by Liberty Mutual at 1.8 times • earnings remained strong but weakened
book value was approved by Safeco somewhat by catastrophes
shareholders
• Rating agency pressure due to pending
acquisition

Earnings remained strong in 2q’08, despite a drop of nearly 20% in net income from 2q’07 that was
primarily attributable to higher catastrophe losses. Surety and auto were the bright spots, with very
strong and improved profitability. While catastrophes affected several segments, the impact was most
significant for the property business within the Safeco Personal Insurance (SPI) segment. Safeco Business
Insurance (SBI) was also weaker, due to lower favorable reserve development on prior years and higher
catastrophe losses.

Net premiums written were down 2.5% in 2q’08 versus 2q’07, mainly due to lower premiums in
personal auto and business insurance, partly offset by premium growth in surety and SPI property.
Despite lower premium and policies in force in personal auto, profitability in this segment improved
significantly, reflecting the company’s disciplined approach to underwriting and pricing.

The merger between Safeco and Liberty Mutual (described in further detail earlier in this report) was
approved by Safeco shareholders on July 29. Liberty Mutual agreed to acquire the common stock of
Safeco at $68.25 per share, which represents an 81% premium to Safeco’s book value per share.
Safeco’s financial strength ratings were put on negative CreditWatch by S&P following the
announcement of the Liberty Mutual transaction, since its rating could be equalized to Liberty Mutual’s,
which is a notch lower.



Appendix 1: Top 20 U.S. P/C insurers based on 2007 net premiums
written
Figures are in thousands of U.S. dollars

Companies featured in this report are indicated with an asterisk (*).

Rank Company 2007 U.S. NPW Market share
1 State Farm Group 47,930,317 10.7%
* 2 American International Group, Inc 35,212,724 7.9%
* 3 Allstate Insurance Group 26,387,474 5.9%
* 4 Travelers Insurance Companies 20,411,528 4.6%
* 5 Berkshire Hathaway 19,166,508 4.3%
* 6 Liberty Mutual 17,199,325 3.9%
7 Nationwide Group 15,799,416 3.5%
8 Farmers Ins Group 14,341,912 3.2%
* 9 Progressive Ins Group 13,773,877 3.1%
* 10 Hartford Ins Group 10,437,288 2.3%
* 11 Chubb Group 9,675,570 2.2%
12 USAA Group 8,708,947 2.0%
* 13 CNA Insurance Cos 7,037,943 1.6%
14 American Family Ins Group 5,952,765 1.3%
15 Zurich Financial Services NA Group 5,865,039 1.3%
* 16 Safeco Ins Cos 5,656,145 1.3%
17 Allianz of America 5,032,643 1.1%
18 W.R. Berkley Group 4,362,912 1.0%
19 Auto-Owners Ins Group 4,321,829 1.0%
20 Ace INA Group 4,044,760 0.9%
Total of top 10 GAAP filers 164,958,382 37.0%
Total of top 20 281,318,922 63.1%
Total U.S. P/C Industry 445,990,307 100.0%
Source: A.M. Best



Appendix 2: Share repurchases in first half of 2008
Company Amount of shares repurchased ($ millions)
1
AIG (5,431)
Allstate 858
Travelers 1,750
Berkshire Hathaway 0
Liberty Mutual 0
Progressive 178
Hartford Financial Services 888
Chubb Corp 863
CNA Financial 70
Safeco 0
1
The negative figure for AIG represents net new issuance of stock, based on $7,343 million of new
common equity and $1,912 million of share repurchases.

Appendix 3: Second quarter 2008 combined ratios adjusted for
catastrophe losses and prior year reserve development
Company Combined ratio Points from Prior year Combined ratio
catastrophes favorable / excl. catastrophes
(unfavorable) & prior year
development development
AIG 97.7 (0.6) (0.8) 96.3
Allstate 94.4 (10.3) 0 84.1
Travelers 89.3 (6.6) 9.8 92.5
Berkshire Hathaway 91.0
Liberty Mutual 101.9 (5.4) 1.5 98.0
Progressive 93.6 (1.7) (0.2) 91.7
Hartford Financial 95.8 (6.6) 1.5 90.7
Services
Chubb Corp 88.5 (5.4) 8 (approx.) 91.1
CNA Financial2 97.7 (2.9) 0.8 95.6
Safeco 94.0 (4.8) 3.2 92.4
2
Figures for CNA are for Property & Casualty Operations only and exclude non-core and run-off
exposures.



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