capital investments by sofikozma

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									       What Insurers Can Expect from
         Their Investments Today

                 An Overview of the Global
                  Investment Environment
             The Royal Institute of International Affairs
                            London, UK

                            2 February 2004

 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
  Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org
               Presentation Outline
• Overview of Global Investment Environment
• Global Economic Situation
• Insurer Asset Allocation in the Wake of the
  “Perfect Storm”
• Hot Spots: Are Some Markets Too Risky
• Q&A
  GLOBAL INVESTMENT
ENVIRONMENT OVERVIEW
                      CEOs: Biggest Threats to Our
                           Business* (%**)
                 Overregulation                                                                      18%
         Increased competition                                                                   17%
         Currency fluctuations                                                             15%
                 Price deflation                                              11%
              Loss of key talent                                            11%
               Global terrorism                                         10%
              Reputational risk                                            10%
                 Cost of Capital                                  8%
        Emerging technologies                             6%
 Corporate-governance issues                             5%
        Stock-market volatility                  3%

                                   0                 5                10                15                20
*Survey of 1,394 CEOs globally during fourth quarter of 2003. **Due to multiple answers percentage exceeds 100.
Source: PriceWaterhouseCoopers
               Stock Market Index Performance in 2003:
                   Ranked in Local Currency Terms
              Australia (All Ordinaries)                  11.1%

    Canada (Toronto 300 Composite)                                     24.3%

                           France (CAC 40)                   16.1%

                            Germany (DAX)                                      37.1%

                      Italy (Milan MIBtel)                  13.9%

                               Japan (Nikkei)                          24.5%

                              UK (FTSE 100)                13.6%

                                     US (DJIA)                         25.3%

                                                 0   10           20     30    40

Source: Wall Street Journal, January 2, 2004.
                   Stock Market Index Performance in
                    Local Currency Terms 2001-2003
                                % change on previous year
       50
                                                         37.1
       40
       30                                                                         24.5

       20                      16.1
                                                                                                         13.6

       10
        0
      -10
      -20                                -19.8                            -18.6
                                                                                         -16.2
                  -21.9                                           -23.5                          -24.5
      -30
                       -33.7
      -40
                                                 -43.9
      -50
                France (CAC 40)         Germany (DAX)           Japan (Nikkei 225)       UK (FTSE 100)


                     2001             2002          2003

Source: Securities Industry Association (SIA), and Wall Street Journal 1/2/2004
                        Short-term Interest Rates
                             (% per annum)
                                                             Recent Peak to Trough Declines:
      8                                                      US: 530 bp
      7                                                      UK: 370 bp
                                                             France/Germany: 210 bp
      6                                                      Japan: 70 bp

      5
                                                                                                          France
      4
                                                                                                          Germany
      3                                                                                                   Japan
      2                                                                                                   UK
      1                                                                                                   US

      0
            1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


*Three-month money market rates where available, or rates on proximately similar financial instruments.
Source: OECD, December 2003
                         Long-term Interest Rates
                             (% per annum)
      9
      8
      7
                                                                                                         France
      6
                                                                                                         Germany
      5                                                                                                  Japan
      4                                                                                                  UK
      3                                                                                                  US
      2
      1
      0
            1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


*10-year benchmark government bond yields where available or yield on proximately similar financial instruments.
Source: OECD, December 2003
ECONOMIC ENVIRONMENT
     OVERVIEW
                                                 -2%
                                                       -1%
                                                             0%
                                                                     1%
                                                                                  2%
                                                                                              3%
                                                                                                        4%
                                                                                                                   5%
                                                                                          2.4%
                                                                                          2.4%
                                                                          1.0%
                                                                                                            4.0%




                                          1994
                                                                                                               4.4%
                                                                                      2.3%
                                                                                  1.8%
                                                                                   1.9%
                                                                                         2.7%




                                          1995

                              Euro Area
                                                                                          2.8%




Source: OECD, December 2003
                                                                                1.4%
                                                                         0.8%
                                                                                                     3.4%
                                                                                                       3.6%




                                          1996
                                                                                              2.7%
                                                                                          2.4%
                                                                                1.5%




                              Germany
                                                                                   1.8%
                                                                                                               4.4%




                                          1997
                                                                                                     3.3%

                                                                                              2.8%
                                                                                  1.7%
                                                   -1.1%




                              Japan
                                                                                                               4.3%




                                          1998
                                                                                                 3.1%
                                                                                              2.8%




                              US
                                                                                   1.9%
                                                              0.1%
                                                                                                            4.1%


                                          1999
                                                                                              2.8%




                              UK
                                                                                                        3.7%
                                                                                                 3.1%
                                                                                              2.8%
                                                                                                        3.8%
                                          2000
                                                                                                        3.8%

                                                                                  1.7%
                                                                          1.0%
                                                                   0.4%
                                                                  0.3%
                                          2001




                                                                                       2.1%
                                                                         0.9%
                                                                  0.2%
                                                                  0.2%
                                                                                          2.4%
                                          2002




                                                                                  1.7%
                                                                                                                          (% change on previous year)




                                                                  0.5%
                                                              0.0%
                                                                                              2.7%
                                                                                                                        Real GDP By Country 1994-2003




                                                                                                2.9%
                                          2003




                                                                                   1.9%
              Forecast GDP Growth by Country
            2004/2005 (% change on previous year)
                US GDP is forecast to grow by just over
                  4% in 2004, more than double that
                 expected for Japan and EU countries.
     4.5                                                      4.2%
                                                                  3.8%
        4
     3.5
                                                       2.9%
       3                                           2.7%
                  2.3%          2.4%
     2.5                                                                 2004
        2                     1.7%     1.8% 1.8%                         2005
              1.4%
     1.5
        1
     0.5
        0
             Germany          France    Japan        UK         US




Source: OECD, December 2003
                             Industrial Production
                            (% change on year ago)

        Euro Area*                                  0.9

                 US**                                           1.6

                  UK*                               0.9

            Japan**                                                       2.4

          Germany*                                0.8

             France*                        0.5

                        0                 0.5       1     1.5         2   2.5


*Year to October 2003; **Year to November 2003


Source: The Economist, January 3, 2004.
                     Unemployment Rates
                  1996-2005 (% of labour force)
    By 2005, unemployment is expected to be at least 8% in France and Germany, compared with around
                                   5% in America, Japan and the UK.
     14

     12

     10

      8

      6

      4

      2

      0
           1996     1997      1998   1999   2000     2001    2002     2003     2004    2005

              France          Germany        Japan          UK        US


Source: OECD, December 2003
               Employment Rates 2002-2005




                                                                                                                                                74.3%
                                                                                                               74.0%
                                                                   73.5%
                           73.4%
80%




                                                                           71.9%




                                                                                                                       71.9%




                                                                                                                                                        71.9%
                                   71.7%
                                           71.0%
                   69.9%




                                                                                                                                        69.3%
                                                           68.9%




                                                                                                       68.7%
                                                                                   62.2%*
           63.7%




                                                   63.4%




                                                                                               63.2%




                                                                                                                                63.2%
70%
60%
50%
40%
30%
20%
10%
0%
                      2002                                    2003                                        2004                             2005
                       France                      Germany                                  Japan                      UK      US

*US figure for 2003 from Bureau of Labor Statistics data.
Source: OECD, December 2003
                      Consumer Prices Forecast 2003-
                     2005 (% change on previous year)
   In the US and UK consumer prices are expected to rise by around 2-3% in
        2004 and 2005. However, Japan continues to experience deflation.




                                                                                               2.8%


                                                                                                             2.7%
                                                                                                      2.6%
     3               2003            2004                 2005




                                                                                2.3%
  2.5




                                                           2.0%




                                                                                        1.8%
                                                                                       1.7%
     2




                                                                  1.4%
  1.5



                                                                         0.9%
                                     0.9%
                                            0.8%
                                                   0.7%


     1
  0.5
     0
                             -0.2%
             -0.2%
                     -0.2%




 -0.5
               Japan                 Germany                 France                    US             UK



Source: OECD, December 2003
                                    Current Account Balances
                                         as a % of GDP
                 America’s current account deficit continues to grow and
       6%         remains one of the biggest risks to economic stability.




                                                                                                                                                     4.3%
                                                                                                                               3.6%
       4%




                                                                                                         2.9%
                                                                                   2.8%
              2.6%




                                    2.5%




                                                            2.1%
       2%




                                                                                                  0.7%




                                                                                                                                                                    0.3%
                             0.1%




                                                                                                                        0.1%




                                                                                                                                              0.1%
                                                                           0.0%
       0%
                                                   -0.6%




       -2%
                     -3.1%




       -4%
                                                                   -3.9%
                                           -4.2%




                                                                                          -4.6%




                                                                                                                -5.0%




                                                                                                                                      -5.0%




                                                                                                                                                            -5.1%
       -6%
                 1999                  2000                    2001                    2002                2003*                 2004*                2005*

                       Japan                           US                         EU

Source: OECD, December 2003
                        Government Budget Balances
                              as a % of GDP
       0%

       -1%

       -2%

       -3%                                      -2.9%




                                                                                         -2.9%




                                                                                                                                  -3.2%
                                                                                                                  -3.5%

                                                                                                                          -3.5%
       -4%



                                                                         -3.7%

                                                                                 -3.7%
                                        -4.0%
                                -4.1%




       -5%
                       -3.1%




                                                                                                         -3.9%
                                                                -4.2%

       -6%

       -7%
                                                        -6.8%




                                                                                                 -6.9%
               -7.4%




       -8%
                               2003                                     2004                                     2005

                Japan                     US            Germany                          France                  UK

Source: OECD, December 2003
EXCHANGE RATES
                                  Euro vs US Dollar
   U.S. Dollars per Euro
                                The dollar continues its slide and hit an all-time low
                                 against the Euro of $1.2853 on January 9, 2004.
     1.4



     1.2



        1



     0.8
            Dec- Dec- Jan- Feb- Mar- Apr- May- June- July- Aug- Sept- Oct- Nov- Dec- Jan-
             01   02   03   03   03   03   03   03    03    03   03    03   03   03 04*
*Rate on Jan. 21, 2004.
Source: Federal Reserve Board
                        Exchange Rates: US Dollar vs
                              British Pound*
              Average of Daily Rates

     0.9
                                                                                            Pound/$
     0.8

     0.7

     0.6

     0.5

     0.4
              1999       2000        2001       2002       2003        2004       2005

*2003, 2004 and 2005 estimates are on the technical assumption that exchange rates remain at their levels
of 3 November 2003
Source: OECD, December 2003
                Exchange Rates: US Dollar vs Japanese
                    Yen* (Average of daily rates)

      130

      125                                                125.3

                                             121.5
      120
                                                                    118
                                                                                116.4       116.4
                                                                                                            Yen/$
      115
                     113.9

      110
                                 107.8

      105
                1999         2000        2001        2002        2003      2004         2005

*2003, 2004 and 2005 estimates are on the technical assumption that exchange rates remain at their levels
of 3 November 2003
Source: OECD, December 2003
   ASSET ALLOCATION:

IN THE WAKE OF THE STORM
                       CEA Insurer Investments in Shares
                         (Stocks) in Total 1992-2001
                                            %, 1992-2001
           40%
                                                                                    37.6% 36.9%
           35%
                                                                                               33.3%
           30%                                                        31.0% 32.0%

                                   26.4% 25.3% 25.9% 27.5%
           25%             23.9%
           20%
           15%
           10%
             5%
             0%
                      1992     1993    1994     1995     1996    1997     1998   1999   2000   2001


Source: Comite Europeen Des Assurances European Insurance Figures, 2003
                   CEA Insurer Investments in Debt & Other
                  Fixed Income Securities in Total 1992-2001
                                            %, 1992-2001
           41%
           40%                                                40.2%

           39%                                       38.9%            39.0% 39.0%
           38%
                                            37.3%
           37%
                                   36.5%
           36%             36.2%                                                               36.4%

           35%                                                                              34.8%
                                                                                    34.5%
           34%
           33%
           32%
           31%
                      1992     1993    1994     1995     1996    1997     1998   1999   2000   2001


Source: Comite Europeen Des Assurances European Insurance Figures, 2003
                  CEA Insurer Investments in Land, Buildings
                     and Participating Interests in Total
                                            %, 1992-2001
           10%
            9%             9.0%
            8%                      8.2% 8.0%
                                                     7.3%
            7%
                                                              6.4%
            6%                                                            5.7%
                                                                                 5.3%          5.0%
            5%                                                                          4.9%          4.9%
            4%
            3%
            2%
            1%
            0%
                      1992     1993    1994     1995     1996     1997      1998   1999   2000    2001


Source: Comite Europeen Des Assurances European Insurance Figures, 2003
                          European Insurers’ Asset
                          Allocation, 1992-2000 (%)
        Between 1992 and 2000, European insurers invested increasingly in equities, some 37.1% in 2000, up
             from 23.4% in 1992. However, there is substantial variation among European countries.
       100%
        90%
        80%                                                                               Other

        70%                                                                               Cash & short-
                                                                                          term assets
        60%
                                                                                          Loans
        50%
                                                                                          Bonds
        40%
                                                                                          Shares (Stock)
        30%
        20%                                                                               Investments in
                                                                                          affiliates
        10%                                                                               Real estate
          0%

                    1992             1994          1996       1998         2000
Includes separate accounts. “Loans” include mortgage loans.
Source: Swiss Re, Sigma No. 5/2002
                     US Insurers’ Asset Allocation,
                            1992-2000 (%)
                  By far the largest investment by US insurers is in bonds, although the
                         industry’s share in equities rose between 1992 and 2000.
       100%
        90%
        80%                                                                         Other
        70%
                                                                                    Cash & short-
        60%                                                                         term assets
        50%                                                                         Loans

        40%                                                                         Bonds
        30%
                                                                                    Shares (Stock)
        20%
        10%                                                                         Real estate

          0%

                    1992             1994          1996       1998    2000
Includes separate accounts. “Loans” include mortgage loans.
Source: Swiss Re, Sigma No. 5/2002
                     US Insurers’ Asset Allocation,
                            1998-2002 (%)
       100%
        90%
        80%                                                       Other

        70%
                                                                  Cash & short-
        60%                                                       term assets
        50%                                                       Bonds
        40%
                                                                  Common and
        30%
                                                                  preferred stock
        20%
                                                                  Real estate and
        10%                                                       mortgages

          0%

                         1998                       2000   2002
Source: Insurance Information Institute and A.M. Best Co
                   Insurance Asset Allocation for
                  Key European Markets, 2001 (%)
        100%

         90%

         80%

         70%                                                                                    Investments in affiliates

         60%                                                                                    Land and buildings


         50%                                                                                    Other

                                                                                                Deposits with credit
         40%                                                                                    institutions
                                                                                                Loans
         30%
                                                                                                Debt securities & other
         20%                                                                                    fixed income
                                                                                                Shares (Stock)
         10%

          0%
                    UK         France      Germany        Italy     Netherlands   Switzerland


Source: Comite Europeen Des Assurances European Insurance Figures, 2003
                      Total Investment Holdings of UK
                       Insurers (December 31, 2002)
           The UK insurance industry had a total £1,016 billion invested at 12/31/02, the majority
           in stocks and shares. Altogether, UK insurers own one fifth of all UK company equity.
                                            Property     Unit trusts
                   Other overseas
                                              8%            6%
                 company securities                                    Overseas public
                        9%                                             sector securities
                                                                             5%

       Overseas ordinary
        stocks & shares
             10%

                                                                                 UK ordinary stocks
                                                                                    and shares
            Cash & other                                                               28%
             investments
                 11%


                  Other UK company
                      securities                                  UK public sector
                         12%                                    securities (inc. gilts)
Source: Association of British Insurers (ABI).                          17%
                             U.S. Policyholder Surplus:
                                    1975-2003*
                                                                                           $3
        $350                                                                                 4.
                                                                                               5
                      Surplus (capacity) peaked at                                                 Bi
                                                                                                      ll   io
                                                                                                                n
        $300
                      $336.3 Billion in mid-1999 and
                      fell by 15.5% ($52 billion) to
        $250
                      $284.3 billion at year-end 2002
                      (a trough?)
$ Billions




        $200          •Surplus during the first nine
                      months of 2003 rose by $34.5B
        $150          or 12.1% to $319.9B

        $100                                                      “Surplus” is a measure of
                                                                  underwriting capacity. It is
             $50
                                                                  analogous to “Owners
                                                                  Equity” or “Net Worth” in
                                                                  non-insurance organizations
              $0
                   75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 0203*

       Source: ISO, Insurance Information Institute                              *First Nine Months
                                                 US Insurer Invested Assets as a Percentage
                                                    of Policyholder Surplus 1980-2003*
                                                                     Assets as % of PHS
                                          4.0
    Assets as % of Policyholder Surplus




                                          3.5



                                          3.0



                                          2.5



                                          2.0
                                                80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*
*Insurance Information Institute Estimate based on first nine months 2003
Source: A.M. Best
       Hot Markets:

If It’s Too Good to be True…
                   Net Financial Flows to Emerging
                    Market Economies by Region
            On a regional basis, Asia is projected to account for 50% of total net flows to emerging
             markets in 2004. Emerging Europe’s share of total net private flows is expected to
                               increase to 27% this year, up from 22% in 2003.

       $200                                                         $196.2
                                                      $187.5
                                    $ Billions
                                                                                      Asia/Pacific
       $150
                       $126.5                $124.2
                                                                                      Africa/Middle
                                                                                      East
       $100                                                                           Europe


                                                                                      Latin
         $50                                                                          America



           $0
                        2001                 2002     2003E         2004F

Source: Institute of International Finance
                  Estimated Total Nonperforming
                       Loans in Asia 2002
                                           $ Billions

               Japan                                       $1,243.35

               China                                $480

       South Korea              $104

             Taiwan           $62.4

           Thailand          $46.76

            Malaysia        $35.18

                India       $25.04

           Indonesia       $20.67

          Phillipines      $10.06




Source: Ernst & Young, The Wall Street Journal 1/13/04
                               China Bank Bailouts
                                           $ Billions                                                Capital Adequacy
                                                                                                          Ratios*

          Industrial &
       Commercial Bank of                                                                   $40           5.54%
            China**

       Agricultural Bank of                                                                               1.44%
                                                                                     $35
             China**


              Bank of China                                       $22.5                                   8.15%



        China Construction                                                                                6.91%
                                                                  $22.5
              Bank


                                0            10             20             30              40            50
*The minimum capital-adequacy ratio of banks must be 8% to meet international standards. ** Tentative amounts.

Source: China’s central government and private-sector economists; Shenyin & Wanguo Securities,
The Wall Street Journal 1/13/04
SCANDAL, CORPORATE
   GOVERNANCE &
IMPACTS ON INSURERS
          Serious Implications for
           Financial Institutions
• Insurers exposed to a wide variety of risks:
    Investment risk (as institutional investors)
    Insurance risk (surety, D&O, E&O, etc.)
    Litigation risk (as both plaintiff & defendant)
    Regulatory risk
    Reputational risk
     Corporate Governance: Expensive
        and Hard-Learned Lessons
• Crisis of Confidence—skepticism/cynicism is high
    Ratings agencies       Analysts       Regulators
    Investors/Creditors    Employees      Lawmakers

• Regulatory/Legislative Fallout Unclear
    SEC opening record number of investigations
    SEC, Administration & Congressional proposals vary
    States will take own legal action (e.g., NY)

• Surge in shareholder suits has already begun
            Market Malaise
                 Crisis in
                 Corporate
                Governance


                               Weak Profit
Terrorism     Market Malaise   Performance




                Geopolitical
                 Instability
                                   Houston…
                                We Have a Problem
   Total Exposure (Life & Non-Life): $3.796 Billion
                                              Multiple                                          Enron is the biggest
                                               7%                                              bankruptcy in US
                                                                                               history ($31B+)
                                                                                                Equity/debt
                                                                                               widely-held as S&P
                                                                                               500 company
                           Surety                                                               Biggest impact in
                            26%                                                                institutional
                                                                                               investors/creditors
                                                                                                11 Congressional
                                                                                               investigations
                                                                                                56 suits against
                                                                                               officers & directors
                                                                                                Will spark similar
             Fin. Guarantee                                                                    suits
                   2%                                                            Investment
                                    D&O
                                                                                    64%
                                     1%
Source: Loss estimates from Morgan Stanley as Feb. 8, 2002; Insurance Information Institute.
                       WorldCom to WorldCon?
                          Insurer Exposure
   Total Exposure (Life & Non-Life): $5.725 Billion*
                                                                                                 WorldCom could
                                                                                 Investment     default on ($29B+)
                                                                                    94%         in debt.
                                                                                                 Equity/debt
                                                                                                widely-held as S&P
                                                                                                500 company
                  Financial
                 Guarantee**                                                                     Biggest impact in
                                                                                                institutional
                     4%                                                                         investors/creditors
                                                                                                 SEC/Congressional
                                                                                                investigations
                         D&O                                                                    underway
                          2%                                                                     Suits against
                                                                                                officers & directors
                                                                                                imminent
*As of 7/1/02; Includes $5.4B in debt assuming default, $100 mil D&O, $225 mil CDO (still collateralized). As
of 7/1, WCOM debt trading at about $0.15 of par, stock trading at $0.08/share. Equity losses are indeterminant.
**Does not include disclosed but unquantified exposure to credit default swaps
Source: Insurance Information Institute based in from Moody’s, company announcements, III research.
                             Total Exposure to Parmalat
                                     ($ Millions)
                                                        $ Millions                                      Charge

                 Citigroup*                                                                      $689 $372 million, before tax

                   Capitalia                                                   $494                     $270-$302 million

                        Aflac                                       $384                                $257 million

               Sanpaolo IMI                                         $377                                N/A

           Bank of America*                               $274                                          $206 million, before tax

   Monte di Paschi di Siena                   $145                                                      N/A

         Barclays Capital**             $82                                                             N/A

  Banco Popolare di Verona            $44                                                               N/A

                                0      100      200      300       400      500       600      700
*As of Dec. 31, 2003, before taxes; Bank of America said that total exposure to Parmalat was previously $647 million but that a
large part of that was insured or backed by cash collateral. **After hedging; estimated.
Source: Wall Street Journal 1/21/04
              Parmalat Exposure: Top 10 US
                      Life Insurers
                                      $ Millions
                     AFLAC                                                            $383.7
                         AIG                            $162.1
            John Hancock                       $117.2
                                                                US life insurers’ total
   Prudential of America                      $104.8
                                                               investment exposure to
                  Pacific Life               $98.5        Parmalat is estimated at around
              TIAA Group                 $86.5             $1.6 billion as of December 31,
                                                              2002, a small amount in
                  Aegon USA              $85.6
                                                            comparison to the industry’s
       Principal Financial             $73.2              consolidated statutory capital of
           New York Life              $64.0                          $238 billion.
          UnumProvident              $54.5

                                 0       100              200           300           400

Source: Moody’s
     Who’s Who in the
Corporate House of Ill-Repute
          Corporate Hall of Shame

Company       Problem                      Potential Charges
              D&Os created complex       •Securities Fraud
              outside partnerships that  •Insider trading
              kept billions in losses of •Perjury
              Enron’s balance sheet;
              Accused by CA of
              manipulating energy market
              Lax oversight of some        •Guilty of obstruction
              client books, conflicts of   of justice
              interest, shredded           •Individual partners
              documents                    may be liable
              Inappropriately accounted    •Fraud
              for $3.8B in expenses,
              inflated profits
          Corporate Hall of Shame

Company       Problem                        Potential Charges
              Ex-CEO Dennis Kozlowski •Tax evasion
              indicted for tax evasion on •Misuse of corporate
              art purchases               funds
                                          •SEC accounting query
              Bogus capacity swaps           •Securities fraud
              inflated revenues (Qwest       •Insider trading
              did too); Dynegy = “round-
              tripping” to inflate revenue
              Ex-CEO Sam Waksal            •Insider Trading
              indicted June 12 for tipping
              off family & friends that
              FDA did not approval of
              cancer drug Erbitux
          Corporate Hall of Shame

Company       Problem                       Potential Charges
              $4.6B in undisclosed loans    •Securities fraud
              to founding Rigas family;     •Misuse of corporate
              Misc. unconventional          funds
              transactions, questionable    •SEC accounting query
              accounting
              Questionable acctg. in sales •Fraud
              of fiber optic capacity; Ex- •Possible insider
              CEO Nacchio under fire for trading
              excessive compensation &
              questionable stock sales
              Complex projects              •Possible fraud
              exaggerated cash flow;
              “Round-tripping” to inflate
              revenue
Martha Stewart Omnimedia fell by
  more than 50% after Imclone
insider trading scandal broke out



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                   WorldCom: From $60/share in to
                       6 Cents in Three Years
                                      As of July 1, 2002




Source: Low trade for July 1, 2002.
                          Xerox: From $60/share in to
                          $6.60 Cents in Three Years*
                                       As of July 1, 2002




Source: Opening price, July 1, 2002.
                        U.S. Insurance Industry Stock
                          and Bond Holdings, 2002
                                           Total Industry Holdings = $3.3 Trillion
               $1,800    Total $1650
 In Billions




               $1,600
                                       P/C $198                            Life     P/C
               $1,400                  Life $1,452
               $1,200
               $1,000                           Total $905
                                                             P/C $156
                $800                                         Life $749
                                                                                             Total $549
                $600
                                                                                                     P/C $165
                $400                                                                                 Life $384
                                                                    Total $211 P/C $190
                $200                                                              Life $21

                  $0
                         Corporate            Corporate            State/Local         U.S. Gov't Bonds
                          Bonds                Stocks                 Bonds

Source: Insurance Information Institute from Board of Governors of the Federal Reserve System.
                      U.S. Institutional Investor
                     Market in Corporate Equities
              Market Value of Holdings, as of December 31, 2002
                                                           All Others
                      Insurers                              $456.1
                       $904.6                                  8%            Total: $6,041.1 billion
                        15%                                               Mutual Funds
                                                                           $2,188.4
                                                                             36%

                                                                                          Insurers are the 4th
               State & Local
                                                                                          largest holder of
              Gov't Retirement                                                            corporate stocks
                    Plans
                  $1,004.3
                    17%                                             Private Pension
                                                                         Funds
                                                                        $1,487.8
                                                                          25%


Source: Insurance Information Institute from Board of Governors of the Federal Reserve System.
                  U.S. Institutional Investor Market
                  in Corporate and Foreign Bonds
                               $ Billions Year-End 2002
                                                                            Total: $3,947.4 billion
                 Banks, SIs,
                   Trusts                                       Mutual Funds
                   $494.6                                         $666.9
                                                                   17%       Private
                    13%
        All Others                                                       Pension Funds
          $432.8                                                              $340.4
           11%                                                                 9%
                                                                   State & Local
                                                                       Gov't       Insurers are the
                                                                    Retirement largest holder of
                   Insurers                                            Plans       corporate bonds
                   $1,649.7                                            $363.0
                     42%               Life = $1,451.8 (88%)            9%
                                       Non-Life = $197.9 (12%)
Source: Insurance Information Institute from Board of Governors of the Federal Reserve System
                           U.S. Insurance Industry:
                        Corporate Equity Holdings, 1995-2002
              $1,400
In Billions




                                                                          $1,173B
              $1,200                                                                    $1,135B
                                                                                               $1,029B
              $1,000                                          $933B                                              $905B

               $800                               $745B
                                                                                                                             P/C
                                      $563B                                                                                  Life
               $600
                       Total $450B
               $400
                                                                            Life $965




                                                                                                                 Life $749
                                                  Life $559




                                                                                         Life $941
                                                              Life $733




                                                                                                     Life $855
                                      Life $414
                          Life $315




                                                                            P/C $208




                                                                                                                 P/C $156
                                                  P/C $186




                                                                                         P/C $194
                                                              P/C $200




                                                                                                     P/C $174
                                      P/C $149
                          P/C $134




               $200

                 $0
                       1995           1996        1997        1998         1999         2000         2001         2002

Source: Insurance Information Institute from Board of Governors of the Federal Reserve System.
                            U.S. Insurance Industry:
                         Corporate Bonds Holdings, 1995-2002
               $1,800                                                                                                      $1,650B
 In Billions




                                                                                                           $1,539B
               $1,600
                                                                                             $1,410B
                                                                 $1,3543B
               $1,400                                     $1,301B
                                                   $1,206B
               $1,200              $1,091B
                        Total $993B
               $1,000                                                                                                                   P/C
                $800                                                                                                                    Life

                $600
                $400
                                                                 Life $1,130



                                                                               Life $1,173



                                                                                             Life $1,222



                                                                                                            Life $1,343
                                                   Life $1,046




                                                                                                                          Life $1,452
                           Life $870


                                       Life $949




                                                                 P/C $171



                                                                               P/C $181



                                                                                             P/C $188



                                                                                                            P/C $196
                           P/C $123




                                                   P/C $160




                                                                                                                          P/C $198
                                       P/C $142




                $200
                  $0
                         1995          1996        1997          1998          1999          2000          2001           2002

Source: Federal Reserve, Flow of Funds Report as of Dec. 31, 2001.
                                   Aviva Equity Exposure
                                       2001 vs. 2002
                    Aviva’s exposure to equities reduced from £ 4.9 billion at 31
                    December 2001 to £ 3.1 billion at year-end 2002. This
         6          represents 18% of its total capital employed.

                               £4.9
         5
                                                                                “This reduction reflects
         4                                                                      the divestment of
                                                                 £3.1           businesses during the
                                                                                year, the impact of
         3
                                                                                falling markets and the
                                                                                reduction of equity
         2                                                                      exposures.”
                                                                                - Aviva 2002 Annual
         1                                                                      Report

         0
                               2001                              2002


Source: Aviva 2002 Annual Report
                   Swiss Re Equity Exposure 1999-
                               2003
Swiss Re’s fixed income portfolio increased to CHF 81 billion at the end
of the first half of 2003, up from CHF 74 billion at year-end 2002.


        100%           4%    5%       5%         5%        4%      “Strong growth in fixed income
          90%                                              10%     portfolio reflects reallocation of
                                                 14%
                                      20%
          80%          34%
                             26%                                   funds from equity portfolios,
                                                                   cash inflows, market
          70%
                                                                   appreciation and two Admin Re
          60%                                                      transactions.”
          50%
                                                                   - Swiss Re Analysts’ Meeting,
                                                           86%
          40%                         75%
                                                 81%               08/29/03
                             69%
          30%          62%
                                                                      Other
          20%
                                                                      Investments
          10%                                                         Shares
           0%
                                                                      Fixed Income
                   1999      2000    2001       2002      2003*       Investments

*As of June 30, 2003
Source: Swiss Re
                 Allianz Group Equity Exposure
                          1999-2003*
Allianz’s equity exposure has reduced significantly since 1999.

       100%          3%             3%             3.0%   3%      3%
                     6%             6%              4%    5%      4%
        90%
                                                          19%     16%
        80%                                        26%
                     37%           36%
        70%
        60%
        50%                                                              Other

        40%                                                       77%    Real Estate
                                                          73%
                                                   67%
        30%                        55%
                     54%                                                 Equities
        20%
                                                                         Fixed Income
        10%                                                              Investments

          0%
                    1999          2000             2001   2002   2003*
*As of September 30, 2003.
Source: Allianz Group Financial Results 9M 2003.
                                    AXA Equity Exposure
                                       2000-2003*
      Axa’s equity exposure has stayed pretty steady,
      while its fixed income investment has increased.

          100%
                         11.0%                7.0%                7.0%                9.0%
           90%                               10.0%                8.0%                7.0%
                         10.0%                                     4%                  4%
           80%                                4%
                          4%                                                                 Cash & cash
                                              16%                 15%                 15%
           70%                                                                               equivalent***
                          17%
           60%                                                                               Mortgage, policy
                                                                                             and other loans
           50%                                                                               Real Estate
           40%
                                              63%                 66%                 65%    Equities
           30%            57%
           20%                                                                               Fixed income
                                                                                             investments**
           10%
            0%
                         2000                2001                2002               2003*
*As of June 30, 2003. **Including mutual funds in bonds. ***Not netted of bank overdrafts.
Source: AXA Group Financial Results 6M 2003/Full year 2002/2001/2000.
                          Beginning of the End:
                        Bursting of the Tech Bubble
                           Composite of Nasdaq 100 Stocks




Source: BigCharts.com
Corporate Governance
     Accounting Problems are Getting
      Many Companies into Trouble
•Enron was tip of an iceberg
•Major implications for insurers (p/c and life)
                    Shareholder Class Action Lawsuits*
                  Shareholders typically recover just
   600             2.56% of amount lost; 1/3 of that
                    goes to lawyers & expenses**                                 491
   500
   400
   300                                                       240
                                                                                       268
                                  231                                     214
                    202                                            204                        213
                                        188
   200        164          163                        173
                                               108
   100
                                                                                                    14
       0
         91

         92

         93

         94

         95

         96

         97

         98

         99

         00

         01



                                                                                       20 03
          *



                                                                                             *
        02



                                                                                           **
       19

       19

       19

       19

       19

       19

       19

       19

       19

       20

       20



                                                                                          20
      20



                                                                                         04
*Securities fraud suits filed in U.S. federal courts. Figures include IPO allocation Filings.
**Suits of $100 million or more. ***2004 figures as of 1/29/04
Source: Stanford University School of Law;Woodruff-Sawyer & Co.; Insurance Information Institute
     Insurance Information
        Institute On-Line




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