Property/Casualty Insurance

Jay CohenFirst Vice President

Merrill Lynch

212 449-5206

jay_a_cohen@ml.comRefer to important disclosures at the end of this report.

Analyst Certification on page 23.

Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies

in this report.

The Fundamental ViewOverview

• Price Increases Continuing

• Balance Sheet Strain Evident

• Commercial Lines/Reinsurance Turning Faster than Personal Lines

• Claims Inflation, Low Interest Rates, Reserve Issues Held Back Earnings

• Expect Earnings to Reflect Improving Environment in 2003 and 2004

• Still Challenges Ahead

Balance Sheet Strain

• September 11th Losses

• Loss reserve issues

• Equity market declines

• Credit losses

• Rating Agency Pressures

Combined Ratio 1Q95-4Q02

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

125.0%

Investment Income % of Premiums

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

Return on Surplus, 1Q95-4Q03

-10%

-5%

0%

5%

10%

15%

20%

Management Changes

• St. Paul

• CNA (2x)

• SAFECO

• Ohio Casualty

• Chubb

• PartnerRe

• Allmerica Financial

• IPC Re

• Horace Mann

• Zurich

• Royal Sun

• Commercial Union

• Allianz

• Argonaut

The Fundamental ViewCommercial Lines

• Premium Rates Rising in Most Lines 10%+

• Expect Rates to Rise for Another 1-2 Years– Margin pressure still evident– Supply Constrained– Reinsurance prices rising

• Increases for Standard Risks Decelerating• Larger Risks/Specialty Seeing Bigger Increases• Look for Earnings Growth in 2003-2004• Reserves Will Be an Issue for Some Insurers

The Fundamental View Commercial Lines (Cont.)

“Anecdotes from Agents”

• Carriers looking for more (clean) business• Underwriting standards have not changed• Risk appetite is still limited• No changes in terms/conditions• Kemper an issue for smaller brokers• Price increases staying ahead of claims• Buyers seem prepared for more increases

The Fundamental View

Reinsurance• Prices began rising in early 2001• Earnings Deteriorated in 2001 and 2002• Reserve Shortfall Still An Issue• Property Catastrophe Levelling Off• Casualty Still Needs Improvement• New Capacity Focused on Reinsurance• Flight To Quality

The Fundamental View

Personal Lines

• Margins Peaked in 1999• Claims Expenses on the Rise (Auto and Home)• Prices Rising, and Now Exceeding Claims Inflation• Distribution Issues• Largely a Commodity

Challenges• Loss Reserves• The Alternative Market• Dominance of Mutuals in Certain Lines• Lower Investment Yields• Increased Credit Risk• Regulatory Constraints• Price Increases relative to starting point• Claims Inflation• Capital Availability

Challenges

• Industry Structure– Mature Industry– Capital Intensive– Little Control Over Distribution– Little Product Differentiation– Losses Slow to Emerge– Pricing Tends to Lag Loss Costs

Challenges

$5,531

$7,564

$1,057

$452

$1,240

$2,078

$3,465

$1,294

$543

$8,779

$290$750

$60

$1,309

$89

$805

$5,584

$3,260

$251$783

$270$215$281

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YTD

"The 1980's Window" "The 1993 Window" "The 2001 Window"

Capital Availability

What Moves the Stocks

• Fundamentals– Pricing– Earnings

• Interest Rates– Higher rates bad for stocks (all else being

equal)

Valuation

• Price Earnings– Earnings growth– Earnings consistency– Earnings sustainability– Group discount to the market

• lower quality earnings

• Price/Book (see later slide)

Price/Book VS. 2004E ROE

•Sustainability of ROE•Consistency of ROE•Quality of Book Value•Leverage•Investment Portfolio

y = 14.756x - 0.4348

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% 21.0% 23.0%

Return On Equity

Pri

ce T

o B

oo

k

ALL

AIG

CB

CNA

XL

HIG

MCY

PGR

SAFCSPC

BERPHLY

ACE

SIGIAFG

IPCR

RNRMKL

OCAS

ACGL TAPA

PTPHMN ENH

IPCC

Historic P/E Ratios

0

2

4

6

8

10

12

14

16

18

20

2/03

5/02

9/01

1/01

5/00

9/99

1/99

5/98

9/97

1/97

5/96

9/95

1/95

5/94

9/93

1/93

5/92

9/91

1/91

5/90

9/89

1/89

5/88

9/87

1/87

5/86

9/85

1/85

5/84

9/83

1/83

5/82

9/81

1/81

Historic Price/Book Ratios

0.0

0.5

1.0

1.5

2.0

2.5

3/95

6/95

9/95

12/9

5

3/96

6/96

9/96

12/9

6

3/97

6/97

9/97

12/9

7

3/98

6/98

9/98

12/9

8

3/99

6/99

9/99

12/9

9

3/00

6/00

9/00

12/0

0

3/01

6/01

9/01

12/0

1

3/02

6/02

9/02

12/0

2

1/03

2/03

Investment Rating Distribution: Financial Services Group (as of 30 September 2002)Coverage Universe Count Percent Inv. Banking Relationships* Count PercentBuy 92 50.27% Buy 47 51.09%Neutral 78 42.62% Neutral 30 38.46%Sell 13 7.10% Sell 8 61.54%

Investment Rating Distribution: Global Group (as of 30 September 2002)Coverage Universe Count Percent Inv. Banking Relationships* Count PercentBuy 1301 45.39% Buy 464 35.66%Neutral 1369 47.77% Neutral 343 25.05%Sell 197 6.87% Sell 44 22.34%

* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.

Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.

[TAPA, PL, TMK] One or more analysts responsible for covering the securities in this report owns such securities.[HMN, OCAS, SIGI] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the

last three years.[ALL, ACGL, CB, HIG, HMN, SIGI, BER, XL, HRH, WSH, LNC, NFS, PNX, PL, PRU, SFG, UNM] MLPF&S or an affiliate was a manager of a

public offering of securities of this company within the last 12 months.[ACE, ALL, AIG, ACGL, CB, HIG, IPCR, MKL, MCY, PHLY, PTP, RNR, SPC, TAPA, BER, XL, AOC, HRH, WSH, JP, JHF, LNC, MET, NFS,

PNX, PFG, PL, PRU, SFG, TMK, UNM] MLPF&S was a manager of the most recent public offering of securities of this company within thelast three years.

[ACGL, IPCR, OCAS, PHLY, SAFC, SIGI] The securities of the company are not listed but trade over-the-counter in the United States.In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration orhave been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.

[MET] An officer, director or employee of MLPF&S or one of its affiliates is an officer or director of this company.[ALL, AFG, AIG, ACGL, CB, CNA, HIG, HMN, MKL, MCY, OCAS, PHLY, PTP, RNR, SIGI, SPC, TAPA, BER, XL, HRH, MMC, USIH, WSH,

JHF, LNC, MET, NFS, PNX, PFG, PL, PRU, SFG, TMK, UNM] MLPF&S or an affiliate has received compensation for investment bankingservices from this company within the past 12 months.

[ACE, AFC, ALL, AFG, AIG, ACGL, CB, CNA, HIG, HMN, IPCR, MKL, MCY, OCAS, PHLY, PTP, PGR, RNR, SAFC, SIGI, SPC, TAPA, BER,XL, AOC, AJG, HRH, MMC, USIH, WSH, AFL, JP, JHF, LNC, MET, NFS, PNX, PFG, PL, PRU, SFG, TMK, UNM] MLPF&S or an affiliateexpects to receive or intends to seek compensation for investment banking services from this company within the next three months.

[ACE, ALL, ACGL, HIG, HMN, TAPA, XL, MMC, USIH, LNC, PL] MLPF&S together with its affiliates beneficially owns one percent ormore of the common stock of this company calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934.

In Germany, this report should be read as though Merrill Lynch has acted as a member of a consortium which has underwritten the most recent offering of securities during the last five years forcompanies covered in this report and holds 1% or more of the share capital of such companies.

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived frominvestment banking revenues.

OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B -Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% ormore for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risksecurities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividendnot considered to be secure); and 9 - pays no cash dividend.

Copyright 2002 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued byMLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by the FSA; has beenconsidered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kongby Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore)Pte Ltd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additionalinformation available.

Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to suchsecurities (“related investments”). MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of thisissuer(s) or in related investments, and may be on the opposite side of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or shortposition in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking orother business from, any entity mentioned in this report.

This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and theparticular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategiesdiscussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, mayfluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to futureperformance.

Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such asADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Analyst Certification

We, Jay A. Cohen and Alison Jacobowitz, hereby certify that the views each of us has expressed in thisresearch report accurately reflect each of our respective personal views about the subject securities andissuers. We also certify that no part of our respective compensation was, is, or will be, directly orindirectly, related to the specific recommendations or view expressed in this research report.