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Page 1
How I Pick Stocks
Jeff Thompson, Property Casualty Insurance Analyst
Presentation to the UCONN School of Business
Page 2
Introduction/ Biography
• Jeff Thompson is a Vice President of equity research at KBW, Inc. focusing on the property casualty insurance sector. Jeff has 14 years experience following the property casualty industry, beginning as a corporate finance specialist in 1990.
• He has received three Wall Street All-star analyst rankings, placing in the top-five nationally for stock picking in both 1999 & 1997 and once for earnings estimate accuracy in 1995.
• He has been interviewed on CNBC, Bloomberg television, Bloomberg radio, FCR Morning Report, and quoted in numerous newspaper and industry journals. KBW has ranked #2 in Institutional Investor for property casualty research in the last two years.
• Prior to KBW, Jeff worked as an equity analyst at Conning & Company, Advest and Northington Partners.
• He holds a bachelor degree with honors from Amherst College, where he concentrated his studies in Mathematics and English.
Page 3
What is KBW?
• Keefe, Bruyette & Woods (KBW) is the largest full-service investment bank that specializes exclusively in the financial services sector.
• Founded in 1962 and 100% employee owned, our firm is recognized as a leading authority for financial services companies. KBW's focus includes banking companies, insurance companies, broker/dealers, mortgage banks, asset management companies and specialty finance firms. Our firm has established industry-leading positions in the areas of research, corporate finance, mergers and acquisitions and sales and trading for financial services companies.
• KBW was directly involved in the 9/11 tragedy and lost 67 employees in Tower II of the World Trade Center. The firm has since rebuilt.
Page 4
How Does KBW Make Money?
• Equity research
• Corporate Finance
• Trading
• Fixed Income
Page 5
Why the P-C Insurance sector is overlooked
• Mature, slow growth• Volatile earnings history/ Cats• Cyclical • Difficult accounting• Heavily regulated• Small percentage of the S&P• Asbestos, Tobacco, Torts• Insurance is boring
Page 6
Quick Overview of Industry
• As of 2001, the industry reported: - Premiums of $324 billion - Assets of $973 billion - Reserves of $385 billion - Surplus of $294 billion
• Types of insurance organizations –stock, mutual, stock reciprocal, and brokers
• By line of business as a % total of premium:- Personal Lines = 54%, - Commercial Lines = 40%, - Reinsurance = 6%.
Page 7
Quick Terminology for P-C
• Net written premium
• Loss ratio
• Expense ratio
• Combined ratio
• Investment Income
• Reserves
Page 8
A Universe of P- C Stocks
Source: KBW estimates
Company S ymbol 2003E Book Value 2004E Book Value % Change in BVDirect General Corporation DRCT 8.10 10.93 34.94%W.R. Berkley Corp oration BER 20.00 24.10 20.50%RenaissanceRe Holdings Ltd. RNR 28.73 34.51 20.12%Everest Re Group , Ltd. RE 56.62 66.81 18.00%American International Group , Inc. AIG 27.18 31.66 16.48%M ontp elier Re Holdings Ltd. M RH 24.68 28.66 16.13%Travelers Prop erty Casualty Corp . TAP`A 11.80 13.60 15.25%Philadelp hia Consolidated Holding Corp . PHLY 24.40 28.00 14.75%PartnerRe Ltd. PRE 41.95 48.06 14.56%Progressive Corp oration PGR 22.50 25.75 14.44%XL Cap ital Ltd. XL 51.82 59.10 14.05%Navigators Group , Inc. NAVG 22.53 25.57 13.49%Allstate Corp oration ALL 28.30 32.00 13.07%ACE Limited ACE 28.66 32.37 12.94%M ax Re Cap ital Ltd. M XRE 17.85 20.10 12.61%IPC Holdings, Ltd. IPCR 31.96 35.97 12.55%Penn-America Group , Inc. PNG 8.90 10.00 12.36%St. Paul Comp anies, Inc. SPC 27.91 31.15 11.61%RLI Corp . RLI 21.47 23.70 10.39%Chubb Corporation CB 46.00 50.20 9.13%Selective Insurance Group , Inc. SIGI 26.80 29.00 8.21%NYM AGIC, INC. NYM 24.67 26.53 7.54%Commerce Group , Inc. CGI 27.30 29.30 7.33%Harleysville Group , Inc. HGIC 20.00 21.00 5.00%
Page 9
My Principles of Investing
• An investor should be able to answer two fundamental questions:
1) What will the world look like in 6-months?2) How do I position myself to make money?
Answering these questions forces the investor to form an opinion from both a top-down and bottom up analysis, a combination that leads to a sound, powerful prediction of stock performance.
Page 10
2004 Outlook for Property Casualty Insurance(or what the world will look like in 6 months)
• Peak Pricing Achieved (Cyclical)• Peak ROEs Ahead• Valuations May Come Under Pressure• Top line Expansion to Slow: Focus on
Book Value Growth• Favor Bermuda, Personal Lines, and
Specialty Lines Companies• M&A to Start Weak but Gain Steam• Reserves (Balance Sheets) Still at Risk
Page 11
Peak Pricing: Underwriting Cash Flow Indicates Weakening Rates but Strengthening Profits
Property Casualty Industry Historical Cash Flow and Premium Growth
Source: A.M. Best & KBW Estimates
0%
5%
10%
15%
20%
25%
30%
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003E
Cash Flow as % of Prem. NWP Grow th
NWP Growth Slows Before Cash Flow2003 Estimates
Page 12
Peak Pricing, Drivers of Competition
• Pressure on Pricing:– Combined Ratios have been Stronger– Cash flow has improved– Aggressive New Capital– Improving Investment Returns?
• But Some Offsets Remain:– Reserve Issues Remain (Asbestos)– Loss Trends Favorable– Interest Rates Still at Historically Low Levels
Page 13
Book Value Growth: Entering Peak ProfitabilityNWP Growth versus Return on Surplus
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
NWP Growth Return on Surplus
*Annualized 2003 results
Pricing PeaksReturn Peaks
Source: A.M. Best
Page 14
H i s t o r i c a l P r i c e t o B o o k V a l u e
0 . 6 x
0 . 8 x
1 . 0 x
1 . 2 x
1 . 4 x
1 . 6 x
1 . 8 x
J u n -8 9
J u n -9 0
J u n -9 1
J u n -9 2
J u n -9 3
J u n -9 4
J u n -9 5
J u n -9 6
J u n -9 7
J u n -9 8
J u n -9 9
J u n -0 0
J u n -0 1
J u n -0 2
J u n -0 3
Pr
ice
to
Bo
ok
Ra
tio
1.2 x
1.7x
0 .9 x
S&P Premium over P&C - Price / Book
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
6/89
9/90
12/91 3/
936/9
49/
9512
/96
3/98
6/99
9/00
12/0
13/
03
Pri
ce /
Boo
k: D
iffe
renc
e
Premium
P&C Industry vs. S&P 500 - Price to Book
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
6/89
9/90
12/91 3/9
36/9
49/9
512
/96 3/98
6/99
9/00
12/01 3/0
3
Pri
ce /
Boo
k
S&P P/BV P&C P/BV
Valuations: Multiples Under Pressure
• Multiples may be under pressure
Source: FactSet
Source: FactSet Source: FactSet
Page 15
Valuations: Multiples Under Pressure
• Book Value Matters:
Five-Year Book Value CAGR vs. Stock Performance CAGR
Source: KBW Research
-20%
-10%
0%
10%
20%
30%
40%
50%
-10% -5% 0% 5% 10% 15% 20% 25% 30%
Book Value CAGR
Sto
ck C
AG
R
SPC
SAFC ACE
XL
RE
RNR
CB
TRH
CNA
PGR
ALL
CINF
Page 16
Impact of Rising Interest Rates
• Investment income may turn more positive
Source: A.M. Best and KBW Research
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001
Property Casualty Industry Net Investment Income
Page 17
Impact of Rising Interest Rates
• But stock performance may suffer
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Dec
-84
Dec
-85
Dec
-86
Dec
-87
Dec
-88
Dec
-89
Dec
-90
Dec
-91
Dec
-92
Dec
-93
Dec
-94
Dec
-95
Dec
-96
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Val
ue
of
$100
(in
vest
ed 1
2/31
/84)
0
2
4
6
8
10
12
14
10-y
ear
Tre
asu
ry R
ate
(%)
PC Insurance Group TSR
10-year Treasury
Interest Rates vs P&C Stock Performance
`
Source: FactSet
Page 18
Personal Lines• Competition may increase and rate increases may slow• But loss trends may stay favorable• Low frequency supported by growth of insured auto vs.
growth of insured drivers.
NWP Growth and Combined Ratios of Personal Lines Insurers
Source: KBW estimates
2003E 2003E 2004E 2004ENWP Combined NWP Combined
Company Symbol Growth Ratio Growth RatioAllstate Corporation ALL 5.6% 94.8% 7.0% 93.1%Commerce Group, Inc. CGI 18.0% 100.7% 15.0% 99.6%Direct General Corporation DRCT 55.8% 75.7% 67.3% 79.8%Progressive Corporation PGR 26.0% 87.9% 15.0% 93.0%SAFECO Corporation SAFC 10.9% 102.1% 7.9% 97.4%
Page 19
Bermuda/Reinsurance• Bermuda in a secular growth mode• Despite better 2004 terms, 2003’s underwriting results will
be tough to beat• Capital markets activity to remain high• M&A may pick up by late 2004
NWP Growth and Combined Ratios of Bermuda/Reinsurance
Source: KBW estimates
2003E 2003E 2004E 2004ENWP Combined NWP Combined
Company Symbol Growth Ratio Growth RatioACE Limited ACE 26.4% 91.3% 18.5% 90.0%Everest Re Group, Ltd. RE 63.0% 94.5% 22.3% 93.1%IPC Holdings, Ltd. IPCR 20.1% 35.9% 7.9% 45.2%Max Re Capital Ltd. MXRE 36.0% 107.1% 17.2% 95.5%Montpelier Re Holdings Ltd. MRH 33.6% 54.5% 10.0% 74.0%PartnerRe Ltd. PRE 35.5% 93.9% 11.4% 93.7%RenaissanceRe Holdings Ltd. RNR 19.5% 56.7% 8.3% 65.8%XL Capital Ltd. XL 6.7% 93.0% 9.6% 88.9%
Page 20
Commercial Lines
• Pricing competition returns, particularly for property lines commodity business.
• Profitability rises as higher rates are earned
NWP Growth and Combined Ratios of Commercial Lines Insurers
Source: KBW estimates
2003E 2003E 2004E 2004ENWP Combined NWP Combined
Company Symbol Growth Ratio Growth RatioAllmerica Financial Corporation AFC 0.0% 105.4% 2.0% 103.2%American International Group, Inc. AIG 28.3% 92.8% 18.5% 92.5%Chubb Corporation CB 23.0% 95.9% 16.0% 97.1%Harleysville Group Inc. HGIC 5.0% 117.0% 2.0% 107.3%Navigators Group, Inc. NAVG 10.8% 97.2% 42.8% 95.8%NYMAGIC INC. NYM -11.1% 96.4% 47.1% 94.3%Penn-America Group, Inc. PNG 28.0% 92.7% 18.0% 92.6%Philadelphia Consolidated Holding Corp. PHLY 26.0% 90.9% 9.0% 87.6%RLI Corp. RLI 11.7% 92.4% 14.6% 92.8%Selective Insurance Group, Inc. SIGI 16.0% 102.5% 13.0% 100.2%St. Paul Companies, Inc. SPC 5.1% 92.1% 4.6% 91.8%Travelers Property Casualty Corp. TAP`A 12.0% 96.0% 16.0% 94.7%W.R. Berkley Corporation BER 40.0% 91.6% 18.0% 90.5%
Page 21
Insurance Brokerage
• Slowing organic growth• Acquisition activity continues• Profit margins at peak levels• Prefer brokers with non-cycle dependent long term growth
prospects
Insurance Brokers Revenue Growth and Operating Margin
Source: KBW estimates
Company S ymbol 2003E 2004E 2003E 2004EArthur J. Gallagher & Co. AJG 16% 10% - -AON Corp oration AOC 14% 10% 15% 16%Brown & Brown, Inc. BRO 22% 15% 37% 36%Hub International Limited HBG 31% 9% 27% 29%Hilb, Rogal and Hamilton Comp any HRH 25% 15% 29% 29%M arsh & M cLennan Comp anies, Inc. M M C 17% 11% - -U.S.I. Holdings Corp oration USIH 8% 13% 22% 23%Willis Group Holdings, Limited WSH 18% 13% 32% 32%Insurance Brokers Average 19% 12% 27% 28%
Revenue Growth Operating Margin
Page 22
Insurance Brokerage
Number of Insurance Brokerage Acquisitions 1997 - 2003
Source: SNL Financial
35
75 70 73 83 84 80
46
52
85
3423 21 2225
47
66
7766 75
60
11
12
16
515
14
15
0
50
100
150
200
250
1997 1998 1999 2000 2001 2002 2003
Nu
mb
er o
f D
eals
Insurance Broker Insurance Bank & Thrift Other
Page 23
Capital Markets
• Almost $12 billion* was raised in 2003– More is needed to
cover industry shortfalls estimated by A.M. Best to be impaired by over $240 billion.
*Includes debt and trust preferred securities
$7.7
$2.8
$1.4
$0
$2
$4
$6
$8
$10
$12
$14
$ in
Bill
ions
Debt Equity Other
Source: KBW Research
Page 24
Capital Markets
• Continued IPO activity; but more secondary offerings• Dividend increases, some buybacks• M&A in second half:
– Organic growth still acceptable– Weak currency– Slowing growth– More anxious sellers– Targets: MRH, MXRE, NYM, PNG, PRE, SAFC– Buyers: ACE, BER, SPC, XL
M&A Activity by Total Deal Value
Source: KBW Research
$0
$5
$10
$15
$20
$25
$30
$35
1997 1998 1999 2000 2001 2002 2003
Dea
l V
alu
e ($
in
Bil
lio
ns)
0
10
20
30
40
50
60
Nu
mb
er o
f D
eals
Total Deal Value # of Deals
Page 25
Reserve Risk• ’97-’01 accident years still at risk for adverse development• Asbestos – may get worse before it improves
Industry Loss Ratio and Paid-to-Incurred Development
Source: A.M. Best
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1 73.9% 77.9% 73.5% 74.0% 69.7% 71.6% 71.9% 73.3% 77.2% 68.3%2 71.9% 76.7% 72.1% 72.9% 68.5% 71.6% 72.7% 74.8% 77.7%3 70.7% 75.5% 71.2% 72.3% 68.4% 72.2% 73.9% 76.5%4 69.4% 74.7% 70.4% 71.6% 68.2% 73.1% 75.6%5 68.8% 74.1% 70.0% 71.4% 68.5% 74.0%6 68.2% 73.7% 69.6% 71.3% 68.9%7 67.8% 73.4% 69.4% 71.4%8 67.3% 73.3% 69.4% Steady loss ratio deteriorat ion9 67.2% 73.4%
10 67.2%
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1 43.1% 45.1% 45.0% 46.8% 44.9% 45.4% 45.5% 46.9% 46.6% 45.7%2 66.4% 67.7% 67.7% 69.0% 66.7% 67.1% 67.7% 70.0% 69.2%3 77.7% 78.4% 78.6% 79.3% 77.7% 78.3% 79.5% 81.3%4 84.8% 85.8% 85.5% 86.1% 85.1% 85.6% 87.2%5 89.8% 89.7% 89.6% 90.7% 90.1% 90.5%6 92.3% 92.5% 92.6% 93.5% 93.1%7 94.0% 94.3% 94.4% 95.3%8 95.3% 95.6% 95.6%9 96.1% 96.5% High p aid-to-incurred ratios indicating p otential weakness.
10 96.7%
Industry Loss Ratio Development
Paid-To-Incurred Ratio Development
Page 26
What Stocks Do We Recommend(or how to position yourself to make $Money$)
• Two stocks with a good investment rationale: Philadelphia Consolidated (PHLY) and Allstate (ALL).
• ALL – upside in stock driven by improving profitability, increased emphasis on top-line growth initiatives, low relative valuation.
• PHLY – upside driven by strong organic growth and profitability, by mixed marketing strategy and product innovation.
Page 27
Forward Projections & ModelingALLSTATE
02/12/2004
2003 1Q04E 2Q04E 3Q04E 4Q04E 2004E 1Q05E 2Q05E 3Q05E 4Q05E 2005EP/C Results: from pg 3Net Premiums Written 25,186.0 6,351.5 6,807.3 7,093.0 6,632.9 26,884.8 6,796.1 7,283.8 7,589.5 7,097.2 28,766.7
% Chg 5.3% 7.0% 6.0% 7.0% 7.0% 6.7% 7.0% 7.0% 7.0% 7.0% 7.0%
Net Premiums Earned 24,677.0 6,400.4 6,496.7 6,612.7 6,721.2 26,231.0 6,832.4 6,951.5 7,075.6 7,191.7 28,051.1 % Chg 5.6% 6.7% 5.7% 6.1% 6.7% 6.3% 6.7% 7.0% 7.0% 7.0% 6.9%NPE/NPW 98.0% 100.8% 95.4% 93.2% 101.3% 97.6% 100.5% 95.4% 93.2% 101.3% 97.5%
Paid Losses 16,471.0 % change -5.5%Inc'd losses (excl cats)Incurred Loss & LAE 17,432.0 4,416.3 4,469.7 4,529.7 4,630.9 18,046.6 4,728.0 4,796.5 4,889.2 4,962.3 19,376.0 Operating Costs 5,846.0 1,536.1 1,559.2 1,587.1 1,613.1 6,295.4 1,639.8 1,668.4 1,698.1 1,726.0 6,732.3 Goodwill - - - - - - - - - - - Restructuring Charge 67.0 - - - - - - - - - -
U/W Income 1,332.0 448.0 467.8 496.0 477.2 1,888.9 464.6 486.6 488.2 503.4 1,942.8
GAAP U/W Ratios:Loss Ratio 70.6% 69.0% 68.8% 68.5% 68.9% 68.8% 69.2% 69.0% 69.1% 69.0% 69.1%Expense Ratio 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0%Combined Ratio 94.6% 93.0% 92.8% 92.5% 92.9% 92.8% 93.2% 93.0% 93.1% 93.0% 93.1%NII Ratio 6.8% 6.8% 6.7% 6.7% 6.9% 6.8% 6.8% 6.7% 6.7% 6.9% 6.8%Operating Ratio 87.8% 86.2% 86.1% 85.8% 86.0% 86.0% 86.4% 86.3% 86.4% 86.1% 86.3%Operating Margin 12.2% 13.8% 13.9% 14.2% 14.0% 14.0% 13.6% 13.7% 13.6% 13.9% 13.7%Restructuring Charge
Cat Losses (Avg. 4 points) 1,486.6 268.8 292.4 330.6 282.3 1,174.1 287.0 312.8 353.8 302.1 1,255.6 Cat Points 6.0% 4.2% 4.5% 5.0% 4.2% 4.5% 4.2% 4.5% 5.0% 4.2% 4.5%Cat EPS 1.37 0.25 0.27 0.31 0.26 1.08 0.27 0.29 0.33 0.28 1.16
AsbestosCombined Ratio Excl. Cats. 88.6% 88.8% 88.3% 87.5% 88.7% 88.3% 89.0% 88.5% 88.1% 88.8% 88.6% Points Reserve (Release) Iincrease 0.7%Combined Ratio x Cats. X Res Chg. 87.9% 88.8% 88.3% 87.5% 88.7% 88.3% 89.0% 88.5% 88.1% 88.8% 88.6%Combined x cats xRes chg xWeather 87.9% 88.3% 88.6%
Net Inv. Inc. 1,679.0 432.5 437.9 440.0 465.5 1,775.7 462.8 468.5 470.7 498.0 1,900.0 % Chg 1.4% 6.0% 5.0% 5.0% 7.0% 5.8% 7.0% 7.0% 7.0% 7.0% 7.0%
Tax on Operations 682.0 221.7 229.4 239.6 236.8 927.5 232.0 240.6 241.5 250.9 965.0 Tax Rate 22.7% 25.2% 25.3% 25.6% 25.1% 25.3% 25.0% 25.2% 25.2% 25.1% 25.1%
Operating Income 658.8 676.2 696.3 705.8 695.3 714.5 717.5 750.5 % Chg 6.6% 36.3% 30.2% 3.8% 5.5% 5.7% 3.0% 6.3%
A-T Gains 192.0 - - - - - - - - - - A-T Gain (L) on Dis.of Ops. 1.0 - - - - - - - - - - Equity earnings of affiliate - - - - - - - - - - -
Net Income 2,522.0 658.8 676.2 696.3 705.8 2,737.2 695.3 714.5 717.5 750.5 2,877.9
A-T Restructuring Charge 43.6 - - - - - - - - - - Oper. Inc. excl. Charges 2,372.6 658.8 676.2 696.3 705.8 2,737.2 695.3 714.5 717.5 750.5 2,877.9
Page 28
Allstate (Continued)ALLSTATE
02/12/2004
2003 1Q04E 2Q04E 3Q04E 4Q04E 2004E 1Q05E 2Q05E 3Q05E 4Q05E 2005E
Life Insurance Results:Premium & Contract Charges 2,304.0 696.5 597.0 591.8 653.4 2,538.7 759.2 668.6 651.0 718.7 2,797.5
% Chg 0.5% 9.0% 12.0% 10.0% 10.0% 10.2% 9.0% 12.0% 10.0% 10.0% 10.2%Net Investment Income 3,248.0 850.1 862.9 880.6 881.7 3,475.3 909.6 923.3 942.3 943.4 3,718.6
% Chg 3.9% 6.0% 8.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%Total Revenues 5,552.0 1,546.6 1,459.9 1,472.4 1,535.1 6,014.0 1,668.8 1,591.9 1,593.2 1,662.1 6,516.1
% Chg 2.5% 7.3% 9.6% 8.2% 8.3% 8.3% 7.9% 9.0% 8.2% 8.3% 8.3%
Policy benefits/ Contract Benefits 1,851.0 1,051.7 992.7 1,001.2 1,043.9 4,089.5 1,134.8 1,082.5 1,083.4 1,130.3 4,431.0 as % of revenues 33.3% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% Credited Interest as % of revenues Amortization of DAC as % of revenuesOperating Costs 672.0 293.9 277.4 279.8 291.7 1,142.7 300.4 286.5 286.8 299.2 1,172.9
as % of revenues 12.1% 19.0% 19.0% 19.0% 19.0% 19.0% 18.0% 18.0% 18.0% 18.0% 18.0%
Restructuring Charge .02* - - - - - - - -
P-T Operating Income 692.0 201.1 189.8 191.4 199.6 781.8 233.6 222.9 223.1 232.7 912.3 Taxes 243.0 68.4 64.5 65.1 67.9 265.8 79.4 75.8 75.8 79.1 310.2
Tax Rate 35.1% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%Operating Earnings 449.0 132.7 125.3 126.3 131.7 516.0 154.2 147.1 147.2 153.6 602.1 A-T Realized Gains (83.0) - - - - - - - - - - Gain (Loss) on dispos.of ops. (61.0) - - - - - - - - - - Net Income 305.0 132.7 125.3 126.3 131.7 516.0 154.2 147.1 147.2 153.6 602.1
Op. Income Excl. Charges 456.0 132.7 125.3 126.3 131.7 516.0 154.2 147.1 147.2 153.6 602.1
-18.3% 61.8% -4.4% -7.1% 23.1% 13.2% 16.2% 17.4% 16.5% 16.6% 16.7%
Per share 0.65 0.19 0.18 0.18 0.19 0.73 0.22 0.21 0.21 0.22 0.86
Corporate & OtherOperating Loss (106.0) (20.0) (20.0) (20.0) (20.0) (80.0) (20.0) (20.0) (20.0) (20.0) (80.0) A-T Realized Gains (Loss) (4.0) - - - - - - - - - - A-T Gain on Disposition of ops. - - - - - - - - - - - Divs on Pfd Sec. of Subsid. (10.0) (10.0) (10.0) (10.0) (10.0) (40.0) (10.0) (10.0) (10.0) (10.0) (40.0) Net Loss (120.0) (30.0) (30.0) (30.0) (30.0) (120.0) (30.0) (30.0) (30.0) (30.0) (120.0)
Consolidated Data:Total Net Income 2,707.0 761.5 771.5 792.7 807.5 3,133.2 819.5 831.6 834.7 874.1 3,360.0 Total A-T Realized Gains 105.0 - - - - - - - - - - Total Op. Inc.(Incl. Pfrd Divs) 2,672.0 771.5 781.5 802.7 817.5 3,173.2 829.5 841.6 844.7 884.1 3,400.0 Restruct. Charges 74.0 - - - - - - - - - - Acquisition Charges, A-T - - - - - - - - - - - Gain (L), disp. of ops A-T 1.0 - - - - - - - - - - Op. Inc. excl. Charges 2,746.0 771.5 781.5 802.7 817.5 3,173.2 829.5 841.6 844.7 884.1 3,400.0
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Summary Page for Allstate
2003 1Q04E 2Q04E 3Q04E 4Q04E 2004E 1Q05E 2Q05E 3Q05E 4Q05E 2005E
2,707.0 761.5 771.5 792.7 807.5 3,133.2 819.5 831.6 834.7 874.1 3,360.0 105.0 - - - - - - - - - -
2,672.0 771.5 781.5 802.7 817.5 3,173.2 829.5 841.6 844.7 884.1 3,400.0 74.0 - - - - - - - - - - - - - - - - - - - - - 1.0 - - - - - - - - - -
2,746.0 771.5 781.5 802.7 817.5 3,173.2 829.5 841.6 844.7 884.1 3,400.0
3.83 1.08 1.09 1.13 1.15 4.45 1.17 1.19 1.19 1.25 4.80 0.16 - - - - - - - - - - 0.04 - - - - - - - - - -
(0.02) - - - - - - - - - - (0.03) - - - - - - - - - -
- - - - - - - - - - - (0.01) (0.01) (0.01) (0.01) (0.01) (0.06) (0.01) (0.01) (0.01) (0.01) (0.06) 3.77 1.09 1.11 1.14 1.16 4.50 1.18 1.20 1.21 1.26 4.85
29% 19% 8%706.3 706.2 705.2 704.2 703.2 704.7 702.2 701.2 700.2 699.2 700.7
29.04 29.85 30.68 31.54 32.42 32.42 33.32 34.24 35.17 36.16 36.16
14.0% 14.7% 14.2%
Page 30
Earnings Model for Philadelphia Consolidated
Earnings Model07/20/2000 E E E E E E E E E EIn $millions, ex. per share 1Q03 2Q03 3Q03 4Q03 2003 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05 4Q05 2005
INCOME STATEMENTGross Written Premium 193.3 210.9 286.4 215.0 905.6 232.0 253.1 343.7 258.0 1086.7 278.4 303.7 405.5 304.4 1292.0 % Change 41.6% 31.2% 36.1% 37.8% 36.4% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 18.0% 18.0% 18.9%% Retained 88.8% 73.0% 68.0% 68.0% 66.1% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0% 68.0%Net Premiums Written 171.6 78.0 196.0 153.1 598.7 157.7 172.1 233.7 175.4 739.0 189.3 206.5 275.8 207.0 878.6 % Change 56.7% -37.8% 21.6% 19.7% 14.4% -8.1% 120.6% 19.2% 14.6% 23.4% 20.0% 20.0% 18.0% 18.0% 18.9%Net Premiums Earned 148.4 121.4 142.7 159.1 571.6 146.2 169.7 179.2 184.7 679.8 192.6 201.2 211.8 219.6 825.3 % Change 66.2% 21.1% 34.4% 26.7% 35.7% -1.5% 39.8% 25.6% 16.1% 18.9% 31.7% 18.6% 18.2% 18.9% 21.4%Other Income 0.7 1.0 2.0 1.8 5.5 1.5 1.5 2.0 2.0 7.0 2.0 2.0 2.0 2.0 8.0 Net Investment Income 9.8 9.4 9.2 10.5 38.8 10.9 11.2 11.7 12.1 45.9 12.4 12.8 13.3 13.7 52.2 % Change 10.7% -0.1% -3.4% 6.9% 3.5% 11.2% 19.5% 27.5% 15.7% 18.3% 13.8% 14.3% 13.7% 13.2% 13.7%Realized Gains & Losses (1.1) (0.7) 0.0 2.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOTAL REVENUES 157.7 131.2 153.8 173.5 616.2 158.6 182.4 192.9 198.8 732.7 207.0 216.0 227.1 235.3 885.5 % Change 60.7% 23.2% 32.3% 28.2% 35.1% 0.6% 39.0% 25.4% 14.6% 18.9% 30.5% 18.4% 17.7% 18.4% 20.8%
Paid Losses 48.5 88.9 237.6 % change 47.9% 109.7% 50.5% Change in ReservesLosses Incurred 90.4 93.0 79.4 96.4 359.2 81.9 95.0 100.3 103.5 380.7 107.9 112.7 118.6 123.0 462.1 Underwriting Expenses 46.4 32.2 41.5 42.8 162.9 42.4 49.2 52.0 53.6 197.2 55.9 58.4 61.4 63.7 239.3 Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Operating Expenses 1.7 1.6 2.7 1.8 7.8 2.1 2.1 2.8 2.8 9.8 2.8 2.8 2.8 2.8 11.2 Total Losses and Expenses 138.5 126.8 123.6 141.0 529.9 126.4 146.4 155.1 159.8 587.7 166.5 173.8 182.8 189.5 712.7
Loss Ratio 60.9% 76.6% 55.6% 60.6% 62.8% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0%Expense Ratio 31.3% 26.5% 29.1% 26.9% 28.5% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% 29.0%Combined Ratio 92.2% 103.1% 84.8% 87.5% 91.3% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0%Impact of Prior Year Res. -24Combined excl. PY Impact 87.1%
PRETAX INCOME 19.2 4.4 30.2 32.4 86.3 32.2 36.1 37.8 39.0 145.1 40.5 42.2 44.3 45.8 172.8 Income Taxes 6.0 0.8 9.7 10.0 26.5 10.7 12.1 12.6 13.0 48.5 13.6 14.1 14.8 15.4 57.9 NET INCOME 13.2 3.6 20.5 22.4 59.8 21.5 24.0 25.1 26.0 96.6 26.9 28.1 29.4 30.5 114.9
31% 32%Average Shares Outstanding 22.4 22.5 22.5 23.0 22.6 23.0 23.0 23.0 23.0 23.0 23.0 23.0 23.0 23.0 23.0
EARNINGS PER SHARE 0.00 263 Reported EPS $0.59 $0.16 $0.91 $0.98 $2.65 $0.94 $1.04 $1.09 $1.13 $4.20 $1.17 $1.22 $1.28 $1.33 $5.00Capital Gains -0.03 -0.02 0.00 0.06 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Items 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating EPS $0.62 $0.18 $0.91 $0.92 $2.63 $0.94 $1.04 $1.09 $1.13 $4.20 $1.17 $1.22 $1.28 $1.33 $5.00 % Change 30.2% -63.5% 635.7% 48.4% 53.5% 50.2% 479.4% 19.8% 23.2% 59.7% 25.3% 16.9% 17.1% 17.4% 19.0%
Dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Book Value $22.33 $22.51 $23.71 $24.63 $24.63 $25.56 $26.61 $27.70 $28.83 $28.83 $30.00 $31.23 $32.51 $33.83 $33.83Tangible BV 1.60 1.37 1.17 Est. Cash Flow From Operations 25.8 -44.9 67.4 6.4 54.6 22.6 16.5 62.1 5.7 106.9 11.8 20.1 73.2 5.5 110.5Return on Average Equity 2.16 11.3% 15.7% 16.0%
Page 31
KBW Focus List Price Targets: 12/31/03
Upside to Target Price
Source: KBW estimates
200412/31/2003 Expected Price-Book Price Upside to
Company S ymbol Price Book Value Multiple Target Target RatingPenn America PNG $13.27 $10.00 1.70x $17.00 28.1% Outp erformEverest Reinsurance Holdings RE $84.60 $66.81 1.57x $105.00 24.1% Outp erformAllstate Corp . ALL $43.02 $32.00 1.50x $52.00 20.9% Outp erformM ax Re Ltd. M XRE $22.50 $20.79 1.30x $27.00 20.0% Outp erformThe Hartford Financial Services Group , Inc HIG $59.03 $41.23 1.70x $70.00 18.6% Outp erformPhiladelp hia Consolidated Hldg. PHLY $48.83 $28.00 2.04x $57.00 16.7% Outp erformRenaissanceRe Holdings Ltd. RNR $49.05 $34.87 1.58x $56.00 14.2% Outp erformIPC Holdings Ltd. IPCR $38.90 $35.97 1.11x $44.00 13.1% Outp erformPartnerRe Ltd. PRE $58.05 $48.06 1.35x $65.00 12.0% Outp erformNavigators Group NAVG $30.87 $25.57 1.33x $34.00 10.1% M arket PerformSafeco Corp SAFC $38.93 $38.95 1.08x $42.00 7.9% Outp erformM ontp elier Re Holdings Ltd. M RH $36.70 $27.30 1.32x $39.00 6.3% M arket PerformNYM AGIC, Inc. NYM $27.42 $26.23 1.11x $29.00 5.8% Outp erformW.R. Berkley Corp . BER $34.95 $23.80 1.54x $36.67 4.9% Outp erformRLI Corp . RLI $37.46 $23.71 1.64x $39.00 4.1% M arket PerformCommerce Group Inc. CGI $39.50 $29.30 1.40x $41.00 3.8% M arket PerformSt. Paul Comp anies SPC $39.65 $31.15 1.32x $41.00 3.4% M arket PerformXL Cap ital, Ltd. XL $77.55 $59.10 1.27x $80.00 3.2% M arket PerformDirect General Corp . DRCT $33.10 $10.93 3.11x $34.00 2.7% Outp erformSelective Insurance Group , Inc. SIGI $32.36 $29.00 1.14x $33.00 2.0% M arket PerformTravelers Prop erty Casualty Co. TAP`A $16.78 $13.60 1.25x $17.00 1.3% M arket PerformAmerican International Group AIG $66.28 $31.64 2.12x $67.00 1.1% Outp erformACE Limited. ACE $41.42 $32.50 1.20x $41.00 -1.0% M arket PerformHarley sville Group Inc. HGIC $19.89 $21.00 0.90x $19.00 -4.5% Underp erformAllmerica Financial Corp . AFC $30.77 $35.00 0.83x $29.00 -5.8% M arket PerformChubb Corp oration CB $68.10 $50.20 1.27x $64.00 -6.0% M arket PerformProgressive Corp oration PGR $83.59 $25.75 2.91x $75.00 -10.3% M arket Perform
Page 32
Job Interviews: What Employers Like to See
• Demonstrated interest in area of job application – internships, courses, etc.
• Success in life – good grades, test scores, good summer jobs, (non-athletic achievements).
• Strong work ethic.
• Broad intellect.
• Good sense of reality.
Page 33
Questions to include in an Interview
Make sure you have questions!
• What kind of employee typically outperforms at your firm? What are their characteristics?
• What are your first year expectations? What happens if expectations are exceeded?
• What is the opportunity for advancement? Where can I expect to be in 2 years? 5 years?
These questions drive a view of eagerness and motivation, people who are not viewed as eager and motivated are often overlooked.
