September 2005Primary Analyst: A. Si LundMorgan Stanley & Co. IncorporatedUS Credit Research(212) 761-1474andrew.si.lund@morganstanley.com

North American Investment Grade ResearchUS Insurance – Market Views on P&C Insurers

The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about the subject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views or recommendations contained herein.

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P&C Insurance Sector Credit Market Themes

MS Sector Recommendation – Equal-weight

Major current focus is on loses from Hurricane Katrina

“Movin’ On” after regulatory risk Regulatory risk appears priced in Softening rate environment

Rates an important question – softening but what does Katrina mean?

Long-term sector questions and challenges: Uneasy about reserves Reinsurance overhang

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Reserves – Always a Concern

Reserve inadequacy is a major sector issue

Skeptical investors tell us that P&C insurers are a “black box”

Reserve analysis can be very quantitative, but most companies are assessed on a qualitative basis

ISO points to a $69BN reserve deficiency

Lines of business / exposures that investors “love to hate” Asbestos and environmental Workers compensation Professional liability

But, if things go badly more information and disclosure is key

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The Big Hole – $69BN in Reserve Deficiency

$84

$54

$69

0

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90

Low-end Mid-point High-end

$40BN: A&E

$1BN: 9/11

$28BN: Core Reserves

$billions

Source: ISO

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P&C Insurance – What Investors Care About Traditional GAAP and Statutory Credit Metrics

Financial leverage (Debt/Capital, etc) Fixed-charge coverage (EBIT Interest Coverage, etc) Statutory metrics (dividend capacity, premiums/surplus, RBC) Underwriting, notably the calendar year combined ratios

“Tail” is a vital driver of valuations Short-tail writers (notably auto) trade at a premium (lower risk) Casualty writers trade at a discount (perceived as riskier) Credits spreads reflect this

Management matters Companies with limited historical reserve inadequacy have premiums Surprises are not welcomed

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Investors Look Through Ratings

The Chubb Corporation (senior debt is rated: A2/A)

- Debt/capital of 20.0%

- Dividend capacity (FCF) to interest expense is 7.9x

- Five-year credit default swaps are quoted at +25bp

XL Capital (senior debt is rated: A2/A)

- Debt/capital of 24.5%

- Dividend capacity (FCF) to interest expense is 6.5x

- Five-year credit default swaps are quoted at +52bp

Why?

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Credit Market Valuations – “Tail” Matters

PGRSAFC

HIGCB

STA

CNA

XLACE

ALL

LIBMUT

0

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100

Cre

dit

Def

ault

Sw

ap S

pre

ad (

bp

)

Short-tail Short-tail & long-tail

Long-tailSource: Morgan Stanley

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P&C Insurers Nearly Always Trade at Discount..

bpP&C Insurance versus Banks & Corporates

Source: Morgan Stanley

Current Valuations

P&C = 108 bp

Banks = 64 bp

Corporates = 99 bp

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290

Jun-00 Jun-01 Jun-02 Jul-03 Jul-04 Aug-05

Property & Casualty Insurance Banks Corporate Index

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P&C at a Discount to Life Insurers Too

bpP&C Insurance versus Life Insurance

Source: Morgan Stanley

Current Valuations

P&C = 108 bp

Life = 83 bp

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290

Jun-00 Jun-01 Jun-02 Jul-03 Jul-04 Aug-05

Property & Casualty Insurance Life Insurance

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Pricing: Neither Combating, nor Compounding Reserve Issue

CIAB data show higher rates in only two lines of business during 2Q05

Source: Morgan Stanley, The Council of Insurance Agents and Brokers

Down Unchanged Up NABusiness Interruption 68% 16% 4% 12%Broker E&O 13% 21% 21% 45%Commercial Auto 74% 17% 7% 2%Commercial Property 92% 4% 4% 0%Construction Risks 53% 18% 13% 16%D&O 54% 26% 11% 9%Employment Practices 53% 28% 6% 13%General Liability 82% 10% 7% 2%Medical Malpractice 12% 14% 21% 54%Surety Bonds 9% 45% 7% 39%Terrorism 19% 54% 6% 22%Umbrella 71% 22% 6% 2%Workers’ Compensation 67% 22% 8% 4%

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Capital and Margins Provide a Strong Backdrop

Source: Morgan Stanley, AM Best, and ISO

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450$ Bn

90

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100

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120Percent

Industry Surplus (Left Axis)

Combined Ratio (Right Axis)

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SAO – What the Credit Market Thinks

Not widely used or reviewed by analysts or investors

Discussions with management teams are generally more useful

Recently enhanced disclosure from some companies on “reserve ranges” has been applauded

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Investor Toolkit – Avoiding Surprises Staying abreast of management comments:

Investors conference calls 10-Qs, 10-Ks Statutory filings

Schedule P Not as widely used in credit markets as one would think Time constraints in performing analysis

GAAP Disclosure on A&E is Useful Survival ratios, while crude, help investors get their arms around the issue for

the industry

Many and any other means

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Investor Wishlist More comments on past problems

Companies and investors try to have “short memories” Are past problems in certain lines of business contained?

Enhanced Disclosure from Bermuda Disclosure from the Island improving but more welcomed ACE’s global loss triangle well-received

Disclosure is one thing, management blessing is another Senior management (CEO) blessing of reserves goes a long way

If there are reserve charges, let the market know why with details

Many and any other means

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Takeaways Reserve inadequacy an omnipresent concern for investors

Concerns remain but are abating somewhat Market valuations reflect investor concern

SAO generally not used by the credit market More “marketing” by underwriters/the profession could change this

Investors’ reserve assessment More qualitative than quantitative The bigger the toolkit the better

Management is key to the process Industry not likely sailing into heightened reserve uncertainty

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DisclaimerCredit Products Rating Distribution Table(as of August 3, 2005)

Rating Count% of Total Count

% of Total IBC

% of RatingCategory

Overweight 166 25% 91 25% 55%

Equal-weight 376 56% 211 58% 56%

Underweight 129 19% 61 17% 47%

Total 671 363

Equal-weight (E) Over the next 6 months, the fixed income instrument’s total return is expected to be in line with the average total return of the relevant benchmark, as described in this report, on a risk adjusted basis.Underweight (U) Over the next 6 months, the fixed income instrument’s total return is expected to be below the average total return of the relevant benchmark, as described in this report, on a risk adjusted basis.More volatile (V) The analyst anticipates that this fixed income instrument is likely to experience significant price or spread volatility in the short term.

Coverage Universe Investment Banking Clients (IBC)

Coverage includes all companies that we currently rate. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

Analyst Ratings DefinitionsOverweight (O) Over the next 6 months, the fixed income instrument’s total return is expected to exceed the average total return of the relevant benchmark, as described in this report, on a risk adjusted basis.

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Important Disclosures on Subject Companies Issuer Name: AetnaFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 07/26/2005

Issuer Name: Cigna HealthcareFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 07/26/2005

Issuer Name: Coventry HealthcareFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Overweight --as of 07/26/2005

Issuer Name: Humana Inc.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Underweight --as of 07/26/2005

Issuer Name: UnitedHealth GroupFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 07/26/2005

Issuer Name: WellpointFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Overweight --as of 07/26/2005

Issuer Name: ACE LimitedFixed Income Research 12-Month HistoryIssue Type: $ Sr. Sec.Current Rating: Overweight --as of 07/22/2005Previous Rating: --as of 03/18/2005 --Equal-weightPrevious Rating: --as of 09/08/2004 –Underweight

Issuer Name: Allstate CorporationFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Equal-weight --as of 08/25/2004

Issuer Name: Axis Capital Holdings Ltd.Fixed Income Research 12-Month HistoryIssue Type: $ Sr SecuredCurrent Rating: Overweight --as of 12/02/2004

Issuer Name: The Chubb CorporationFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Equal-weight --as of 08/25/2004

Issuer Name: CNA FinancialFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Equal-weight --as of 10/04/2004

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Important Disclosures on Subject Companies Issuer Name: Liberty MutualFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Underweight --as of 04/01/2005Previous Rating: --as of 11/16/2004 --Equal-weightPrevious Rating: --as of 08/13/2004 –Overweight

Issuer Name: Markel Corp.Fixed Income Research 12-Month HistoryIssue Type: $ Sr. Sec.Current Rating: Equal-weight --as of 10/04/2004

Issuer Name: The Progressive CorporationFixed Income Research 12-Month HistoryIssue Type: $ Sr. Sec.Current Rating: Equal-weight --as of 09/08/2004

Issuer Name: Safeco CorporationFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Underweight --as of 08/25/2004

Issuer Name: W.R. Berkley Corp.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Overweight --as of 10/04/2004

Issuer Name: Xl Capital Ltd.Fixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Equal-weight --as of 01/21/2005Previous Rating: --as of 08/25/2004 –Overweight

Issuer Name: AssurantFixed Income Research 12-Month HistoryIssue Type: $ Sr. UnsecuredCurrent Rating: Overweight --as of 10/04/2004

Issuer Name: Hartford Fin. Services Grp.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 09/15/2004

Issuer Name: Jefferson Pilot Corp.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Underweight --as of 09/15/2004

Issuer Name: Lincoln National CorpFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 09/15/2004

Issuer Name: Metlife Inc.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Overweight --as of 09/15/2004

Issuer Name: Nationwide Finl. Svcs.Fixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 10/04/2004

Issuer Name: Principal Financial GroupFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 09/15/2004

Issuer Name: Prudential FinancialFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Equal-weight --as of 09/15/2004

Issuer Name: UnumprovidentFixed Income Research 12-Month HistoryIssue Type: $Current Rating: Overweight --as of 02/07/2005

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Important Disclosures on Subject Companies

As of July 29, 2005, Morgan Stanley beneficially owned 1% or more of a class of common equity securities/instruments of the following companies covered in this report: Aetna, Cigna Healthcare, Humana Inc., UnitedHealth Group, Axis Capital Holdings Ltd., The Chubb Corporation, Xl Capital Ltd., Assurant, Hartford Fin. Services Grp., Lincoln National Corp, Principal Financial Group, Prudential Financial.

As of July 29, 2005, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in this report (including where guarantor of the securities): Cigna Healthcare, Coventry Healthcare, Wellpoint, Allstate Corporation, The Chubb Corporation, CNA Financial, Liberty Mutual, The Progressive Corporation, Safeco Corporation, Lincoln National Corp, Metlife Inc., Nationwide Finl. Svcs., Prudential Financial, Unumprovident.

An employee or director of Morgan Stanley serves as an officer, director or advisory board member of Allstate Corporation.

Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of UnitedHealth Group, ACE Limited, Allstate Corporation, Axis Capital Holdings Ltd., CNA Financial, W.R. Berkley Corp., Xl Capital Ltd., Assurant, Hartford Fin. Services Grp., Nationwide Finl. Svcs., Principal Financial Group, Prudential Financial.

Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Aetna, Cigna Healthcare, UnitedHealth Group, ACE Limited, Allstate Corporation, Axis Capital Holdings Ltd., CNA Financial, The Progressive Corporation, W.R. Berkley Corp., Xl Capital Ltd., Assurant, Hartford Fin. Services Grp., Jefferson Pilot Corp., Metlife Inc., Principal Financial Group, Prudential Financial.

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Aetna, Cigna Healthcare, Coventry Healthcare, Humana Inc., UnitedHealth Group, Wellpoint, ACE Limited, Allstate Corporation, Axis Capital Holdings Ltd., The Chubb Corporation, Liberty Mutual, Safeco Corporation, W.R. Berkley Corp., Xl Capital Ltd., Assurant, Hartford Fin. Services Grp., Jefferson Pilot Corp., Lincoln National Corp, Metlife Inc., Nationwide Finl. Svcs., Principal Financial Group, Prudential Financial, Unumprovident.

Morgan Stanley policy prohibits research analysts from investing in securities/instruments in their MSCI sub industry. Analysts may nevertheless own such securities/instruments to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.

Morgan Stanley is involved in many businesses that may relate to companies or instruments mentioned in this report. These businesses include market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley trades as principal in the securities/instruments (or related derivatives) that are the subject of this report. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.

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