Sector Recommendation: Underweight
We believe that spreads on average in the Property and Casualty (P&C) sector are
not attractive at this time. As can be seen in Exhibit 1 the average P&C 5-year
CDS level is relatively low compared to the Bear Stearns Investment Grade
Index. In addition, we can see from Exhibit 2 that the P&C index is far lower than what
is offered for other highly-rated financial sectors. In 2006, P&C levels were very close to
the levels of banks, brokers, life insurers, and were moderately tighter than financial guaranty
(which includes financial guarantors and mortgage insurers). Over time, we believe
the P&C sector should move much closer to the 2006 differential.
The differential to other financials is perhaps largely due to the weak mortgage environment
and relatively poor liquidity conditions in the capital markets, both of which are
weighing on firms with material mortgage exposure and/or more persistent funding needs.
In contrast, we believe the P&C industry has relatively little risk to the mortgage environment,
and receives most of its funding from customer premium payments which are not
directly at the whims of the capital markets. In addition, the industry is showing excellent
fundamentals at this time from a historical standpoint, including solid profitability, strong
capital, and improved reserve positions, particularly with regards to asbestos and environmental
exposure.
However, despite many reasons why P&C spreads should be favorable, we believe the current
differential is overdone.

Sector Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Company Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ACE Limited (ACE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Allstate Corporation (ALL) . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
American International Group, Inc.(AIG) . . . . . . . . . . . . . . . . .25
Chubb Corporation (CB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
CNA Financial Corporation (CNA) . . . . . . . . . . . . . . . . . . . . . .35
Hartford Financial Services Group, Inc.(HIG) . . . . . . . . . . . . . .40
Liberty Mutual Group (LIBMUT) . . . . . . . . . . . . . . . . . . . . . . .45
Safeco Corporation (SAF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Travelers Companies, Inc. (TRV) . . . . . . . . . . . . . . . . . . . . . . .55
XL Capital Ltd. (XL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Addendum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65