Financial  Reinsurance.  Within the Life  Reinsurance  segment,  we also write a
substantial amount of financial reinsurance business. Financial reinsurance does
not transfer  significant  underwriting  risk to the  reinsurer  and is designed
primarily to enhance the current  statutory  surplus of the ceding company while
reducing future statutory earnings as amounts are repaid to the reinsurer. These
financial  transactions  are effectively  collateralized  by anticipated  future
income streams from selected insurance policies. Financial reinsurance typically
has a duration of three to five  years.  These  types of  arrangements  often do
contain  significant  credit  risk;  we manage this risk by only  entering  into
transactions  of this  nature  with  highly-rated  companies  and then  actively
monitoring the financial status of such entities.

Property and Casualty Reserves for Unpaid Claims and Claim Expenses

Our insurance/reinsurance  businesses maintain reserves to cover their estimated
ultimate liability for unpaid claims and claim expenses with respect to reported
and unreported  claims incurred as of the end of each accounting  period (net of
estimated  related  salvage and  subrogation  recoveries).  These  reserves  are
estimates  that involve  actuarial and  statistical  projections of the expected
cost of the ultimate  settlement  and  administration  of unpaid claims based on
facts  and  circumstances  then  known,  estimates  of  future  trends in claims
severity and other variable factors such as inflation, new concepts of liability
and change in claim settlement  procedures.  Insurance  reserves,  by their very
nature,  do not represent an exact  calculation  of liability and, while we have
established  reserves  equal to the current  best  estimate of ultimate  losses,
there   remains  a  high   likelihood   that   further   changes  in  such  loss
estimates--either  upward or downward--will occur in the future.  Adjustments to
previously  reported  reserves for net claims and claim  expenses are considered
changes in estimates for accounting  purposes and are reflected in the financial
statements in the period in which the adjustment occurs.

There is a high  degree of  uncertainty  inherent in the  estimates  of ultimate
losses  underlying  the  liability for unpaid  claims and claim  expenses.  This
inherent   uncertainty  is  particularly   significant   for   liability-related
exposures,  including  latent claim  issues (such as asbestos and  environmental
related coverage  disputes) due to the extended period,  often many years,  that
transpires   between  a  loss  event,   receipt  of  related  claims  data  from
policyholders and/or primary insurers and ultimate settlement of the claim. This
situation is then further  exacerbated for  reinsurance  entities (as opposed to
primary  insurers)  due to  lags  in  receiving  current  claims  data.  Because
reinsurance  protection is often provided on an  "excess-of-loss"  basis whereby
the  reinsurer  is only  obligated  to pay  losses in excess of  pre-established
limits,  notification  is only required to be provided to the reinsurer when the
claim is assessed as having a reasonable  possibility  of exceeding  the primary
insurer's retention  thresholds.  This notification can often be years after the
loss event was initially reported to the primary insurer.

We continually  update loss estimates using both  quantitative  information from
our reserving  actuaries and qualitative  information from other sources.  While
detailed  analysis  is  performed  on a  quarterly  basis to assess the  overall
adequacy  of  recorded  claim  reserves,  a  more  comprehensive  evaluation  is
undertaken  on an annual  basis.  This more  comprehensive  review is  generally
undertaken  and  completed  during  the  fourth  quarter of each year using both
reported and paid claims  activity as of September  30. This more  comprehensive
review encompasses all major reserve segments, with specific additional emphasis
focused on those lines of  business in which  recent  reported  claims  activity
differs significantly from anticipated levels.

The  liability  for claims and claim  expenses  includes  two  components:  case
reserves for reported  claims and IBNR reserves  (incurred but not reported) for
unreported  claims that are estimated to have  occurred  prior to the end of the
respective  accounting  period.  Case reserves are  established  by  experienced
professionals   from  our  claims  teams  based  on   case-specific   facts  and
circumstances  and  are  updated  continually  as  further  information  becomes
available.  Determining  required IBNR reserves is a more complex and often more
subjective  process involving  qualified  actuaries familiar with the underlying
exposures in the portfolio.

With respect to our primary insurance activities, our claims personnel establish
a "case reserve" for the estimated amount of the ultimate payment when the claim
is  reported.  The estimate  reflects the informed  judgment of the claims staff
based  on  general  insurance  reserving  practices  and on the  experience  and
knowledge  regarding  the nature and value of the specific  type of claim.  With
respect  to  our  reinsurance   activities  (as  opposed  to  primary  insurance
activities),  we typically  establish a case reserve when we receive notice of a
claim from the ceding company. Such reinsurance-related reserves are based on an
independent  evaluation  by our claims  departments,  taking into  consideration
coverage,  liability,  severity of injury or damage, jurisdiction, an assessment
of the ceding company's  ability to evaluate and handle the claim and the amount
of reserves  recommended by the ceding company. For both primary and reinsurance
business,  recorded  case  reserves  are  adjusted  periodically  by our  claims

                                       7
<PAGE>

departments  based  on  subsequent  developments  and  audits  of  documentation
supporting the underlying  claims. We have reorganized our claim teams in recent
years into integrated groups aligned with our business structure.  In the course
of this reorganization,  the team recognized that best practices existed in many
of the original claims teams.  In order to leverage these best practices  across
the new claims  organization,  the Global  Claims Team  launched  the Claims Six
Sigma initiative.  Claims Six Sigma has focused on establishing common processes
in areas such as claims adjudication, subrogation, auditing, alternative dispute
resolution and use of structured settlements.

In accordance  with GAAP, we also maintain  reserves for claims incurred but not
reported  ("IBNR").  Such  reserves are  established  to provide for future case
reserves and loss payments on incurred claims that have not yet been reported to
an insurer or reinsurer. In calculating IBNR reserves, we use generally accepted
actuarial  reserving   techniques  that  take  into  account  quantitative  loss
experience data,  together with, where appropriate,  qualitative  factors.  IBNR
reserves are based on claim experience and are grouped both by class of business
and by accident year or  underwriting  year.  IBNR reserves are also adjusted to
take into account certain  additional  factors--such as changes in the volume of
business  written,  reinsurance  contract  terms  and  conditions,  the  mix  of
business,  claims processing and  inflation--that  can be expected to affect our
liability for claims over time.

The  methodology we employ in  establishing  IBNR reserves for a given reserving
segment  consists of a combination  of the use of expected loss ratios  ("ELRs")
and loss  development  factor  based  methodologies  ("LDFs").  The  ELRs,  when
multiplied  by  earned  premiums,  generate  an  expected  ultimate  loss  for a
portfolio of business. For the most recent underwriting year, ELRs initially are
established  jointly by the reserving and  underwriting  teams. The underwriting
teams are comprised of professional underwriters and pricing actuaries. The ELRs
reflect  recent  years'  underwriting  results,  adjusted  for known  changes in
pricing, loss trends,  contract terms and conditions and other factors that will
likely influence actual  underwriting  results achieved (using both quantitative
and subjective  analysis).  As new information  becomes available regarding loss
trends,  pricing levels, and other factors that influence  underwriting results,
ELRs for prior periods are reviewed jointly by underwriting,  pricing actuaries,
reserving   actuaries,   and  selected  business  leaders,   and  revised  where
appropriate.

The  reserving  actuaries  select loss  development  factors based on prior year
claim experience.  The selected loss development factors are used to extrapolate
future loss  development in order to generate  ultimate loss estimates driven by
actual loss experience. While the LDF methods are statistically based, they also
incorporate subjective interpretations of the underlying claim trends.

The LDF-based approach is generally viewed as preferable once an acceptable base
of observable loss activity is available.  Accordingly, for more recent/immature
experience periods, the ELR-based approach is generally more heavily relied upon
due to the  lack of  historical  loss  data on  which  to  perform  the LDF loss
projections. As the experience period matures (i.e., more data becomes available
over time), the weights given to the ELRs are generally shifted to the LDF-based
loss projections.

We apply the ELR and LDF reserving  approaches to over 300 individual  reserving
segments,  each possessing unique actuarial development trends.  However,  these
300  reserving  segments can generally be broadly  assigned to  property-related
exposures or liability-related  exposures.  For property-related  exposures, the
insured "loss event" is normally  readily  apparent (e.g.,  losses due to fires,
windstorms or vehicle  accidents) and the related claims are generally  received
within a relatively short period  following such event.  Property claims involve
relatively  infrequent  disputes as to coverage or determination of damages but,
in such an event,  the disputes are normally  fully  settled  within a few years
following the underlying event. As a result,  the migration within our reserving
process from  reliance on ELRs to the more claims  driven LDF  approach  happens
quite  quickly.  Compared  to  property-related   exposures,   liability-related
exposures  are  often  significantly  more  complicated  and  routinely  involve
situations in which claims are  identified  and  submitted  many years after the
occurrence of the insured  "loss event" giving rise to such claims.  As would be
expected, these types of claims also involve a higher incidence of dispute as to
coverage,  interpretation of contract wording and fair compensation for damages.
Consequently,  it generally  takes a number of years before a sufficient base of
reported  claims  experience  develops  in order to  support  reliable  LDF loss
projections.  Accordingly,  we rely on ELRs within the  reserving  process  much
longer for liability-related exposures than for property-related exposures.

                                       8

<PAGE>

Reserve  Development.  The  development  of our net balance  sheet  property and
casualty  liabilities  for unpaid claims and claim  expenses for accident  years
1992 through 2002 is summarized in the following table.

Net  Liability.  The first row of data shows the  estimated  net  liability  for
unpaid claims and claim expenses at December 31 for each year from 1992 to 2002.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers.  The rows immediately following
the first row of data show  cumulative paid data at December 31, as of one year,
two years, . . ., 10 years of subsequent payments.

Net Liability Re-estimated. The middle rows of data show the re-estimated amount
for previously  reported net liability based on experience as of the end of each
subsequent calendar year's results. This estimate is changed as more information
becomes known about the underlying  claims for individual  years. The cumulative
favorable  (adverse)  development shown in the table is the aggregate net change
in estimates over the period of years  subsequent to the calendar year reflected
at the top of the respective columns.  The amount in the line titled "Cumulative
favorable (adverse)  development ," represents for each calendar year (the "Base
Year") the  aggregate  change in (i) our original  estimate of net liability for
unpaid  claims and claim  expenses for all years prior to and including the Base
Year compared to (ii) our  re-estimate as of December 31, 2002, of net liability
for unpaid  claims and claim  expenses for all years prior to and  including the
Base Year.  Favorable  development  means that the original estimate was greater
than the re-estimate and adverse  development  means that the original  estimate
was less than the re-estimate.

                                       9

<PAGE>
<TABLE>
<CAPTION>
                                           Changes in Historical Reserves for Unpaid Claims and Claim Expenses
                              For the Last Ten Years - GAAP Basis as of December 31, 2002 (Property & Casualty Operations)

                                                                    Year ended December 31,
                             -------------------------------------------------------------------------------------------------------
(In millions)                 1992     1993    1994      1995     1996     1997      1998      1999       2000       2001      2002
                             -------------------------------------------------------------------------------------------------------
<S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>        <C>        <C>        <C>
   Net liability for unpaid
   claims and claim
   expenses                 $3,991   $4,525   $5,071   $9,351   $9,458   $9,114   $12,495   $13,210    $12,202    $12,303    $15,140

Cumulative paid as of:
One year later.......          802      949    1,115    1,964    1,949    2,176     2,867     4,811      4,758      4,798        ---
Two years later......        1,274    1,602    1,804    3,130    3,189    3,241     5,803     7,782      8,035        ---        ---
Three years later....        1,739    2,054    2,341    3,933    3,881    4,863     7,263     9,962        ---        ---        ---
Four years later.....        2,036    2,424    2,708    4,464    5,294    5,648     8,648       ---        ---        ---        ---
Five years later.....        2,293    2,690    2,988    5,686    5,919    6,245       ---       ---        ---        ---        ---
Six years later......        2,485    2,952    3,318    6,151    6,350      ---       ---       ---        ---        ---        ---
Seven years later....        2,688    3,181    3,540    6,488      ---      ---       ---       ---        ---        ---        ---
Eight years later....        2,841    3,353    3,771      ---      ---      ---       ---       ---        ---        ---        ---
Nine years later.....        2,985    3,534      ---      ---      ---      ---       ---       ---        ---        ---        ---
Ten years later......        3,122      ---      ---      ---      ---      ---       ---       ---        ---        ---        ---

Net liability re-estimated
   as of:
One year later.......       $3,919   $4,612   $5,173   $9,192   $9,229   $9,179   $12,410   $13,749    $13,314    $16,341        ---
Two years later......        4,066    4,656    5,313    8,959    9,127    8,655    12,115    14,504     16,798        ---        ---
Three years later....        4,095    4,793    5,256    8,907    8,549    8,453    11,987    17,001        ---        ---        ---
Four years later.....        4,238    4,747    5,155    8,392    8,252    8,601    13,708       ---        ---        ---        ---
Five years later.....        4,154    4,668    4,902    8,029    8,389    9,231       ---       ---        ---        ---        ---
Six years later......        4,075    4,487    4,804    8,180    8,707      ---       ---       ---        ---        ---        ---
Seven years later....        3,942    4,402    4,854    8,454      ---      ---       ---       ---        ---        ---        ---
Eight years later....        3,906    4,461    5,159      ---      ---      ---       ---       ---        ---        ---        ---
Nine years later.....        3,946    4,704      ---      ---      ---      ---       ---       ---        ---        ---        ---
Ten years later......        4,125      ---      ---      ---      ---      ---       ---       ---        ---        ---        ---
Cumulative favorable
   (adverse) development      (134)    (179)     (88)     897      751     (117)   (1,213)   (3,791)    (4,596)    (4,038)       ---
Effect of foreign
   exchange (1)                (12)      16       (9)    (620)    (608)    (289)     (587)     (400)       598        381        ---
                             -----    -----    -----    -----    -----    -----    ------    ------     ------     ------     ------
Cumulative favorable
   (adverse) development,
   excluding foreign         $(146)   $(163)   $ (97)    $277   $  143    $(406)  $(1,800)   $(4,191)  $(3,998)   $(3,657)    $  ---
   exchange                  =====    =====    =====     ====   ======    =====   =======    =======   =======    =======     ======

</TABLE>
<TABLE>
<CAPTION>

(In millions)                         1993     1994     1995      1996      1997      1998      1999      2000      2001      2002
                                      ----------------------------------------------------------------------------------------------

<S>                 <C>             <C>      <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Balance at December 31-gross        $5,312   $6,020   $11,145   $10,869   $10,936   $15,342   $17,435   $16,932   $20,882   $23,839
Less reinsurance recoverables         (787)    (949)   (1,794)   (1,411)   (1,822)   (2,847)   (4,225)   (4,730)   (8,579)   (8,699)
                                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------
Balance at December 31-net           4,525    5,071     9,351     9,458     9,114    12,495    13,210    12,202    12,303    15,140
                                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------
Latest re-estimated liability-
   gross                             5,881    6,408    10,085    10,394    11,431    17,372    22,311    22,796    26,829       ---
Less re-estimated reinsurance
   recoverables                     (1,177)  (1,249)   (1,631)   (1,687)   (2,200)   (3,664)   (5,310)   (5,998)  (10,488)      ---
                                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------
Latest re-estimated liability-net    4,704    5,159     8,454     8,707     9,231    13,708    17,001    16,798    16,341       ---
                                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------
Gross cumulative development          (569)    (388)    1,060       475      (495)   (2,030)   (4,876)   (5,864)   (5,947)      ---
Effect of foreign exchange (1)          17        2      (717)     (674)     (285)     (706)     (444)    1,035       838       ---
                                    ------   ------   -------   -------   -------   -------   -------   -------   -------   -------
Gross cumulative development,
   excluding foreign exchange       $ (552)  $ (386)  $   343   $  (199)  $  (780)  $(2,736)  $(5,320)  $(4,829)  $(5,109)  $   ---
                                    ======   ======   =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>

(1)  The  results of  our  international  operations  translated from functional
     currencies into U.S. dollars are included with our underwriting  operations
     in this table.  The foreign currency  translation  impact on the cumulative
     redundancy   (deficiency)   arises  from  the  difference  between  reserve
     developments  translated  at the  exchange  rates at the end of the year in
     which the liabilities  were originally  estimated and the exchange rates at
     the end of the year in which the liabilities were re-estimated.

Note:  For a description of the purpose of the above table and the various table
sections,  please refer to the immediately  preceding  section entitled "Reserve
Development."

                                       10

<PAGE>

A number of trends that occurred within the insurance  industry,  the economy in
general and several factors specific to us have had a significant  impact on our
recorded  liabilities  for unpaid claims and claim  expenses  during the periods
covered by the preceding table.

In the early to mid  1990's,  generally  adequate  pricing  existed  within  the
overall property and casualty insurance/reinsurance  industry. This is reflected
in the preceding table,  with respect to us, by the relatively modest subsequent
year  reserve  development  applicable  to these  years.  Starting  in the later
1990's,  there was significant  downward  pressure on premium pricing within the
industry  as a number of major  industry  players  were  attempting  to increase
market share.  Based on an observable  acceleration  in reported  claim activity
relative to associated premiums, beginning in 2000, it started becoming apparent
that the level of price  erosion  that  occurred  in the  primary  property  and
casualty insurance  industry in recent years was significantly  greater than had
been previously contemplated.

The  negative  impacts  of this  price  erosion  on  property-related  exposures
manifested  itself  within a few years due to the  relatively  short  historical
settlement  period (i.e.,  the time between when an insured property loss occurs
and the time it is  fully  settled)  applicable  to  these  types of  coverages.
Liability-related  exposures,  on the other hand, are often  significantly  more
complicated and routinely involve  situations in which claims are identified and
submitted  many years after the  occurrence  of the insured  "loss event" giving
rise to such claims. As would be expected,  these types of claims also involve a
higher incidence of dispute as to coverage,  interpretation  of contract wording
and fair compensation for damages. Consequently,  there is a much longer period,
often many  years,  that  transpires  between a loss  event,  receipt of related
claims data from policyholders  and/or primary insurers and ultimate  settlement
of the  claim.  This  situation  is then  further  exacerbated  for  reinsurance
entities  (as  opposed to primary  insurers)  due to lags in  receiving  current
claims  data.   Because   reinsurance   protection  is  often   provided  on  an
"excess-of-loss"  basis whereby the reinsurer is only obligated to pay losses in
excess of pre-established  limits,  notification is only required to be provided
to the reinsurer  when the claim is assessed as having a reasonable  possibility
of exceeding the primary insurer's retention  thresholds.  This notification can
often be years  after  the loss  event was  initially  reported  to the  primary
insurer. As a result of the above, it took a number of years before we were able
to obtain a clearer  picture of the actual level of pricing  insufficiency  that
existed with respect to the 1997  through  2001  underwriting  years and reflect
such realities in our recorded claim reserves.

During the fourth quarter of 2002, we completed our annual  comprehensive review
of recorded  claim  reserves.  As part of this review,  in response to continued
escalation in reported  claim  activity and the resulting  realization  that the
level of price erosion related to  liability-related  exposures  underwritten in
1997  through  2001  were   significantly   greater  than  had  been  previously
contemplated,  we concluded that our best estimate of ultimate losses was higher
in the range of reasonably  possible loss scenarios than  previously  estimated.
Accordingly, we recognized a fourth quarter pre-tax charge of approximately $2.5
billion to increase  recorded  reserves to reflect  the revised  indications  of
remaining  liability.  The  significant  components of this adverse  development
included hospital medical  malpractice  ($300 million),  product liability ($300
million),  professional  liability  ($250  million),  umbrella  liability  ($200
million),  workers  compensation  ($200  million),  individual  liability  ($150
million) and asbestos-related  exposures ($150 million). With amounts recognized
in  previous  quarters  of 2002,  our overall  2002  pre-tax  charge for adverse
development amounted to approximately $3.6 billion.

The significant indicated  deficiencies reflected in the preceding table for the
more recent accident years is primarily attributable to recognition during 2000,
2001 and 2002 of adverse development with respect to liability-related exposures
underwritten  during the 1997 through 2001 time frame.  Also contributing to the
indicated  deficiencies  were higher than expected  industry-wide  property loss
projections   related  to  the  1998  Hurricane  Georges  and  certain  European
windstorms occurring in December 1999.

                                       11


<PAGE>


The  reconciliation  of our beginning and ending property and casualty  reserves
for unpaid claims and claim expenses on a GAAP basis is summarized as follows:
<TABLE>
<CAPTION>

                                                                 Year ended December 31,
                                                         -------------------------------------
(In millions)                                                2002         2001         2000
                                                         -------------------------------------

<S>                <C>                                     <C>          <C>          <C>
Balance at January 1 - gross............................   $20,882      $16,932      $17,435
Less reinsurance recoverables............................   (8,579)      (4,730)      (4,225)
                                                           -------      -------      -------
Balance at January 1 - net...............................   12,303       12,202       13,210
                                                           -------      -------      -------

Claims and expenses incurred:
   Current year..........................................    3,865        4,579        4,401
   Prior years...........................................    3,568          811          934
                                                           -------      -------      -------
                                                             7,433        5,390        5,335
                                                           -------      -------      -------
Claims and expenses paid:
   Current year..........................................     (472)        (761)      (1,290)
   Prior years...........................................   (4,797)      (4,758)      (4,811)
                                                           -------      -------      -------
                                                            (5,269)      (5,519)      (6,101)
                                                           --------     -------      -------

Claim reserves related to acquired companies.............      285            -          279

Foreign exchange and other...............................      388          230         (521)
                                                           -------      -------      -------
Balance at December 31 - net.............................   15,140       12,303       12,202
Add reinsurance recoverables.............................    8,699        8,579        4,730
                                                           -------      -------      -------
Balance at December 31 - gross...........................  $23,839      $20,882      $16,932
                                                           =======      =======      =======
</TABLE>

The  liabilities  for claims and claim  expenses in the preceding  table include
long-term disability claims and certain workers' compensation claims (limited to
run-off business in a Bermuda-domiciled  subsidiary) that are discounted at a 6%
and 3%  rate,  respectively,  for  all  years  presented.  As a  result  of this
discount,  total  liabilities for claims and claim expenses have been reduced by
an  estimated  1% at December  31, 2002 and 2001.  The  accretion of discount is
included in current  operating  results as part of the development of prior year
liabilities.  Discounts amortized as a percentage of claims,  claim expenses and
policy benefits were less than 1% for each of the years ended December 31, 2002,
2001 and 2000.

The reconciliation of property and casualty reserves for unpaid claims and claim
expenses between statutory basis and GAAP basis is summarized as follows:
<TABLE>
<CAPTION>

                                                                                December 31,
                                                               ------------------------------------------------
(In millions)                                                         2002            2001           2000
                                                               ---------------- --------------- ---------------

<S>                                                                 <C>             <C>             <C>
Statutory basis reserves for U.S. companies - net.........          $ 9,728         $ 5,786         $ 6,213
Adjustments to arrive at GAAP basis (1)...................              490             664             500
                                                                    -------         -------         -------
GAAP basis reserves for U.S. companies - net..............           10,218           6,450           6,713
GAAP basis reserves for non-U.S. companies - net..........            4,922           5,853           5,489
                                                                    -------         -------         -------
Total GAAP basis reserves - net...........................           15,140          12,303          12,202
Add reinsurance recoverables..............................            8,699           8,579           4,730
                                                                    -------         -------         -------
GAAP basis reserves - gross...............................          $23,839         $20,882         $16,932
                                                                    =======         =======         =======
</TABLE>


(1)  Statutory  basis  reserve  offsets and  reserves  reclassified  to contract
     deposit assets or liabilities based on risk transfer provisions of SFAS No.
     113.

Asbestos and  Environmental  Exposure.  Included in our liability for claims and
claim expenses are liabilities for asbestos and environmental  exposures.  These
claims and claim  expenses are  primarily  related to policies  written prior to
1986 as the  policies  written  since  1986 have  tended to  explicitly  exclude
asbestos  and  environmental  risks from  coverage  and most of the asbestos and
environmental exposures arise from risks located in the United States.

                                       12
<PAGE>


The three-year  development of claims and claim expense reserves associated with
our asbestos and  environmental  claims,  including case and IBNR  reserves,  is
summarized as follows:
<TABLE>
<CAPTION>

                                                                          Year ended December 31,
                                                                --------------------------------------------
(In millions)                                                        2002           2001           2000
                                                                -------------- -------------- --------------

<S>                <C>                                               <C>            <C>            <C>
Balance at January 1 - gross..............................           $786           $829           $800
Less reinsurance recoverables.............................           (165)          (183)          (195)
                                                                     ----           ----           ----
Balance at January 1 - net................................            621            646            605

Claims and expenses incurred..............................            121             23             99
Claims and expenses paid..................................            (86)           (48)           (58)
                                                                     ----           ----           ----

Balance at December 31 - net..............................            656            621            646
Add reinsurance recoverables..............................            287            165            183
                                                                     ----           ----           ----
Balance at December 31 - gross............................           $943           $786           $829
                                                                     ====           ====           ====
</TABLE>

The  amounts  in the  preceding  table  represent  our best  estimate,  based on
currently  available  information,  of claims  and claim  expense  payments  and
recoveries for asbestos and environmental exposures that are expected to develop
in future years. In connection with a comprehensive  reserve review completed in
the  fourth  quarter  of 2002,  we  benchmarked  our  recorded  asbestos-related
reserves against certain of our industry  competitors  having similar exposures.
The most  common  benchmarking  approach  involves  the  comparison  of what are
referred to as "survival ratios." A survival ratio is a measure of the number of
years it would  take to  exhaust  recorded  asbestos  reserves  based on  recent
payment  activity.  This ratio is derived by taking the current ending  reserves
and dividing it by the average  annual  payments for the most recent three years
(generally  excluding  large  one-time  settlements  such as those  involving  a
commutation  of a  block  of  business).  Based  on  our  industry  benchmarking
analysis, we made the decision to increase specific asbestos-related reserves to
reflect a 12-year survival ratio. This resulted in an approximately $150 million
pre-tax  charge,  which was a component of the overall $2.5 billion charge taken
for adverse development in the fourth quarter.

We monitor  evolving  case law and its effect on  asbestos-related  illness  and
toxic waste cleanup claims.  While our portfolio did not have asbestos and toxic
waste  cleanup  exposures  at the size and scale of many of our  competitors  at
either the  primary or  reinsurance  level,  and we have  implemented  an active
commutation program to eliminate these exposures, many factors may significantly
affect future claim  development.  Among these factors are changing domestic and
foreign   government   regulations   and   legislation,   including   continuing
congressional  consideration of federal  Superfund  legislation,  newly reported
claims,  new contract  interpretations  and other  factors  could  significantly
affect  future claim  development.  While we have  recorded our best estimate of
liabilities for asbestos-related illness and toxic waste cleanup claims based on
currently available information,  it is possible that additional liabilities may
arise in the  future.  It is not  possible to estimate  with any  certainty  the
amount of additional net claims and claim  expenses,  or the range of net claims
and claim expenses, if any, that is reasonably possible; therefore, there can be
no assurance that future  liabilities will not materially  affect our results of
operations, financial position or cash flows.

Other Mass Tort Exposures. In addition to asbestos and environmental  exposures,
we also may have  exposures  to other mass  torts  involving  primarily  product
liability issues such as tobacco products, gun manufacturers and silicone breast
implants.  We have,  in the  past,  generally  avoided  the  products  liability
reinsurance  business,  and, based on currently  available  information,  future
liabilities  resulting from these matters are not expected to be material to our
results of operations, financial position or cash flows.

Life and Health  Reserves for Future Policy  Benefits and  Accumulated  Contract
Values

Future policy benefits for  traditional  life and health  reinsurance  contracts
represent  the  present  value of such  benefits  based on  mortality  and other
assumptions  which were  appropriate at the time the policies were issued or, in
the event that we acquired the policies  from  another  insurer,  at the date of
acquisition.  Interest rate  assumptions  used in calculating  the present value
generally  ranged from 5-9% per annum at December  31, 2002.  Payments  received
from  sales of  universal  life  and  investment  contracts  are  recognized  by
providing   liabilities  equal  to  the  accumulated   contract  values  of  the
policyholders'  contracts.  Interest  rates  credited to such universal life and
investment  contracts are generally  guaranteed for a specified time period with
renewal  rates  determined  by the issuing  insurance  company.  Such  crediting
interest rates ranged from 3-8% per annum in 2002.

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