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The Financial Community

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Decisions required: fast, and at excitable point. Ramifications often emerge later ' ... Paid development techniques -- Cash flow projections ... – PowerPoint PPT presentation

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Title: The Financial Community


1
The Financial Communitys Needs From Actuaries In
Due Diligence
  • A CFOs Perspective
  • Presented at the CAS Annual Meeting
  • Washington, DC
  • November, 2000
  • by
  • Gayle Haskell, FCAS, MAAA
  • CFO Chief Actuary, Providence Washington
    Insurance Companies

2
A PERSPECTIVE ON M As
  • Consolidation to continue, P/C Industry
  • Many reasons to pursue an acquisition
  • Poor Industry results breed opportunities, and
    Risk
  • Many (?most?) Mergers fail Failures more
    visible then internal failures
  • Decisions required fast, and at excitable
    point Ramifications often emerge later

SYNERGIES COME GO FINANCIAL IMPACTS LAST
3
FINANCIAL COMMUNITYS NEEDS FROM ACTUARIES
PERFORMING DUE DILIGENCE
  • OF COURSE, TRADITIONAL STUFF
  • Reserve evaluation

Reprinted Courtesy of Schiffs Insurance
Observer
4
FINANCIAL COMMUNITYS NEEDS FROM ACTUARIES
PERFORMING DUE DILIGENCE
  • OF COURSE, TRADITIONAL STUFF
  • - Reserve evaluation
  • - Economic valuation
  • - Rate adequacy assessment

FINANCIAL COMMUNITY SEEKS MORE !!
5
WHY SEEK MORE?
  • Reserves, economic valuations often a range
    buy/sell decisions arent
  • Volatility of some valuation vehicles
  • Example Market Value, and Market Caps
    (B) 12/99 10/00 Amazon 36
    10 Ins Web 1 .06 AIG
    172 214 Marsh McLennan 24 32
  • Economic valuations may not reveal some important
    pressures Example Cash Is King
  • Its a short-term world!

6
HELP THE CFO THE COMPANY MAKE THE RIGHT
DECISION
  • Understand the audiences
  • Understand the constraints
  • Put skin in the game
  • Can it be fixed? How fast? Costs?
  • What are the risks? Timing? Solutions?
  • To Economic, add nearer-term financial
    impacts

Concisely Articulate Stand Behind Your
Recommendation!
7
UNDERSTAND THE AUDIENCES
  • CEO, Board
  • Owner(s)
  • Rating Agencies
  • SEC (Public)

Improves Input Quality Personal Credibility
8
UNDERSTAND THE CONSTRAINTS
  • Examples
  • - Return horizon accretive to EPS by 2nd
    year?
  • - cash flow demands?
  • Commercial Lines Companies 97 98 99
    Organizations 796 781 746 U/W Cash Flow
    ( 4.3) (10.1) (17.8) Investment Inc. 21.8
    22.2 21.4
  • leverage

CONSTRAINTS, AND CONSOLIDATED CONSIDERATIONS,
MAY OUTWEIGH TARGETS STAND ALONE VALUE
9
PUT SKIN IN THE GAME
PUT SKIN IN THE GAME
12M 200G
  • Ranges often appropriate, BUT
  • For Acquisition decision , not necessarily good
    enough
  • CFO needs tighter range , key risks, When , ..

AVOID PERCEPTION MORE IMPORTANT TO NOT BE WRONG -
THAN - TO BE HELPFUL
10
CAN IT BE FIXED? HOW FAST?
  • Current and recent accident years Trend?
    Expectations next 2-3 AYs?
  • Cash flow To improve? Deteriorate? Asset
    implications?
  • Concentration Excessive? Implications?
  • Data content quality Ability to effectively
    manage book
  • Quality of Key Personnel

11
WHAT ARE THE RISKS? TIMING? SOLUTIONS?
  • Asbestos? Other singular exposures?
    Reinsurance solutions?
  • Developments, key state/line? How soon impact
    Net Income?
  • Past successes/failures masking emerging picture?
    Examples
  • Release of previous reserve redundancies
  • Runoff of unprofitable business masking
    profitable growth

12
TO ECONOMIC, ADD NEARER-TERM FINANCIAL IMPACTS
  • AY Reserve development potential --gt projected
    CY performance
  • Paid development techniques --gt Cash flow
    projections
  • Pricing trends and opportunities --gt WP and cash
    flow forecasts
  • Use DFA/other approaches to measure
  • - risks to financial proforma
  • - targets asset allocation vs. financial goals

13
CONCISELY ARTICULATE STAND BEHIND YOUR
RECOMMENDATION
  • Concise, to the point due diligence is unlike
    fine wine
  • Provide straightforward, comprehensive linkage
  • Longer term reserves, valuation with
  • Nearer term CY projections, cash flow
    estimates, etc .
  • Go beyond the numbers
  • Any walk-away issues you encountered?
  • Targets capabilities
  • Fixing it Slam dunk? Iffy?
  • Dont equivocate

SEEK TO BE More than THE TEAMS BEST
TECHNICIAN Optimally THE TEAMS MVP
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