Title: The Financial Community
1The 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
2A 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
3FINANCIAL COMMUNITYS NEEDS FROM ACTUARIES
PERFORMING DUE DILIGENCE
- OF COURSE, TRADITIONAL STUFF
- Reserve evaluation
-
Reprinted Courtesy of Schiffs Insurance
Observer
4FINANCIAL COMMUNITYS NEEDS FROM ACTUARIES
PERFORMING DUE DILIGENCE
- OF COURSE, TRADITIONAL STUFF
- - Reserve evaluation
- - Economic valuation
- - Rate adequacy assessment
FINANCIAL COMMUNITY SEEKS MORE !!
5WHY 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!
7UNDERSTAND THE AUDIENCES
- CEO, Board
- Owner(s)
- Rating Agencies
- SEC (Public)
Improves Input Quality Personal Credibility
8UNDERSTAND 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
9PUT 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
10CAN 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
11WHAT 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
12TO 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
13CONCISELY 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