CAS Seminar on Valuation

Mergers, Acquisitions, and Actuaries: Do We Have the Right Stuff?

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Presenters

• Bill Wilt, Moody’s Investors Service– Report on CAS Project - Actuarial Role in

M&A

• Paul Brehm, St. Paul Fire & Marine– Actuarial Perspective on M&A Work

• Bill Egan, Merrill Lynch– Financial Perspective on M&A and Actuarial

Role

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Goals - Do We Have The Right Stuff?

• Report on Survey of Industry CFOs– Better Understand Role Being Played– Areas of Improvement - Constructive Criticism

• Different Perspectives of Actuarial Role– Inside Profession– Outside Profession

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Overview of VFIC Project

• Actuarial Role in Acquisitions– “The goal of the survey is to provide feedback

to the actuarial community as it strives to create tools and capabilities that will lend further insights into the financial operations of insurance companies.”

– Opportunity to Provide Guidance to Actuarial Community

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

History and Status

• Began Life as CAS RFP in mid-1990s

• Valuation, Finance & Investment Committee - 1998

• Survey of Financial Managers (CFOs) Involved in Recent M&A

• To Date -- 10 Interviews

• Product - Report to CAS

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Overview of Survey

• Background on Acquisition– Motivation for Transaction– Quantitative Models– Qualitative Considerations

• Actuarial Involvement– Description of Role (Quant and Qual)– General Feedback -- Areas of Improvement,

Business Skills

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Summary of Responses - Background

• Motivation – Strategic: New Products, Distribution, Talent

– Financial: Price is Secondary, Though Paramount

“Strategic intent opens the deal, financial reasons close the deal.”

• Models: DCF, Comparable Transactions, Market Multiples

• Qualitative: Aligned with Strategic Motives

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Summary of Responses - Actuarial Role

• Quantitative - 3 Most Common– Reserves and More Reserves– ‘Run-Rate’ Loss Ratios For Use in DCF– Evaluation of Reinsurance Programs– Other Areas Cited Less Frequently:

• DCF Model

• Capital Allocation

• Catastrophe or EIL Models

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Summary of Responses - Actuarial Role

• Qualitative - Surprisingly Infrequent– Compatibility of Operations– Adequacy of Target’s Claims or Financial

Reporting Systems– Negotiations

• Limited Role in (Almost) All Cases

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Summary of Responses - General Feedback

• Favorable Feedback on:– Reserve Analyses, Loss Payouts– Technical and Modeling Skills in General

• Areas to Improve– Too Numbers Driven, Too Theoretical– Need to Broaden Perspective– Conflicting Views on Precision– Accounting and Asset Valuation

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Drill-Down Points

• Accounting/Asset Valuation– Appropriate Level of Knowledge? How Broad Should

Skill Set Be?

• Precision -- Ranges Vs Point Estimates– Understand What User Wants

• Broader Perspective– Common Critique, But Actuaries Provide Balance

• Data and Systems -- Overlooked?

April 10, 2000 CAS Seminar on Valuation St. Louis, MO

Next Steps

• Conclude Interviews– Complete Interviews as Summarize Findings

• Prepare a Report for CAS– Expect to Support Many Initiatives Currently

Underway (Committees on Nontraditional Practice Areas, Seminars)

– Include Educational Recommendations– Provide Benchmark for Future Surveys