DFA-25 DFA Pricing - In Depth Case Study Memphis B 2:15-3:30

1. Implications ofDynamic Financial Analysis (DFA)on Demutualizationby Jan Lommele andKevin Bingham DFA-25 DFA Pricing - In Depth Case Study Memphis B 2:15-3:30

2. Introduction • Approaches to Demutualization • Why Demutualization • Actuarial Valuation Considerations • Actuarial Valuation Methodology • Deterministic Base Case • Stochastic Simulation • Model Results and Communication • Afterthoughts

3. Approaches to Demutualization • Full Demutualization • Focus of This Paper • Mutual Holding Company • NAIC White Paper Draft on “Mutual Insurance Holding Company Reorganizations”

4. Why Demutualize?“ A C C E S S T O C A P I T A L ” • Key Drivers for Accessing Capital • Entering New Lines of Business • Expansion Into Different Geographic Areas • Investment in Technology and New Products • Increased Competition • Acquisitions • Current Options for Accessing Capital • Retention of Net Profits • Issuance of Surplus Notes • Offer Shares of Stock in Downstream Subsidiary • Merger

5. Actuarial Valuation Considerationsfor Demutualization • Parties Involved • Insurance Department • Policyholders • Lawyers • News Media • Investment Bankers • Tax Specialists • Actuarial Valuation Considerations • Use of DFA • Readability of Analysis • Comfort With Actuarial Assumptions • Conceptualization of Actuarial Valuation Methodology • Comfort With Final Appraisal Range of Value

6. Actuarial Valuation Methodology • Key Assumptions • Leverage Ratio • Renewal Retention Ratio • Opportunity Cost of Capital • Model Set-up • Losses and Reinsurance • Invested Assets • Non-Invested Assets • Uncollected Premiums • Other Liabilities • Unpaid Expenses • Benefit Accruals (Deferred Compensation and Post-Retirement Health) • Other Income • Taxes

7. Actuarial Valuation Methodology • Actuarial Appraisal Range of Value • Implied Dividends or Capital Contributions • Net Liability To Surplus Ratio < Selected Ratio Dividend to Policyholders (DIV) • Net Liability To Surplus Ratio > Selected Ratio Capital Contribution (CC) • Discount DIV/CC and Ending Surplus Stream Using Opportunity Cost of Capital (OCC) • Adjustments • Reserve Inadequacy/Redundancy • Adjustment of Assets to Fair Market Value • Appraisal Value Factor = Simulated Company Value Actual December 31st Surplus

8. Deterministic Base Case

12. Stochastic Simulation • Losses • Premiums • Expenses • Asset Returns • Timing of Cash Flows • Variability of Payout Pattern (% Unpaid) • Premium Collection Lag • Expense Payment Lag

14. Model Results and Communication • Management Discussion • Model Coverage • Name Brand Recognition • Agency Distribution Network • Value of Licenses • Result Overview • Commissioner of Insurance - Public Hearing • Hearing Goal; “Fair and Equitable” • Final Distribution • Stock • Cash • Distributed based upon the ratio of the policyholder’s net-earned premium paid in a timely manner during the three years immediately preceding the adoption of the Conversion Plan to the total net earned premiums received by the Company from all policyholders

15. Afterthoughts • Appraisal Value Factors • Internet Documentation • NAIC Research Library • http://www.naic.org/products/libr/ - Lists a number of articles and documents discussing demutualization and mutual holding companies. • Public Access Network Corporation (PANIX.COM) • http://www.panix.com/~okubo/ - Up to date information on current headlines, demutualization links, state statutes, and reports and articles on demutualization and mutual holding companies. • Glenndaily.com Information Services • http://glenndaily.com/ - Web Site provides the reorganization status of mutual life insurance companies.