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The Financial Community’s Needs From Actuaries In Due Diligence

The Financial Community’s Needs From Actuaries In Due Diligence. A CFO’s Perspective Presented at the CAS Annual Meeting Washington, DC November, 2000 by Gayle Haskell, FCAS, MAAA CFO & Chief Actuary, Providence Washington Insurance Companies. A PERSPECTIVE ON M & A’s.

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The Financial Community’s Needs From Actuaries In Due Diligence

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  1. The Financial Community’s Needs From Actuaries In Due Diligence A CFO’s 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 & A’s • 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 pointRamifications often emerge later “SYNERGIES” COME & GO; FINANCIAL IMPACTS LAST

  3. FINANCIAL COMMUNITY’S NEEDS FROM ACTUARIES PERFORMING DUE DILIGENCE • OF COURSE, “TRADITIONAL STUFF”: • Reserve evaluation Reprinted Courtesy of ‘Schiff’s Insurance Observer’

  4. FINANCIAL COMMUNITY’S 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 aren’t • Volatility of some valuation vehicles Example: “Market Value”, and Market Caps ($B)12/9910/00 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” • It’s 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 TARGET’S 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 AY’s? • 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 --> projected CY performance • Paid development techniques --> Cash flow projections • Pricing trends and opportunities --> WP and cash flow forecasts • Use DFA/other approaches to measure: - risks to financial proforma - target’s 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? • Target’s capabilities • “Fixing it”: Slam dunk? Iffy? • Don’t equivocate SEEK TO BE: More than: THE TEAM’S BEST TECHNICIAN Optimally: THE TEAM’S MVP

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