On the Outside,
Looking In
Meyer Shields, FCAS, MAAA
J.P. Morgan Securities, Inc.
November 28, 2001
Equity Research - Making
Profitable Recommendations for
Investors
 Markets are not perfectly efficient
 Sooner or later, investors recognize value
 Mosaics, few magic bullets
The Value of an Insurance
Company
 PV of Future Earnings – a good starting
point, not an end
 Value to Investors
– Undervalued, Appreciation Potential
– Provide Diversification Opportunities
 The “Takeout Play” – Value to other
companies
Valuation Methods
 Discounted Cash Flows
 Price/Earnings
 Price/Book
 No Eyeballs
Earnings Forecasting
 Need to estimate:
– Revenues
– Expenses
– Taxes
 In insurance-speak: NWP & NEP, Loss
Ratios, Expense Ratios, etc.
 Operating vs. Net Earnings
Prediction Origins
 General Economic Trends
 Insurance-Industry Trends
– North America
– Europe
– Asia
 Company and Line of Business
Developments
Upcoming Challenges –
September 11 Leads The List
 Cost of the event itself
– Unexpected cash outflows
– Line of business convergence
 ‘Too Much Capital’
– Some insurers withdrawing from markets and LOBs
– Significant capital raises in unprecedented (?) hard
market
 Rates, Rates, Rates
More September 11 Fallout
 Creation of Government-Sponsored
Terrorism Pool
 Restricted Underwriting
– War & Terrorism Exclusions
– New Limits and Deductibles
 ‘One Event or Two’ – Public Relations
May Matter
Other Challenges
 “First thing, let’s kill all the lawyers…”
Unanticipated Exposures
 Asbestos
 Mold
 D&O Fallout – The Internet Bubble
 Economic Downturn
 Sins of the Past
As An Actuary
 Provides a thorough understanding of
insurance-related financial concepts
 Less data to use than before
 Background provides both analytical tools
and an understanding of how tools are used