135 final paper fickes

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The Correlation between Actuarial Valuations andInsurance Company Market Valuations

Steven W. Fickes, F.S.A.

I. INTRODUCTION

The purchase price of a Target Insurance Company is typically determined through an actuarialvaluation. In a very simplistic form, an actuarial valuation is defined as the discounted value of theprojected future cash flows from operations of the Target Insurance Company, plus its adjusted net worth.Cash flows are basically defined as the projected distributable earnings, which are typically assumed toequal the projected net after tax earnings of the Target Insurance Company, determined under statutoryaccounting practices (SAP).

When an Insurance Company goes public in an initial public offering (IPO), Investment Bankersdetermine the public company valuation price by reference to comparable price to earnings (P/E) andprice to book value (P/BV) ratios. Both ratios are calculated using earnings and book values determinedaccording to generally accepted accounting principles (GAAP). After an IPO is completed, the commonstock price of the Insurance Company is perceived as being largely driven by GAAP financial results.

For most investors, the only financial statements readily available in a useful form are the GAAPfinancial statements. Often times, even the senior management teams of insurance companies come to viewtheir companies as two separate entities - the Statutory Companies and the GAAP Companies. Whenproperly applied, both accounting standards are inter-related; and, therefore, both should support consistentvaluations.

The purpose of this paper is to demonstrate that there is a strong correlation between actuarialvaluations and the day-to-day trading price of the equity securities of publicly traded U.S. InsuranceCompanies. Furthermore, it appears that investors in the public markets are attempting to find accuratevalues through trial and error using various proxies. Properly constructed actuarial valuations provide abetter and more stable determination of the value of insurance companies than the valuation proxies

currently being employed in the public markets.

II. VALUATION PROXIES

One of the first issues to consider is: how, if public markets are investing based on GAAP financialinformation, can such public market valuations correlate to actuarial valuations, which are entirely drivenby statutory accounting?

The answer is that most proxies are derived from fact and not fantasy. A common problem is thatoftentimes the user of a valuation proxy relies entirely on the proxy and therefore loses sight of the fact thatthe proxy is merely an approximation.

For example, there was a time in which portfolio managers traded fixed income securities relying

upon the rule of fives. The rule represented the approximate change in the price of a bond for every fivebasis point change in yield. That was in the days of pre-computer and pre-calculator, which surprisinglywere not that long ago.

P/E ratios implicitly assume a pattern of future earnings and a discount rate. If an investor demandsan after-tax rate of return of 15%, the appropriate multiple is 6.67 times earnings assuming no growth inearnings and 11.5 times earnings, assuming earnings growth of 5% per year. The derivation of both of thesemultiples can be shown mathematically.

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if:

EV0 = Equity Value of an enterprise at time 0

CFt = Cash Flows, or earnings, in year t

CFt+1

= CFt* (1+g), where g represents the annual growth in earnings

v = 1/(1 + i), where i represents the required rate of return

then:

EV0 = v * CF1 + v2 * CF2 + v

3 * CF3 + . . .

EV0 = v * (1 + g) * CF0 + v2 * (1 + g)2 * CF0 + v

3 * (1 + g)3 + . . .

EV0 = CF0 * (1 + g) / (i-g)

In estimating the equity values of insurance companies, the use of GAAP earnings in place ofstatutory earnings (cash flows) multiplied by a P/E ratio is convenient because GAAP can act to smooth

earnings. Offsetting the advantage of potentially smoother earnings is the disadvantage of opaque financialstatements at best, and too often, completely non-transparency.

Using a multiple of GAAP book values is also a commonly used approximation or proxy for equityvaluations. For Property & Casualty (P&C) insurance companies, the book value is expressed relative tothe amount of premiums which can be written, which in turn drives profitability. With Life insurancecompanies, the deferred acquisition assets (DAC) and value of business acquired (VOBA) represent aportion of the companys embedded value. Based upon historical observations, typically, the DAC andVOBA assets, both of which are GAAP assets, tend to be in the 40% to 60% range of a companysembedded value. The use of a multiple of GAAP book value, therefore, approximates all of the componentsof an actuarial valuation.

While using GAAP financials as the basis for estimating the equity value of an insurance group

maybe convenient, GAAP valuations can be flawed because GAAP financial results can vary significantlyfor two identical companies, depending on the objectiveness of management in establishing assumptionsand depending on the timing and circumstances under which such assumptions were established. Whileinvestors and analysts attempt to adjust for such factors, the introduction of such adjustments moves thevaluations towards art and away from science.

Therefore, if one is to conclude that P/E and P/BV ratios are simplified attempts to arrive at avaluation using as a basis GAAP financials, why not use actuarial valuations which rely on the moretransparent and less subjective statutory financials?

III. ACTUARIAL VALUATIONS BARRIERS TO USE

A.) Organization Structure

Anyone who has ever been involved in the development of a traditional actuarial valuation knowsthat it generally involves teams of actuaries and can take weeks or months to complete. Added to thealready inherent level of complexity is the common practice of Insurers to operate through multipleregulated insurance entities, referred to herein as (Regulated Insurance Companies).

For example, Chart 1 below shows a portion of the corporate organization structure of ProgressiveCorporation. While most stock market investors would regard Progressive as one insurance company, inreality, it is comprised of approximately sixty (60) subsidiaries, of which over half are Regulated InsuranceCompanies.

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NAIC TIER 1 TIER 2 TIER 3 TIER 4 TIER 5

GROUP 155 Progressive Corporation (PGR)

24260 Progressive Cas Ins Co37286 PROGRESSIVE GULF INS CO-PGR SUB42412 Progressive Gulf Ins Co16322 Progressive Direct Ins Co32786 Progressive Specialty Ins Co11770 United Fncl Cas Co12879 PROGRESSIVE COMMERCIAL CASUALTY CO42919 Progressive Northwestern Ins Co38628 Progressive Northern Ins Co37834 Progressive Preferred Ins Co10187 Progressive MI Ins Co

24252 Progressive American Ins Co10193 Progressive Express Ins Co42994 Progressive Classic Ins Co37605 Progressive Marathon Ins Co10192 Progressive Select Ins Co24279 Progressive Max Ins Co10042 Progressive Northeastern Ins Co35190 Progressive Mountain Ins Co10243 National Continental Ins Co44288 Progressive Choice Ins Co11851 Progressive Advanced Ins Co21727 Progressive Universal Ins Co27804 Progressive West Ins Co

38784 Progressive Southeastern Ins Co44180 Mountain Laurel Assur Co17350 Progressive Bayside Ins Co10050 Progressive Security Ins Co10067 Progressive HI Ins Corp21735 Progressive Premier Ins Co Of IL11410 Drive NJ Ins Co44695 Progressive Paloverde Ins Co10194 Artisan & Truckers Cas Co12302 Progressive Freedom Ins Co14800 Progressive Garden State Ins Co29203 Progressive Cnty Mut Ins Co

Corporate Structure for Progressive Corporation (partial)

Chart 1

as of December 31, 2008

The organizational chart, shown above, highlights companies both by tier and type of companywithin the organization structure. A Tier 1 Subsidiary, for example, is a subsidiary held directly by theholding corporation. Tier 2 Companies have a single intermediate parent between the Tier 2 Company andthe ultimate holding company. This layering of companies within an organizational structure allowscompanies reporting under statutory accounting principles to, at times, double count statutory capital andsurplus. This is referred to as stacking. The occurrence of stacking obscures statutory accountingprinciples financial statements and, thereby, makes any actuarial analyses more difficult.

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In the U.S., organizational charts are included in Schedule Y of statutory statements filed byregulated insurance companies. All regulated insurance companies file statutory financial statements withthe National Association of Insurance Commissioners, (NAIC), and the state insurance department,where they are licensed.

The organizational structure shown above is abbreviated in that it does not include all the companieswithin Progressive Corporations organization structure. The Companies highlighted in yellow representthe regulated P&C Insurance Companies within Progressive Corporation. It should also be noted thatProgressive Corporation was not singled out because it operates through so many regulated insurancecompanies. In fact, for its size, Progressive has one of the simpler organization structures compared to otherpublicly insurance groups. For example, American International Groups organizational structure, before itstarted its divestitures, filled six type written pages in single line format.

It is easy to understand therefore, if the actuarial valuation of a single regulated Insurance Companyrequires teams of actuaries working weeks or months to complete, valuations for multiple RegulatedInsurance Companies, within any actionable time frame, would be virtually impossible.

In order to create actuarial valuations for publicly traded insurance groups, which will be discussedlater herein, it was necessary to created consolidated financial statements for all of the regulated P&CInsurance Companies within every insurance group combined, and when applicable, consolidated financial

statements for all regulated Life Insurance Companies within each insurance group. The process of creatingthe consolidated financials for the Regulated Insurance Companies involves the elimination for eachindividual Regulated Insurance Company within the consolidation, all affiliated common equity and theincome from affiliated common equity investments.

Through the elimination of all affiliated common holdings in consolidating the Regulated InsuranceCompanies, the number of valuations required for each insurance group can be reduced to at most two: avaluation for the regulated P&C Insurance Companies and a valuation for the regulated Life InsuranceCompanies.

B.) Valuation of the Holding Company and Other Operations

Another difficulty that arises when attempting to apply the methodology of an actuarial valuation toa publicly traded insurance group is the Valuation of the Holding Company and Other Operations. The

information required to value the Holding Company and Other Operations is not available through statutoryfilings of the Regulated Insurance Companies. Such information can, however, be obtained from aCompanys annual 10-K filings with the Securities and Exchange Commission.

The most significant components in the valuation of the Holding Companies and Other Operationsare discussed below.

Cash and Invested Assets:Holding Company Cash and Invested Assets, other than investments insubsidiaries, are reported in the condensed financial statements for the parent company in the annual 10-Kfiling.

Holding Company Debt: Unaffiliated debt is reported in the consolidated balance sheets of theparent company, including both long-term and short-term debt.

Affiliated Debt:Affiliated Net Receivable/Payable to Parents, Subsidiaries, and Affiliates is reportedin the consolidated financial statements for the parent company in the annual 10-K filing. Since theseamounts are also included in the adjusted net worth of the Regulated Insurance Companies, to avoid doublecounting, they must be removed from the valuation.

Value of Other Operations: There is no simple method of valuing Other Operations. This can onlybe done through research such as determining the original purchase price or carrying values if the OtherOperations are held as investments by any of the Regulated Insurance Companies.

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For most publicly traded U.S. Insurance Groups, the value of Other Operations is not significant. Agood method by which to gauge the significance of Other Operations is to compare the consolidatedstatutory assets of the Regulated Insurance Companies, not including affiliated equity and debt, to theparent companys consolidated assets shown on a GAAP basis in the annual 10-K filing. Below, Exhibit 1demonstrates such a comparison, again using Progressive Corporation for illustrative purposes.

Exhibit 1, shown below, illustrates that the consolidated statutory assets of ProgressiveCorporations regulated insurance companies represent approximately 95% of Progressive Corporationsconsolidated GAAP assets. Goodwill, Deferred Acquisition Assets (DAC) and Value of BusinessAcquired (VOBA), all items applicable only to GAAP, represent 2% of the GAAP assets. Reinsurancerecoveries and other GAAP asset represent the remaining 3% of GAAP assets. In Progressives case, atleast, on an asset basis, the statutory balance sheets capture almost the entire company. For insurancegroups with operations outside of the regulated insures, such operations can manually be adjusted if it isdeemed to be material to the overall valuation.

Exhibit 1

95%

2%2%-1%

US Statutory Insurance Assets

DAC and VOBA Assets

GAAP Reinsurance Receivable

All Other Assets

GAAPversusStatutoryAssetAnalysisDecember31,2008

Source: Raedel Financial Solutions

C.) Access to Available Information

Once the holding company and other operations have been valued, the remaining value of theenterprise is the actuarial value of the regulated insurance companies within a group. This is an obstacle inthat U.S. companies, at least, do not annually create such valuations; and, when they are created, areseldom made public. To independently create a traditional actuarial valuation would require access to

inside information and management. Fortunately, however, the statutory financials provide an abundanceof financial information from which non-traditional actuarial valuations can be built.

IV. NON-TRADITIONAL ACTUARIAL VALUATIONS

Non-traditional actuarial valuations or economic valuations can be performed using only publiclyavailable financial data, primarily from the statutory filings the regulated insurance companies provide tothe NAIC. This information serves as the basis for the assumptions necessary to create projections.However, by using assumptions derived solely from public data, the assumptions become somewhat sterile

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in that they only reflect historical performance and not managements outlook, insights, pessimism, oroptimism. On the other hand, using only public financial data may be beneficial in that all assumptions canbe derived more consistently, mechanically and objectively, thereby removing some of the actuarial artand managerial bias, which may be present in a traditional actuarial valuation.

The non-traditional actuarial valuation, which relies on assumptions derived from publicinformation, mimics the form of a traditional actuarial valuation, the components of which are discussedbelow.

Adjusted Net Worth: The combined total adjusted statutory net worth of all of the combined U.S.Regulated Insurance Companies within a group can be obtained from the statutory statements filed by eachcompany. All affiliated common equity investments must be excluded from reported Capital and Surplus.Included in the adjusted statutory net worth is the consolidated capital and surplus, adjusted for affiliatedinvestments, and for Life Insurance Companies, the interest maintenance reserve and the asset valuationreserve.

Cost of Capital:The cost of capital is an imputed charge made in order to reflect the fact that at leasta portion of a Regulated Insurance Companys adjusted net worth is not immediately available toshareholders. The capital must remain in the company to support its business and ratings. The cost ofcapital each year is assumed to equal the difference between:

1) the after-tax rate of return required by shareholders, and2) the after-tax investment yield the company could reasonably earn on investments, applied to the

minimum capital that the companies must maintain each year.The projected annual cost of capital is then discounted back to the valuation date using selected discountrates.

Value of Existing and New Business:The value of the existing and new business is calculated as ofthe valuation date based on the discounted present values of projected statutory income for fifty (50)calendar years following the valuation date. For new business, it is assumed that ten years of new businessis written. The projected statutory income amounts are developed based on assumptions derived from thehistorical statutory financial statements of the Regulated Insurance Companies within an insurance group.

The projected statutory income amounts are determined based on unit expense assumptions

developed by line of business based on industry results, or the insurance companys actual unit expenses, iflower. For lines of business where the insurance companys unit expenses exceed the industry unitexpenses, the difference is calculated and assumed to be an expense over-run.

Policyholder Dividend Obligations:This represents an adjustment for the estimated present value offuture policyholder dividend obligations, after tax.

Expense Over-runs: An additional expense amount, for each line of business, is calculated bycomparing a companys reported expense ratios to the industry expense ratios. If the companys expenseratios exceed the industry expense ratios, the excess is considered to be an expense overrun and is projectedassuming a run-off at a rate of 10% per year. The present value of the projected expense over-runs iscalculated and represents a potential offset against the overall valuation of the company. If a company ismanaging its business below industry expense ratios, 100% credit is given in all future projection years for

such expense efficiency.

Estimate Loss Reserve Deficiency: The estimated value of a P&C Insurance Companys operationmust also include an estimate of the loss reserve deficiency, if any. The loss reserve deficiency can beestimated using several different methods together with the information provided in the Schedule P of thestatutory annual statements.

Other Adjustments: Insurance Companies at times assume reinsurance from other companies andcede reinsurance to other companies. Because non-traditional actuarial valuation projections are based on

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an analysis of direct business, an estimate must be made for the present value of the projected net cost ofreinsurance, after tax.

Actuarial Value (non-traditional) after tax: The estimated non-traditional actuarial value, after tax,is calculated as follows:

1) Adjusted Net Worth, less the Cost of Capital, plus2) Net Existing and New Business Values, less3) Adjustments for projected Expenses Over-runs and Policyholder Dividend Obligations, plus4) Other Adjustments, including outstanding debt.

Assumptions: The assumptions used to project future statutory earnings should be based onhistorical results of the company, the industry and peer companies. However, most importantly, theformulas and methods used should be consistently applied to all companies. If this is done, some of thesubjectivity, which at times can be introduced into traditional actuarial valuations, is removed.

V. NON-TRADITIONAL ACTUARIAL VALUATIONS - CASE STUDY

At this point, an actual case study may be useful.

The MONY Group, Inc. and AXA Financial, Inc. announced that they had agreed to a transaction

under which AXA Financial would acquire 100% of MONY in a cash transaction valued at approximately$1.5 billion.

The corporate organization structure of the MONY Group as of the prior year-end is shown below inChart 2. The companies highlighted in blue represent the regulated Life Insurance Companies; the MONYGroup had no U.S. P&C insurance operations.

Chart 2

The MONY Group, Inc

Organizational Structure prior to acquisition

Using the methods and processes previously discussed, an economic value range for the MONYGroup, Inc. of from $1.215 billion to $1.558 billion was established using a non-traditional actuarialvaluation based entirely on publicly available financial information. The components of the valuation arediscussed below.

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VALUATION SUMMARY The MONY Group

A.) Holding Company and Other Operations

Cash and Invested Assets:Holding Company Cash and Invested Assets, other than investments insubsidiaries, of $221.1 million were reported in the condensed financials for the parent company.

Holding Company Debt: The unaffiliated debt of $883.3 million was reported in the consolidatedbalance sheets of the company. This amount included long-term debt of $876.3 million, and $7.0 millionof short-term debt.

Affiliated Debt: Affiliated Net Receivable/Payable to Parents, Subsidiaries, and Affiliates in theamount of a $3.1 million payable was reported in the financial statements of the consolidated U.S.Insurance operations along with $1.3 million of affiliated invested assets. Since these amounts wereincluded in the net worth of the U.S. Insurance operations, they were removed from the consolidatedvaluation to avoid double counting.

Value of Other Operations: The estimated value assigned to the Other Operations of the MONYGroup was $471.1 million. This was determined using $162.9 million for the value of the non-insuranceinvestments held by the Regulated Insurance Companies, their respective statutory book value and $308.2

million for the Advest Group Inc, its original purchase price.

B.) Valuation of U.S. Life Insurance Operations

Value of Business: The estimated future statutory earnings for the MONY Life InsuranceOperations existing business were projected and then discounted at 8%, 10%, and 12%, producing after-tax values ranging from $1.785 billion to $2.252 billion. The values of statutory new business weredeveloped by projecting the anticipated statutory profits from ten years of new business. The projectedstatutory profits were then discounted using rates of 10%, 12%, and 14% to produce an after-tax valuerange of from $375 million to $637 million.

Cost of Capital: The Cost of Capital is normally the difference between Required Capital and thelesser of discounted cash flows from interest earned after taxes at 6.5% on the Required Capital. For theMONY Group, however, the Cost of Capital adjustment was limited to 50% of the Required Capital.

Policyholder Dividend Obligations: Future policyholder dividends were projected then presentvalued using discount rates of 8%, 10%, and 12%. The present values of the policyholder dividendobligations for the MONY Group were significant, ranging from $959 million to $1.281 billion.

Expense Over-runs: An additional expense amount for each line of business was calculated bycomparing the companys reported expense ratios to the industry expense ratios. The expense over-run wasthen projected assuming a run off at a rate of 10% per year. The present value of the projected expenseover-runs was offset against the overall valuation of the company. The MONY Group had significantexpense over-runs, which on a present value basis, even assuming a 10% reduction per year, exceeded $500million.

Other Adjustments: No Other Adjustments were made to the valuation of the U.S. Life InsuranceOperations.

Tax Rate:An effective tax rate of 35% was applied to all estimated future statutory earnings.

C.) Valuation of US Property Casualty Operations:No US Property Casualty operations wereowned.

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In Table 1, which is shown below, the various components of value are summarized:

Table 1

The MONY Group Inc.

Non-Traditional Actuarial Valuation RangeValue Range High Medium Low

Estimated Value of Holding Company and other Operations

Holding Company Cash & Investments $221.1 $221.1 $221.1Holding Company Debt and Preferreds ($883.3) ($883.3) ($883.3)

Less Affiliated Assets on Ins. Company books ($1.3) ($1.3) ($1.3)

Less Net Intercompany Receivable/Payable $3.1 $3.1 $3.1

Estimated Value of Non Insurance Operations $471.1 $471.1 $471.1

Estimated Value of Debt and other Operations ($189.3) ($189.3) ($189.3)

US Life Operations

Adjusted Net Worth $980.1 $980.1 $980.1

Less Cost of Capital ($264.5) ($264.5) ($264.5)

Existing Business after tax $2,252.1 $1,994.3 $1,785.0

New Business after tax $637.3 $488.2 $375.2Less Policyholders Dividends ($1,281.3) ($1,097.7) ($954.9)

Less Additional Expenses ($576.2) ($545.0) ($516.8)

Other Adjustments $0.0 $0.0 $0.0

Net Present Value of US Life operations $1,747.5 $1,555.4 $1,404.1

US P&C Operations

Capital & Surplus $0.0 $0.0 $0.0

Less Cost of Capital $0.0 $0.0 $0.0

Present Value of Business After Taxes $0.0 $0.0 $0.0

Less Additional Expenses $0.0 $0.0 $0.0

Estimated Loss Reserve Deficiency $0.0 $0.0 $0.0

Other Adjustments - Primarily Reinsurance $0.0 $0.0 $0.0

Net Present Value of P&C Operations $0.0 $0.0 $0.0

Estimated Value of US Insurance Operations $1,747.5 $1,555.4 $1,404.1

Estimated Total Value incl. Other Operations1

$1,558.2 $1,366.1 $1,214.8

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In Illustration 1, shown below, the estimated valuation ranges derived from the non-traditionalactuarial valuation of the MONY Group in relation to the stock markets valuation throughout the two yearprior to its acquisition. In determining the high, medium and low ends of the estimates, future projectedstatutory profits for existing business were discounted using discount rates of 8%, 10%, and 12%,respectively. For projected statutory profits from new life insurance business, the discount rates wereincreased by 200 basis points to 10%, 12%, and 14%, respectively. These selected discount rates wererepresentative of the discount rates which tend to be utilized in traditional actuarial valuations.

VI. NON-TRADITIONAL ACTUARIAL VALUATIONS versus MARKET VALUATIONS

The actual stock market capitalization of the MONY Group was calculated using the closing marketprice of MONY Groups common shares (ticker MNY at that time) on the first business day of eachmonth, multiplied by the number of shares outstanding.

Illustration 1

Non-Traditional Actuarial Valuation Range

versus Market Capitalization

The comparison of MONY Groups market capitalization, based on quoted stock prices and theactuarial valuation range, non-traditional, shows that the market valuation of MONY Group prior to AXAsannounced bid was at the lower end of the range, while AXAs bid for control, was at the high end of therange. This seems to suggest a continuity between the market value pre-bid and AXAs valuation, with thevariable appearing to be the discount rate.

VII. NON-TRADITIONAL ACTUARIAL VALUATIONS Other Publicly Traded Groups

In order to further explore the relationship between stock market valuations, non-traditional actuarialvaluations of other publicly traded insurance groups were undertaken.

Illustrations 2, 3, and 4 reflect non-traditional actuarial valuations of three predominately P&Cpublicly traded insurance groups, shown in comparison to their respective market capitalizations for theperiod from April 2003 through August of 2004. Again, market valuations were determined using theclosing share prices on the first business day of each month. The non-traditional actuarial valuations for thethree insurance groups were as of December 31, 2003. The high, medium, and low ends of the valuationranges were developed by discounting future projected statutory earnings using discount rates of 8%, 10%and 12%, respectively; and for Allstates and Allmericas new life insurance business, discount rates of10%, 12% and 14% were used.

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Non-traditional Actuarial Valuation Ranges

versus Market Capitalizations

Illustration 2

The Progressive Corporation


Illustration 3

The Allstate Corporationas of December 31, 2003

Illustration 4

Allmerica Financial Corporation


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As can be seen from the three illustrations, during the course of the measurement period, all threeInsurance Groups traded within the value ranges determined using non-traditional actuarial valuations.Additionally, the upper end of the value ranges seemed to represent a ceiling through which a companysshare price could pierce then crest shortly thereafter. Tests of other companies over different time framesseemed to suggest similar patterns existed at the bottom end of the valuation ranges as well. Share pricescould dip below the low end of the valuation range only to later reverse directions and head back towardsthe valuation range.

VIII. NON-TRADITIONAL ACTUARIAL VALUATIONS RANGES versus MARKET VALUATIONS

Multiple Time Periods

Next, the non-traditional actuarial value ranges were produced for several publicly traded insurancegroups in comparison to the stock market valuations over multiple time periods. In Illustration 5, the high,medium and low valuations are shown for Progressive Corporation. The non-traditional actuarial valuationswere determined as of years ending December 31, 2002, December 31, 2003 and December 31, 2004.

Illustration 5

Non-Traditional Actuarial Valuation Range

versus Market Capitalization


From January 2, 2003 through January 4, 2005, Progressive Corporations common share price rosefrom $50.95 per share to $86.66. Coincidentally, the mid-point of the non-traditional actuarial valuationrange, converted into an equivalent value per share of common stock, rose from $52.80 as of December 31,2002 to $81.29 as of December 31, 2004. During the course of calendar year 2003, Progressives shareprice rose above the valuation range, which had held constant based on the December 31, 2002 valuation.Early in calendar year 2004, the share price came back within the valuation range, based on the December31, 2003 valuation. A similar but less discernable pattern seemed to occur again at the end of calendar year2004 and the beginning of calendar year 2005.

IX. NON-TRADITIONAL ACTUARIAL VALUATIONS RANGES versus MARKET VALUATIONS

Interpolated Valuation Ranges

The patterns which appeared to emerge as the non-traditional actuarial valuation ranges grew stale aseach year progressed led to an examination of the relationship between the stock markets valuations andthe actuarial valuation ranges, non-traditional, interpolated between the year-end valuations.

Illustration 6 reflects the non-traditional actuarial valuation ranges from January 2003 throughJanuary 2005. The non-traditional actuarial value range shown for January 2003 is the value range

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established as of December 31, 2002. The non-traditional actuarial value ranges shown for each monththereafter, throughout the remainder of calendar year 2003, are the linearly interpolated values between theDecember 31, 2002 valuation range and the December 31, 2003 valuation range. The valuation ranges forcalendar year 2004 were created in a similar fashion by interpolating between the December 31, 2003valuation range and the December 31, 2004 valuation range.

Illustration 6

Non-Traditional Actuarial Valuation Range versus Market Capitalization(using Interpolated Valuations)


Illustration 6 shows that by using a dynamic valuation, the share price of Progressive Corporationconsistently fell within the non-traditional actuarial valuation range throughout the entire two year period,at least as measured by the closing share price on the first business day of each month. Results for otherpublicly traded insurance groups were similar to the results for the Progressive Corporation, although theshare prices of some companies consistently tracked above their respective valuation ranges and a fewconsistently tracked below.

X. NON-TRADITIONAL ACTUARIAL VALUATIONS RANGES versus MARKET VALUATIONS

Interpolated Valuation Ranges and a Valuation Roll-Forwards

While the historical relationship between the market valuations of publicly traded Insurance Groupsand their respective non-traditional actuarial valuation ranges viewed dynamically is interesting by itself, itis somewhat an academic exercise. This is because the monthly dynamic valuation ranges pre-suppose thatone has perfect knowledge of the coming year-end valuation. A counter argument might be that futurevaluations are very predictable because assumptions should not change dramatically from period to period.As a matter of fact, if assumptions are assumed to remain constant for the following year, rolling thevaluation forward one year to arrive at the valuation for the following year becomes a relatively simpleexercise.

Illustration 7 reflects the stock market valuation of Progressive Corporation from January 2003

through October 2005, along with the non-traditional actuarial valuation range. For the valuation range incalendar 2005, monthly valuation ranges have been determined by interpolating between the non-traditionalactuarial value range as of December 31, 2004, and the estimated non-traditional actuarial value range as ofDecember 31, 2005. The estimated valuation range as of December 31, 2005 is developed by increasing theadjusted net worth from the prior year end valuation by the projected after-tax statutory earnings for 2004,and then taking the discounted present value of future projected statutory earnings, discounted to December31, 2005. Adjustments for any expense overruns and outstanding debt are assumed to be unchanged fromone year to the next.

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Illustration 7

Non-Traditional Actuarial Valuation Range versus Market Capitalization

(Interpolated Valuations and a Valuation Roll-forwards)


Illustration 7 shows that even without the perfect knowledge of the following year-end actuarialvaluation range, the dynamic valuation range continues to track with the stock markets valuation ofProgressive Corporation throughout calendar year 2005. The most important fact is that the valuationranges for all of 2005 would be known as of the beginning of 2005.

Where the predictive abilities of the non-traditional actuarial valuation ranges using roll-forwardvaluations could be weakened or even break down entirely would be if the events which occur in a currentyear are sufficiently dramatic to cause a significant change in the next years valuation assumptions. Thispotential vulnerability can likely be mitigated by updating the valuation roll-forward based upon eachquarters statutory results. The roll-forward valuation used in the Illustration 7, intentionally assumed noknowledge of quarterly results.

XI. NON-TRADITIONAL ACTUARIAL VALUATION RANGES and DISCOUNT RATES

In each illustration so far, the discount rates used to determine the non-traditional actuarialvaluations have been fixed at 8%, 10%, and 12%, with 200 basis points added to the discount rates forprojected life insurance new business. Having made estimates of the future, cash flows or statutoryearnings, we can make the analogy that pricing the common equity of a company would be equivalent topricing a perpetual bond with coupons or cash flows, which vary from year to year.

The market price of the bonds of two distinct corporations, even with identical coupon payments andmaturities can be different at any given time due to the markets perceived risk associated with eachindividual company. Similarly, the discount rate used in a non-traditional actuarial valuation should reflectthe probability or risk that the future cash flows will develop as projected.

This is a departure from the methodology used for traditional actuarial valuations. Typically, with atraditional actuarial valuation, the discount rates to be used are fixed, for example, at 8%, 10% and 12%.Oftentimes, actuaries implicitly introduce margins for risk into the assumptions. With a non-traditionalactuarial valuation, the assumptions are more mechanically set, thereby creating what could be regarded asmore standardized valuations. Increasing the discount rates used in a non-traditional actuarial valuation isan indirect way of introducing margins to compensate for risk in the valuation process.

In order to examine the range of discount rates which would be implied by the markets pricing ofvarious publicly traded insurance groups, the mid-point discount rate of each non-traditional valuation wasadjusted in order to attempt to fit the mid-point of the non-traditional actuarial valuation range to themarket valuation over the prior twenty-month period. A moving twenty-month period was selected in order

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to allow for the possibility that the markets base discount rates may change over time due to non-companyspecific factors, such a changes in the risk free rate of return or more indirectly the perceived yield ofalternative investments.

As reflected below in Illustration 8, the market price of Progressive Corporation common stock isshown in comparison to a dynamic valuation range whereby the mid-point of this valuation range has beenadjusted by using an assumed discount rate of 8.79%. This discount rate was selected in order to attempt tominimize the difference between the market value of the Progressive Corporations common shares and themid-point of the valuation range over the prior 20 months.

A discount rate of 8.28% was used to establish the high-end of the dynamic valuation range. Thatdiscount rate was selected based upon the average by which the market value of Progressive Corporationsstock price, during the 20 monthly periods, exceeded the mid-point of the valuation range. A discount rateof 9.29% was used to establish the low end of the dynamic valuation range. That discount rate was selectedbased upon the average by which mid-point of the valuation range exceeded the market value ofProgressive Corporations stock price, during the prior twenty-monthly periods.

Illustration 8

Non-Traditional Actuarial Valuation Range versus Market Capitalization(using interpolated valuations and modified discount rates)


Illustration 8 demonstrates a reasonable fit of the non-traditional actuarial valuation range to themarket valuation of Progressive Corporation over the 34-month period from January 2003 through October2005. This would seem to suggest that the markets discount rates, if such creatures exist, do not fluctuatewidely, as the band width for the non-traditional actuarial valuation range was very narrow ranging from alow of 8.28% to a high of 9.29%, a width of 101 basis points.

Similar analyses were performed on thirty-three (33) other public traded insurance groups. The highmedium and low discount rates are shown below for each of these insurance groups. The discount rateranges were calculated in an identical manner to the range of discount rates determined for ProgressiveCorporation.

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Table 2

Adjusted Discount Rate Ranges

Valuation Range Discount Rates Valuation Range Discount Rates

Company TICKER High Medium Low Width Company TICKER High Medium Low Width

AFLAC AFL 11.10% 11.57% 12.31% 1.21% METLife, Incorporated MET 11.90% 12.36% 12.85% 0.94%

Allmerica Financial Corporation AFC 6.74% 10.97% 12.59% 5.85% MGIC Investment Corporation MTG 6.30% 7.67% 8.74% 2.44%

Allstate Corporation ALL 7.51% 8.63% 9.31% 1.80% Nationwide Financial Services, Inc. NFS 9.71% 10.16% 10.75% 1.04%

American Financial Group, Inc AFG 11.53% 11.55% 11.78% 0.24% Ohio Casualty Corporation OCAS 12.26% 12.52% 13.05% 0.79%American International Grpoup, Inc. AIG 5.93% 7.51% 9.08% 3.15% Progressive Corporation PGR 8.28% 8.79% 9.29% 1.01%

Chubb Group CB 12.08% 12.42% 13.04% 0.97% Protective Life Corporation PL 7.51% 8.26% 9.02% 1.51%

Cincinnati Financial Corporation CINF 14.64% 15.61% 16.34% 1.70% Prudential Financial, Incorporated PRU 3.80% 5.62% 7.20% 3.41%

Conseco, Inc. CNO 10.67% 11.19% 11.76% 1.09% Reinsurance Group of America RGA 7.01% 8.33% 9.83% 2.82%

Direct General Corporation DRCT 7.96% 10.40% 14.85% 6.89% Safeco Corp. SAFC 9.35% 9.88% 10.31% 0.97%

Great American Financial Resources GFR 13.83% 14.31% 15.10% 1.27% Scottish Re SCT 4.49% 5.79% 6.24% 1.75%

Hartford Insurance Group HIG 10.93% 11.20% 11.67% 0.74% Selective Insurance Group, Inc SIGI 12.00% 12.25% 12.96% 0.96%

Infinity Property and Casualty Corp. IPCC 6.96% 10.51% 12.20% 5.24% St. Paul Travelers Companies, Inc. STA 10.15% 10.46% 11.06% 0.91%

Jefferson Pilot Corp. JP 3.71% 4.04% 4.28% 0.58% Stancorp Financial Group SFG 11.30% 12.16% 12.85% 1.56%

Lincoln National Corporation LNC 4.85% 5.40% 5.94% 1.09% The Phoenix Companies, Inc. PNX 7.56% 9.18% 9.54% 1.98%

Markel Corporation MKL 8.46% 9.26% 10.44% 1.98% TORCHMARK Corporation TMK -0.65% -0.16% 0.18% 0.83%

MBIA, Inc. MBI 11.01% 11.79% 13.28% 2.27% UnumProvident Corporation UNM 11.13% 11.45% 11.96% 0.83%

Mercury General Corporation MCY 6.32% 7.25% 7.92% 1.60% W. R. Berkley Corporation BER 10.02% 10.74% 11.27% 1.25%

Total 8.72% 9.68% 10.56% 1.84%

It seemed both interesting and surprising that the average mid-point of the discount rates for allcompanies studied, 9.68%, was very close to the mid-point of the discount rates originally used based uponindustry practice. Furthermore, it was interesting that many of the discount rates, as adjusted, fell in linewith empirical views of risk, volatility and quality. For example, the three predominantly P&C InsuranceGroups, Progressive, Allstate and Allmerica, generally would be regarded from best to less than best in thatorder. The mid-point of the discount rates were; 8.79% for Progressive, 8.63% for Allstate and 10.97% forAllmerica, suggesting that Progressive was probably undervalued relative to Allstate. Coincidentally, in theweeks following the completion of this study, Progressives share price increased significant whileAllstates share price declined.

The range of the discount rates was unexpectantly narrow, differing from high to low by 184 basispoints on average. The range of discount rates predominately seen in the industry for traditional actuarialvaluations has ranged from 200 basis points to 400 basis points.

XII. IRRATIONAL DIFFERENCES BETWEEN VALUATIOS

When the a market valuations differs from the non-traditional actuarial valuations using rationaldiscount rates, such differences can potentially be attributed to the following:

A) the cash flows projected in the non-traditional actuarial valuation are incorrect, or disagree withthe implied market perception,

B) the company underwent a recent unanticipated event, such as a reserve strengthening, which hascaused the market to react with confusion,

C) the company may have marketed itself, indirectly to investors, as being either better or worsethan its historical results would support,

D) the marketplace has unrealistic expectations, fueled by events outside of the company, or oftentimes by management optimism which historical results would indicate are unfounded, or

E) the basis upon which most investors rely in determining their valuations, the GAAP financials,are misleading or obscure an accurate picture of the company

A.) Errors or disagreements with the markets perception of future earnings

If the models developed in a non-traditional actuarial valuation are consistently more conservativethan the markets collective perception of an insurance groups future earnings, a pattern similar to thatshown in Illustration 9 should be expected to develop over time.

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Illustration 9

Expected Market Valuation

versus

Non-Traditional Actuarial Valuation

(assuming NTAV consistently more conservative)

If the markets perception about future earnings is more optimistic, implying higher growth inearnings than the valuations projected earnings, it should be expected that as time periods progress, themarket valuations should exhibit a pattern of divergence from the non-traditional actuarial value range. Insuch case, the markets valuation should be expected to increase more rapidly than the non-traditionalactuarial value ranges. Similarly, if the market has a more conservative view of the future, the non-traditional valuation range should rise more rapidly and diverge from the markets valuation, as is shownbelow in Illustration 10.

Illustration 10

Expected Market Valuation

versus

Non-Traditional Actuarial Valuation

(assuming the Market is consistently more conservative)

In reviewing the graphs for each of the publicly traded insurance groups, the patterns describedabove are not readily apparent and do not seem to exist at all. Instead, the most common pattern is that ofthe market valuations over time cutting and weaving through and around the non-traditional actuarialvaluation range.

While it may not be apparent that the projected future cash flows used to develop the non-traditionalactuarial value ranges are incorrect, when the discount rates used do not appear rationale, thereasonableness of the projections used is still the first item reviewed.

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B.) Market Surprises Unanticipated Events

When unusual or unexpected events occur, such as a large reserve strengthening, the market oftenappears to over react. This is likely due to the markets inability to quickly discern if an event is acute orsystemic. Items such as reserve deficiencies are adjusted for in the development of the non-traditionalactuarial valuation; and therefore, an announced reserve strengthening should not impact the non-traditionalactuarial valuation range, while the markets valuation may, at least temporarily, tend to over-discount.

C.) Market Perception

Whether deserving or not, if a company has a positive image with the investment community, it maybe rewarded with a higher share price, hence, lower discount rate than other potentially comparablecompanies. Conversely, companies with negative views pay by way of a lower market price for their stock,and higher discount rates.

Historically, there have been cases where companies have been rewarded by the market with highshare prices because of perceived quality. American Insurance Group (AIG) and General Electric (GE)were examples. Both of these companies very successfully used their perception premiums to acquireother companies at what could be deemed very attractive prices because the currency used, their stocks,was richly valued. This created a self reinforcing cycle where markets perceptions were met, not

necessarily due to the underlying realities but definitely as a by-product of those perceptions.

D.) Unrealistic Expectations

Probably one of the greatest causes of market valuations differing from a non-traditional actuarialvaluation ranges occurs when the market develops unrealistic expectations. This especially happens whenmanagement provides the market with over optimistic guidance. The ability to discern a managementteams ability to perform beyond levels witnessed in the past, like so many other things, is a matter of art.For the skilled practitioner of such art, the rewards will be great. The non-traditional actuarial valuation inthis regard can be viewed as unimaginative in that it is limited to relying only on past performance as thestarting point for projecting future performance.

E.) Misleading Financial Information

Often the comparison of statutory financials to GAAP financials is a simple indicator that aparticular company is disseminating what could potentially be misleading GAAP financials. The paradox isthat the most difficult thing to predict is: when will the public markets become aware that GAAP financialinformation maybe be somewhat misleading or at the very least cast with glint of optimism?

When the GAAP financials are misleading, the basis by which the public markets estimates orperceived values are wrong. This can cause inflated market valuations. In the discussion below, a few ofthe indicators of misleading GAAP financial are discussed.

Statutory earnings versus GAAP earnings

In the long-run, we will all be dead. That is popular and accurate quote of John Maynard Keynes.

While not as well known, a statement which is equally true is; In the long-run, statutory earningsand GAAP earnings must in the aggregate be equal. GAAP earnings differ from statutory earnings, for aclosed book of business, only as to their timing not their aggregate amount.

It is true that growing companies may report higher GAAP earnings compared to statutory earnings,due to the deferral of acquisition costs under GAAP accounting. However, when companies consistentlyreport higher GAAP earnings than statutory earnings, explanations should be pursued.

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For example, below in Table 3, the cumulative difference between the statutory earnings and GAAPearnings are shown over the same four-year period for two different publicly traded insurance groups.

Year 1 Year 2 Year 3 Year 4Insurance Group A $22 $267 $515 $853

Insurance Group B $24 ($46) ($54) $13

Table 3

Cumulative excess of reported GAAP Income over Statutory Income

(amounts in millions)

Insurance Group A, over the four-year period had average GAAP earnings, pre-tax of $594.5 millionwhile Insurance Group B had average pre-tax earnings of $534.9 million. Surprisingly, during this periodInsurance Group A was not growing while Insurance Group B had significant growth.

In the fifth year Insurance Group A reported a large GAAP loss, with GAAP earnings at $678million lower than statutory earnings. The notion that GAAP earnings and statutory earnings willeventually in the aggregate be equal was reinforced through a very significant decline in Insurance GroupAs share price.

Deferred Acquisition Costs

The markets ability to reasonably estimate a publicly traded insurance groups future earnings usingGAAP earnings as the basis can be impaired by the accounting practices of certain companies. Below inTable 4, the percentage of a publicly traded insurance groups total statutory commissions and expenseswhich were deferred on a GAAP accounting basis are shown over a three-year period. Also shown are thepercentages of the deferred acquisition cost assets, at the beginning of each year, amortized during eachyear.

Year 1 Year 2 Year 3

Commissions and Expenses Deferred 35.1% 41.1% 44.1%

Percentage of Total DAC Asset Amortized 14.6% 10.9% 7.2%

Table 4

Insurance Group C

Deferred Acquisition Cost Amortization/ Total DAC Asset

Deferred Acquisition Expenses/Total Commission and Expensesand

Table 4 illustrates that in each year, Insurance Group C deferred a greater portion of totalcommissions and expenses. In addition each year, the company amortized a smaller portion of its deferredacquisition cost asset. The share price of Insurance Group Cs stock increased in the year following yearthree, only to eventually adjust downward by approximately 85%.

Reinsurance Assumed and Ceded

Both life insurance companies and P&C insurance companies file statutory statements showing most

amounts net of reinsurance assumed and ceded. In order to project earnings to be used in the developmentof a non-traditional actuarial valuation, it is necessary to create the financials for the direct business only.By separating reinsurance results from direct results, the potential to inadvertently assume a profit or lossdue to reinsurance in perpetuity can be avoided.

Additional insights emerge from viewing an insurance groups results separately for direct andreinsured business, further insights can be garnered. For example, in Table 5 below, an insurance groupsunderwriting results on a direct basis are shown along with their net gain on reinsurance over three years.

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Year 1 Year 2 Year 3Direct Underwriting Gain (Loss) ($70.3) ($115.2) ($211.5)

Gain or (Loss) on Reinsurance $52.1 $44.4 $107.4

Table 5

Direct Underwritings Gains or (losses)

versus

Reinsurance Gains or (Losses)

Insurance Group D(amounts in millions)

As can be seen in the above example, in each of the three years shown, Insurance Group D reportedlarge underwriting losses on a direct basis. With reinsurance however, Insurance Group D was moresuccessful and showed net gains throughout the same time period. Whether or not the reinsurance gainsreported were appropriate, any valuation which used earnings that included the reinsurance gains likelywould have been inflated, given that it is unrealistic to assume that reinsurers will continue to lose moneyin perpetuity.

For Insurance Group D, the reinsurance gains did reverse in the year following the third, causing a60% decline in Insurance Group Ds market capitalization.

XII. CORRELATION of MARKET VALUATION and NON-TRADITIONAL ACTUARIAL

VALUATIONS

Using the formula, shown below, sample correlation coefficients were calculated for each of the 34companies initially studied using the monthly share prices and the mid-point of the non-traditional actuarialvaluation ranges for each month over a two year period.

The correlation coefficient can range from minus 1 to plus 1. A correlation coefficient of zero would

imply no relationship between the monthly share price for a publicly traded insurance group and non-traditional actuarial value range. If the absolute value of the correlation coefficient were 1, that wouldimply perfect linear correlation between monthly share prices and the non-traditional actuarial valuationranges. The closer the absolute values of the correlation coefficient are to 1, the greater the degree ofcorrelation.

Below in Table 6, the distribution of the correlation coefficients is shown for the initial 34companies included in the study.

Coefficient Number of Companies

90 % and higher 1080% to 89% 12

50% to 79% 8

under 50% 4

Distribution of the Correlation Coefficients

Table 6

As can be seen in Table 6, only 4 of the 34 insurance groups had correlation coefficients below 50%,while 22 had coefficients greater than 80%.

n xy x y

[ n x2 ( x)2][ n y2 ( y)2]r =

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XIII. PREDICTABLITY

Given the apparent correlation between the share prices of the publicly traded insurance groups andthe non-traditional actuarial valuation ranges, a back test was undertaken. The back test used a portfolioof stocks, comprising a subset of approximately 40 publically traded insurance groups. The shares of thesecompanies were assumed to be purchased or sold each month based upon the closing share price on the firstbusiness day of each month beginning on January 2002 and continuing through the end of December 2008.

Over the course of the study the number of companies in the study varied due to acquisitions andinsolvencies. New insurance companies were added to the study to replace insurance companies whichwere no longer traded. During all periods the number of companies included ranged between 35 and 40.Attached as appendix A is a listing of all insurance companies, by ticker symbol included in the study.

The rules which were established assigned a weight of 200 to the shares of any insurance group ifthe share price of the insurance group fell below the lower end of the non-traditional actuarial valuationrange, based upon the closing price on the first business day of each month. If the share price of aninsurance group was above the low end, that groups non-traditional actuarial valuation range but below themid-point, a weight of 100 was used. If the share price was above the mid-point but below the high end ofthe range, a weight of 50 was used. And if the share price exceeded the high end of the non-traditional

actuarial valuation range, a weight of zero was used.

Using the weights determined as of the first business day of each month a hypothetical fund wascreated and assumed to be invested in proportion to the weight assigned to each individual insurance groupover the total weighting assigned for the month to all of the insurance groups. Using the closing shareprices on the first day of each month, the portfolio was assumed to be rebalanced.

Table 7 shows the results of this back test on several bases and compares those results for theStandard and Poors (S&P) Insurance index, the S&P 500 index and the Dow Jones index over the sametime periods.

S&P

Dynamic/ FIXED INSURANCE S&P 500 DOW

Period Modified 20 Month 12 Month 6 Month Discount INDEX INDEX JONES

2002 -4.47% NA NA NA NA NA 0.00% 0.00%

2003 33.26% NA NA NA NA 15.58% 21.94% 20.94%

2004 41.55% NA NA NA NA 5.15% 7.18% 2.12%

2005 24.22% 23.54% 22.82% 22.52% 25.98% 15.04% 6.80% 2.04%

2006 17.30% 17.04% 18.99% 15.00% 12.58% 8.05% 11.65% 15.00%

2007 -2.00% -4.73% -3.21% -3.29% -4.41% -10.44% 2.16% 4.56%

2008 38.80% 12.66% 12.77% 3.31% 33.12% -57.52% -35.61% -30.74%

Dynamic Discount Rate

Major Stock Market Indexes 2002 through 2008

to

Comparison of Results based on Actuaril Valuation Approach

Table 7

In a few instances the dynamic discount rates resulted in irrationally low or negative discount rates.In such cases the dynamic discount rates were replaced with the fixed discount rates. These results areshown in Table 7 under the column heading Dynamic/Modified.

While the initial study used a 20 month period for determining the dynamic valuation rates,beginning in 2004 shorter periods of 12 months and 6 months were also tested. In Table 7 the results usingdynamic discount rates determined over 20 month, 12 month and 6 month periods, without anymodification are shown. From these results it appears that there is a small amount of improvement resulting

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from using a 12 month period for determining the dynamic discount rate versus a 20 month period andusing a six month period results in poorer performance than either the 12 or 20 month periods.

For periods from the beginning of 2004 through 2008 back testing was also performed using thestandard fixed discount rates, the same discount rates for all periods. Results using the fixed discount rateswere not as good as the results using any of the dynamic discount rates but the results using the fixeddiscount rates were consistently better the performance of the S&P Insurance index, for all periodsmeasured.

XV. CONCLUSION

This paper has attempted to demonstrate that the actuarial methodology, which has traditionallybeen used within the insurance industry to value regulated insurance companies, can be broadly applied ona consistent basis to the valuations of entire publicly traded insurance groups. Like its much older cousin,the traditional actuarial valuation, the non-traditional actuarial valuation is developed based on assumptionswhich are created using statutory financial information. The statutory financial statement information filedwith the NAIC contains far more detailed and granular information than the financial data provided inGAAP financial statements; and therefore, provides the basis for greater insights and potentially fewersurprises.

Unlike traditional actuarial valuations which use inside information and rely upon access tomanagement, the non-traditional actuarial valuation relies entirely on publicly available information. Whilethe non-traditional actuarial valuation removes some of the actuarial art that is involved in theestablishment of assumptions, the sterilization of the assumptions and methods which are used in a non-traditional actuarial valuation provide greater comparability between the valuations of various insurancegroups and permits the valuation process to be automated. The standardization of the assumption settingand the mechanizing of the valuation process allows for the isolation of projected cash flows from thediscount rates. This isolation of the discount rates, in turn, provides greater insights into both the rationaleand irrational behavior of the stocks of various insurance groups.

This analysis involved hundreds of non-traditional actuarial valuations that have been developed andrepeated over multiple measurement periods. This in mass analysis has helped to begin to build bridges

between fundamental equity analysis and technical equity analysis; and the initial results appear to supportthe notion that the two methods may have interrelationship.

This study also illustrates that non-traditional actuarial valuations, which derive their assumptionsfrom publicly available financial information, have high degrees of correlation to the stock marketsvaluation of publicly traded insurance groups. Whether processes similar to the development of non-traditional actuarial valuations could be adapted to other regulated industries, and the degree to which suchvaluations would correlate to market valuations, remains to be tested.

135 final paper fickes

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