Implications of Dynamic Financial Analysis (DFA) on Demutualization by Jan Lommele and Kevin Bingham Guest Speaker: Stephen List, CFO The National Atlantic Companies DFA Case Study Plymouth/Royale 3:30 p.m. - 5:00 p.m.

Actuarial Standards and DFA Parallel’s Between ASB#19 and DFA –DFA is a Tool For an Actuarial Appraisal –Concepts in ASB#19 are Directly Applicable Distribute Earnings Risk Adjusted Rates of Return Value of Existing (v.s. Future) Business Lapsation of Contracts Operational Assumptions Economic Assumptions Sensitivity Analysis (Stochastic Analysis)

The National Atlantic Companies Company Background Unique Agent Partnership Strategy Use of DFA in Acquisitions –Identify Target (Mutual or Non-Mutual Company) –Discuss Insurance Department Requirements –Benefits of Demutualized Company Immediate Access to Market Name Brand Recognition Reduces Time and Cost of Licensing New Company –Demutualize Company and Implement Strategy

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

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

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

Actuarial Valuation Considerations for 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

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

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

Deterministic Base Case

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

Model Results and Communication Management Discussion –Model Coverage Name Brand Recognition Agency Distribution Network Value of Licenses –Result Overview and Appraisal Value Factors 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

Afterthoughts Goal of DFA Analysis –Demutualization Appraisal Value Factors External Focus (Insurance Department and Policyholders) –State Fund Profitability Market Share (Premium) Impact on Equity –SFAS 115 –SFAS “Other Comprehensive Income” Internal Focus (Primarily Board of Directors) –IRS Section 42 - Affordable Housing Funds Model Risk Factors Facing LIHTC Projects Estimate Reinsurance Costs For Client GAAP Projections

Afterthoughts Internet Documentation –NAIC Research Library - Lists a number of articles and documents discussing demutualization and mutual holding companies. –Glenndaily.com Information Services - Web Site provides the reorganization status of mutual life insurance companies. –Demutualization.org - Policyholder focused web-site listing a number of articles, documents and answers to typical policyholder questions.