1. Mix of Business Review Example Executive Level Decision Making Using DFA Patrick J. Crowe, FCAS, MAAA

2. Goals of Study Review Mix of Business Options Evaluate Optimal Growth Patterns using simulation model results

3. Mix of Business Options 1.Base Model WC+5%, HO+5% 2.Increase Base Model, HO+10% 3.Increase Base Model, WC+10% 4.Decrease Base Model, HO-10% 5.Decrease Base Model, WC-10%

4. Financial Measures Earned Premium Net Loss Ratio Premium to Surplus Ratio Expected Return\Standard Deviation Cash Flow Net Operating Results

5. Model / Assumptions Assumptions Behind Simulation Underwriting operations and investment strategy are not affected by change in policy growth assumptions. The DFA model assumes there is a tradeoff between growth and profitability.

6. DRM Flow Workers Compensation Homeowners Financial Calculator Starting Policy Holder Surplus $40 million Corporate Elements Reinsurance Investment Underwriting Taxes Financial Results Simulated over Five Years Balance Sheet Income Statement Analyze Results Financial Measures Net Earned Premium Net Loss Ratio Premium to Surplus Ratio Return on Surplus Cash Flow Net Operating Results

7. Caveats Effect on expense ratios has not been modeled Reducing exposures could result in higher expense ratios and thus may not result in the best alternative Effect of change in investment strategies has not been modeled Reducing exposures will most likely result in a change in investment strategies Not considered as significant as the effect on company expenses

8. Initial Balance Sheet Loss & loss expense reserves = 64% of Surplus Bonds = 91% of Assets

9. Net Earned Premium Fifth Year Projection

10. Net Loss Ratio Fifth Year Projection

12. Premium to Surplus Ratios Fifth Year Projection

13. Premium to Surplus Ratio Fifth Year Projection

14. Return on Surplus Fifth Year Projection Less risky Less rewarding

15. Return on Surplus Fifth Year Projection Better

16. Cash Flow Fifth Year Projection

17. Net Operating Results Fifth Year Projection

19. Conclusion – Risk vs. Return Decreasing Homeowners exposures (10)% results in: Higher expected return and Lower standard deviation … vs. the current and other strategies. ExpectedStandard Option ReturnDeviation HO (-10%)+6.1%± 12.0% WC (-10%)+5.4%± 12.3% Base+3.9%± 12.8% WC (+10%)-1.1%± 18.5% HO (+10%)-3.9%± 19.7% 

20. Conclusion – Cash Flow Decreasing Homeowners exposures (10)% also results in: Higher cash flow … vs. the current and other strategies. Cash Option Flow HO(-10%)0.0167% Base0.0163% HO(+10%)0.0157% WC(-10%)0.0137% WC(+10%)0.0136% 

21. Conclusion – P:S Ratio at the 50% Percentile Decreasing HO & WC exposures (10)% results in: Lowest premium to surplus ratios … vs. the current and other strategies. Premium to Option Surplus Ratio HO(-10%)1.26 WC(-10%)1.33 Base1.81 WC(+10%)2.91 HO(+10%)3.14   

22. Conclusion – Net Operating Ratio Decreasing HO exposures (10)% results in: Highest probability of operating ratio < 100% … vs. the current and other strategies. Probability of Option Operating Ratio < 100% HO(-10%) 79.4% WC(-10%) 61.7% Base 45.2% WC(+10%) 27.6% HO(+10%) 14.8% 

23. Conclusion – Net Loss Ratio Decreasing HO & WC exposures (10)% results in: Lowest net loss ratio … vs. the growth strategies. Net OptionLoss Ratio WC(-10%) 71.4% HO(-10%) 71.5% Base 71.5% HO(+10%) 71.7% WC(+10%) 72.9% 

24. Conclusion – Rankings Decreasing HO exposures (10)% results in: Most return and least risk Greatest cash flow Lowest P:S Ratio Lowest Operating Ratio Lowest Net Loss Ratio Risk vs. Cash P:S Net Net OptionReturn Flow Ratio Op Ratio Loss Ratio HO (-10%) # 1 # 1 Tied # 1 # 1 Tied # 1 WC (-10%) # 2 # 4 Tied # 1 # 2 Tied # 1 Base # 3 # 2 # 3 # 3 Tied # 1 WC (+10%) # 4 # 5 # 4 # 4 # 5 HO (+10%) # 5 # 3 # 5 # 5 # 4 

25. Conclusion Although decreasing Homeowners exposures is the best option, neither the current U/W strategy nor the alternatives are expected to result in an adequate return or a sufficient financial position to support the company’s business!