1. Milliman & Robertson, Inc. Casualty Actuarial Society Presented by Camilo J. Salazar, ASA, MAAA St. Louis, April 10, 2000 Valuation of Insurance Operations in Latin America

2. Milliman & Robertson, Inc. I. Two Perspectives l Seller l Buyer “ The general rule that the buyer’s appraisal is approximately 40% of that produced by the seller is not too far off the mark.” (Luke Girard, January, 2000, North American Actuarial Journal)

3. Milliman & Robertson, Inc. Seller l Represent the client to protect his/her best interest l Develop best possible value within professional standards of practice l Prepare client for outside scrutiny l Capture all potential elements of value

4. Milliman & Robertson, Inc. Buyer l Represent the client to protect his/her best interest l Conduct due diligence within professional standards of practice l Alert client about inconsistencies in value l Discount value that does not fit with buyer

5. Milliman & Robertson, Inc. II. Cultural Issues l “Why do I need to obtain an independent appraisal? My actuarial department can do it.” l “I am afraid you will go and tell my competition what you learn about us.”

6. Milliman & Robertson, Inc. Cultural Issues l Historically Closed Markets l Protected Competition l Globalization Trends l Foreign Investment l 1st World Capital in 3rd World Markets

7. Milliman & Robertson, Inc. III. Appraisal vs. Estimate of Value “We intend to sell the company to a foreign investor. Can you give me a quick estimate of the value of the company in two weeks?”

8. Milliman & Robertson, Inc. Appraisal vs. Estimate of Value l Quality of Information l Time Constrains l Setting of Assumptions l Company Operating Strategies l Limitations on distribution

9. Milliman & Robertson, Inc. IV. Value Added by Appraisal l To the Seller – Components of Value l To the Buyer – Due Diligence

10. Milliman & Robertson, Inc. Components of Value l Adjusted Statutory Book Value l Value of Inforce Business l Value of Future Business

11. Milliman & Robertson, Inc. Components of Value l Adjusted Book Value –Capital and surplus, adjusted for items such as: Book-to-market value of assets Reserve redundancies/deficiencies Non-admitted assets

12. Milliman & Robertson, Inc. Components of Value l Value of Inforce Business –Present value of future profits from current business inforce based on : Expected premiums Expected expenses (admin. & distribution) Expected claims Expected interest rates Discounted at hurdle rate

13. Milliman & Robertson, Inc. Components of Value l Value of Future Business –Value of ability of company to produce profitable business in the future from: Existing products Existing distribution channels Planned products New distribution channels

14. Milliman & Robertson, Inc. Due Diligence l Assessing Value –Review operations –Review/revise assumptions –Product fit –Distribution fit –Sensitivity tests –Rationalize with buyer’s strategy

15. Milliman & Robertson, Inc. Value Added by Appraisal To the Seller: l Deep understanding of sources of value l Rationalization of present and future strategies l Rationalization of costs l Opportunity to take corrective action l Prepare for outside scrutiny l Not leaving money on the table

16. Milliman & Robertson, Inc. Value Added by Appraisal To the Buyer: l Clear understanding of sources of value l Market context - especially for foreign party with little or no previous exposure l Clear understanding of opportunities and products l Getting what you pay for

17. Milliman & Robertson, Inc. Appraised Value vs. Market Value l Appraised value not equal to market value l Informed judgement involved l Strategic considerations different for each potential buyer l Buy to merge vs. buy to operate