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RETIREMENT • LIFE INSURANCE • INVESTMENTS
The Role of the CFO in Creating Shareholder Value
November 15, 2012
Actuaries Clubs of Hartford/Springfield and Boston, Joint 2012 meeting
Mark Kaye, CFO, U.S. Retirement
An Insurance Industry Case Study
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Agenda
About me
The Role of the CFO
Principles underlying risk and return
Case Study and Market Behaviors
Guiding metrics in driving success
Q & A
CN0926-4901-1112
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Role of the CFO – Maintain a Strong Base
Investor Valuation Decision Tree
Balance Sheet Strength 1 Equity has Little Value
Poor
Liquidity Position 2 Equity has Little Value
OK
Poor
Capital Adequacy 3 Potential Dilution
from Capital Raise
OK
Poor
Capital Adequacy
Earnings & Return on Investment
3
4 Discounted Valuation
OK
OK
Poor
Poor
Premium Valuation & Capital Deployment
If All Good
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Role of The CFO – Maintain a Strong Base
Investor Valuation Decision Tree
Balance Sheet Strength
Liquidity Position
Capital Adequacy
Earnings & Return on Investment
1
2
3
4
Premium Valuation & Capital Deployment
OK
OK
OK
If All Good
Asset Quality
Investments
Inventory
Property, Plant & Equipment
Intangibles
Capitalized Costs
Goodwill
Deferred Tax Assets
Reserve Strength
Financial Leverage
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Role of The CFO – Maintain a Strong Base
Investor Valuation Decision Tree
Balance Sheet Strength
Liquidity Position
Capital Adequacy
Earnings & Return on Investment
1
2
3
4
Premium Valuation & Capital Deployment
OK
OK
OK
If All Good
Holding Company Flexibility
Working Capital
Interest/Dividend Coverage
Debt Maturities
Lines of Credit
Subsidiary Flexibility
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5 5
Role of The CFO – Maintain a Strong Base
Investor Valuation Decision Tree
Balance Sheet Strength
Liquidity Position
Capital Adequacy
Earnings & Return on Investment
1
2
3
4
Premium Valuation & Capital Deployment
OK
OK
OK
If All Good
Capital Ratios
Risk Based Capital (Insurance)
Tier-1 Capital (Banks)
Operating Leverage
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6 6
Role of The CFO – Maintain a Strong Base
Investor Valuation Decision Tree
Balance Sheet Strength
Liquidity Position
Capital Adequacy
Earnings & Return on Investment
1
2
3
4
Premium Valuation & Capital Deployment
OK
OK
OK
If All Good
Create value by generating returns above the cost of capital
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www.ing-presentations.intranet Guiding Principles / Questions in Balancing Risk-Return Tradeoffs
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Design, develop, and sell our products with the explicit mission
of:
Obligations to shareholders or customers or regulators
Develop products, take hedging positions, or make decisions
that are / are not based on individual market views?
Exit a market when conditions become irrational?
Willingness to lose market share?
Expand risk appetite to achieve financial targets?
Evaluate risk at the product or enterprise level or both?
Manage from a short-term or long-term perspective?
Value of stability / predictability in results?
Fairness
Market neutral
Price discipline
Measured risk
Long-term view
Proprietary & Confidential – Property of ING U.S.
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M&A Volume vs. S&P 500 Index
$Bn S&P 500 Index
1,279 1,207 1,029 900 794
Notes: Source : Morgan Stanley, Thomson Reuters, Capital IQ
1. Includes announced transactions, each with an aggregate value of $100MM or more. Includes transactions with estimated values.
Excludes terminated transactions. Future terminations of pending transactions will reduce totals shown
2. Includes transactions announced as of 31 December 2011
No. of
Transactions 539 901 917 779 660 739 1,267 1,246 1,214 1,127 775
High valuations, high
M&A deal volume
Lower valuations, lower
M&A deal volume
Observed Behavior – Acquisitions
8 Proprietary & Confidential – Property of ING U.S.
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9
Share Repurchase Activity vs. S&P 500 Index
Since 2002 Aggregate Notional ($Bn) S&P 500 Index
Source: Morgan Stanley, CapitalIQ, Yahoo Finance
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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10X Case Performance relative to
industry since IPO*
Performance relative to
market since IPO*
ALL VALUES THROUGH 2002.
Amgen 77.2X 24.0X
Biomet 11.2X 18.1X
Intel 46.3X 20.7X
Microsoft 118.8X 56.0X
Progressive Insurance 11.3X 14.6X
Southwest Airlines 550.4X 63.4X
AVERAGE 135.9X 32.8X
*Returns benchmarked against aggregate industry and market indices constructed using historical data from the Center for Research in
Security Prices (CRSP) at U. Chicago - Booth.
Source: CRSP, Great by Choice (Collins and Hansen, New York: Harper Collins, 2011).
What sets“10X” firms apart?
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Source: SNL
10X firms: Resilient despite macro headwinds
Progressive has consistently outperformed the SNL U.S. Insurance Industry Index
Since the start of the most recent recession, Progressive is up +21% versus -30% for
the industry index
+21%
since 12/07
-30% since
12/07
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Roald Amundsen
(First explorer to reach South Pole)
Robert Falcon Scott
(Perished in the attempt)
Productive paranoia
Fanatic discipline Empirical creativity
Amundsen vs. Scott (Great by Choice)
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AMP
AIZ
CNO
GNW
HIG
LNC
MET
PRI
PFG
PNX
PL
PRU
RGASFG
SYA
TMK
UNM
y = 10.308x - 0.1506R² = 0.8648
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2% 4% 6% 8% 10% 12% 14%
Pri
ce/B
oo
k (
x-A
OC
I)
2012E Return on Equity (x-AOCI)
Improvements in ROE Are Critical For Valuation
13 Proprietary & Confidential – Property of ING U.S.
Prices as of 04/26/2012
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Free cash flow (FCF) “represents the cash that a company is able
to generate after laying out the money required to maintain or
expand its asset base”*.
Distributable earnings are a key driver of FCF, which ultimately impacts
how much room we have to pursue opportunities which enhance
shareholder value, such as:
Investment in organic growth / capital investments
M&A
Return of capital to shareholders
Think about this in the context of what actions firms take in different
market environments.
Free Cash Flow is Key
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*Source: Valuation (Copeland, Koller and Murrin, New York: John Wiley & Sons, Inc., 1995), Investopedia.com
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Conclusion
I. Strong Balance Sheet
II. Ingrained Guiding Principles
A. Productive Paranoia
B. Fanatic Discipline
C. Empirical Creativity
III. Tools to Evaluate Success
A. (Risk Adjusted) ROE Expansion
B. Free Capital Generation
C. Profitable Sales
15 Proprietary & Confidential – Property of ING U.S.
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Questions?
