Selling the Company.

With financial-services reform, new interest in selling all or part of an insurance company will require new measures of performance.

Traditionally, measures of insurer performance have been incorporated into the insurance sales process. The measures, namely ratings of claim-paying ability, have been used to provide some assurance to the consumer that a carrier's assets are secure and will be available to pay any claims the insured might have in the future. In this insurance-product sales mode, the available ratings and performance measures in the industry are well designed and have served the industry well in assisting purchasers in making their buying decisions.

With the recent changes in legislation impacting all financial industries in the United States, the sale of the company's products may be overshadowed by the need or desire to sell all or part of the insurance company. These sales may take one of several forms, such as an acquisition, a merger, a partnership or an alliance. With a partnership or alliance, the "sell" may be more marketing than commerce. The point is that some insurers will find themselves in the position of wanting or having to sell their company, in some degree, and will need a set of measures to provide their buyers with a heightened sense of security about the value of their purchase.

Asset-based measures currently incorporated into the insurance sales process still will be useful but will not be as relevant in this new sales mode. This is due to the enormous capital capacity of the noninsurer financial institutions that will likely have an interest in acquiring insurers or insurance operations. Such companies will want to know the condition of the target insurer's assets, but will probably be more concerned with the quality of its core business operations. They will have sufficient capital to bolster the asset position of an acquisition, but they will not necessarily have the skills to improve the efficiency or effectiveness of core insurance business operations.

These noninsurer institutions will be looking for critical measures to benchmark the quality of the core insurance business operations of carriers in terms of efficiency and effectiveness. Key areas will be the ones the acquirers have the least ability to evaluate independently, namely underwriting and claims. Other noncore operations such as accounting and investment management will be familiar to the acquiring institutions, requiring little in terms of evaluative assistance.

The objective of the measures should be to accurately reflect the quality of the insurance operations and to differentiate one company's operating performance from that of other carriers or to benchmark it against a standard.

Though useful, standard ratios used in the industry currently are not sufficient to provide enough comfort to potential purchasers/allies without additional analysis. Standard ratio analysis alone cannot eliminate problems-such as the impact of the industry business cycle, unusual nonrecurring events or unusual accounting treatments. In addition, standard ratio analysis does not differentiate the cause of poor performance between ineffectiveness and inefficiency.

Short of developing a new set of performance measures or ratings specifically designed to provide these needed insights about operational quality, companies must rely on their ability to obtain independent expert evaluations of operational quality. Carriers or others that wish to develop new performance measures and benchmarks should target the following characteristics for their system:

* use publicly available data to assure that common measures can be developed for all insurers;

* develop measures that are objective and fact based; and

* assure that the complete set of measures and benchmarks reflect both the efficiency and the effectiveness of insurers' core insurance business operations.

This would mean that measures of underwriting should compare carriers on the cost to acquire revenue of a certain amount or to handle a particular volume of claims, as well as how well insurers leverage those costs to generate profit.

Insurers with an interest in selling all or part of their company should seek such an evaluation of their company's operational performance for several reasons. It will provide them with a reliable evaluation of their operation to improve their understanding of the value their company presents to the marketplace. The evaluation can be used as part of a marketing package presented to potential acquirers or allies. It also can be used as a diagnostic tool to suggest ways a carrier can "spruce itself up" and become more attractive as a company to partner with or acquire. The combination of currently available ratings and performance measures with specific evaluations of the quality of the core insurance business operations of a carrier will likely be called upon greatly in the future as the critical sale for an insurer shifts from the sale of insurance products to the sale of the company.

Gregory J. Hoeg, Esq., a Best's Review columnist, is vice president of Am-Re Consultants Inc., a subsidiary of American Reinsurance Co., Princeton, N.J.