Here is the last episode.

Cast of Characters, in order of appearance

• John Davidson ? Protagonist, CEO of Wonderful Life
• Peter Farell ? Chief Investment Officer for Mega Insurance, the holding company for all of the operating subsidiaries.
• Brent Fowler ? CEO of Whata Life
• Henry Goldsmith ? CEO of Mega?s P&C reinsurance subsidiary
• Marc Blitztein ? CEO of Mega?s domestic P&C insurance
• Brad Baldwin ? CEO of Mega Insurance
• Stan Bullard ? Scion of the family that owns Mega
• Caleb Matmo ? Runs a firm that analyzes insurance financial statements, consulting for Mega

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John returned to the conference room, ready to make his defense to those assembled.? He had a grim determination akin to a gladiator going into his last fight.? He bowed his head and prayed.? Looking up, he saw Brent Fowler looking at his packet from Caleb Matmo.? It was an odd sight, because he had never seen Brent scowl before.? It made him curious about about his own packet, and so he began to look at it more closely.

Before John could dig in too deeply, Stan Bullard said, “Mr. Matmo, please complete your report.”

Caleb spoke up and said, “Insurance accounting is tricky.”? Looking at Henry and Marc, he added, “For short-tail P&C reinsurance and insurance, okay, not so tricky, particularly if your asset policies are conservative, as it is for both of you.? Your reserves validate themselves every year, and you have reserved prudently.”? Henry and Marc visibly relaxed and smiled to each other.

Caleb turned to the other side of the room and looked at Brent and John.? “Life insurance is tougher, much tougher,” he said, “The long tail nature of the business, and the lower asset quality, together with hard-to quantify guarantees makes the accounting much more difficult.? Also, the risk-based capital rules are a little weak in some areas, making economic decisions difficult for executives that rely only on those metrics.? Beyond that, how one values policy options and illiquid assets makes quite a difference.? Also, reinsurance treaties can obscure the underlying economics of the business.”

John quickly looked at Brent.? He had never seen Brent’s face turn red before.? There was a sense of anger spouting from his brow.

Caleb continued, “We have in front of us polar opposites in terms of the two insurance companies held by Mega Insurance.? One is extremely conservative, and underappreciated.? The other has been liberal in accounting and actuarial practices, and has grown like a weed.”

Brent Fowler stood up and said, “I resent that.? My company has topped the industry in volume growth over the past five years.”

Brad Baldwin looked him in the eye and said, “Sit down, Mr Fowler. Mr. Matmo is not done yet.? Caleb?”

“If I may, let me characterize the difficulties at Whata Life.? 1) Their aggressive asset portfolio has the company as a whole underwater on a mark-to-market basis.? 2) Though the RBC guidelines indicate the company is fine, our risk-based capital model, which is tougher, indicates that Whata Life is in need of more surplus. Why?? 3) Whata life financed much of their growth through selling off much of their statutory profits through reinsurance treaties.? If the volume growth ever stops, so do their profits.? 4) They have systemically mishedged their options exposure, leaving a deadweight loss that the accounting presently papers over.? 5) All of this allow Whata Life to grow rapidly on a thin capital base when measured properly.”

“Whata Life made money in the past, but correcting their accounting to reflect release from risk (eliminating reinsurance), derivative pricing, and likely future losses, their profitability has been decidedly subpar.”

John tried to not smile, but the sight of Brent Fowler gritting his teeth was astounding to see.

“As for Wonderful Life, we have few difficulties.? They chose the conservative ways to reserve, and so their earnings are a worst case estimate of profitability and dividend capacity.? Their products and assets are simple, and so our adjustments are positive, but not large.? The rest is in your packets in detail.? Please review it and give us your comments.”

Brad Baldwin Stood up and said, “Thank you, Mr. Matmo.? As you all know, these are tough times.? We cannot afford to be imprudent.? We passed Mr. Matmo’s analysis by two other actuarial consulting firms, and they agreed with his analysis.? Our decision is complete.? Mr. Fowler, you are being replaced by Mr. Davidson, and the two firms will be merged.”

Brent Fowler spouted, “You can’t do this! You will hear from my lawyer!”

“Consult your employment contract and be wise, Mr. Fowler, lest this be a termination for cause, as we might have reason to apply.” said Brad.

Brent stormed from the room, and John, widening his eyes, wondered at the matter.?? Henry said, “Way to go , John.”? Marc added, “Man, you survived.”

Stan Bullard took the floor saying, “Yes, John survived, but now he has the tough task of reforming Whata Life.? Conserve the good, and eliminate the bad.? Don’t rely on the parent company.”

John looked at Stan with concern.? Stan answered, “John, we know you.? Just don’t ask for a lot as you reconcile matters at Whata Life.”? John relaxed and sighed.? He quietly thanked Jesus, and said, “I will do my best, as always.”? Brad said, “That’s all that we expect. Have at it, John.”

The meeting dispersed.? Marc offered the use of Ziggy, which John readily accepted.? Henry offered operational help with Whata Life, though John knew that he could do better.

After many congratulations, John left the room, and picked up his cell phone.? Punching in the phone number, his wife answered, and he said, “Hi dear, so what did John, Jr. do today?”