Here's my reasoning for each one (I tried to get each of the 6 lessons to fit somewhere - perhaps this was a mistake.)
A. Lesson 1: He is assuming past data will help predict future trends.
Lesson 2: He won't know more than everybody else because Schedule P is publicly available and the analysis he is proposing is an obvious idea easily carried out by any investor.
B. Lesson 3: The price of the stock will indicate investors' suspicions regardless of Jacob’s statement.
Lesson 4: Jacob’s statement has the goal of bringing a financial illusion to an end. However, there are no financial illusions and the price must be taken as an indication of true value.
C. Lesson 5: Shareholders can more effectively and efficiently diversify on their own, so they prefer to not have companies attempt to do it for them.
Lesson 6: Stocks should be assessed for ROI and nothing else. Hence the guiding principle behind decisions should be maximizing ROI; not, as Jacob suggests, principles such as diversification or smooth earnings.
[NEAS: The homework assignment was not written to use all six lessons. This summary is good; we point out several items.
Lesson 1: Loss reserves are not an efficient market. Past data are good indicators of future figures.
Lesson 2: Correct. Stock analysts have been using chain ladder development for thirty years to analyze insurers’ profitability. Jacob’s suggestion is simple. It is done by many stock analysts and is embedded in the market price.
Some actuaries presume that actuaries are better than stock analysts at reserve estimates. This is the common wisdom in the actuarial community, but it is unlikely to be true.
Actuaries have little financial incentive to properly value an insurer. The actuary’s salary is not ties to the accuracy of his or her estimates. If the actuary’s estimate are completely misguided, he or she won’t stay employed too long. But for most actuaries, advancement and bonuses are based on other management skills, not on the accuracy of their reserve estimates.
Stock analysts have enormous incentive to properly value insurers. If their estimates are incorrect, they may lose their clientele.
Lessons 3 and 4: The NAIC and the actuarial community place great weight on the Statement of Actuarial Opinion. Investors consider Jacob’s statement like that of any other market analyst’s.
Lessons 5 and 6: Well stated. From the shareholders’ perspective, Dina is right. Synergies are valid justification for mergers; diversification is not a valid justification. These are the first two bullet points at the end of the homework assignment.
From management’s perspective, diversification is a justification for mergers. This is the third bullet point at the end of the homework assignment.]