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Read the attached case and answer as following requirements: Perform a strategic analysis of the company. Include in your analysis each of the following, if applicable, and use an appropriate strategic planning tool/model to support your analysis.Evaluation of the company’s strengths and weaknessesScan of the environmentIdentification of the critical strategic decision(s) that should be addressedIdentification of additional information that would be helpful in preparing your strategic analysisFormulate one or more strategies for the company that you believe would create competitive advantage. Support your recommendations with specific reasons and analyses.Identify and explain how you would implement the recommended strategy or strategies. Factors that you may want to consider include the following:Leadership and communicationPrioritization, overcoming challenges, and change managementOrganizational structureLinking strategy to the strategic financial planAligning tactics with long-term strategic goalsThe role of the Board of Directors, the CEO, the CRO, and the management accountantIncentives Recommend a performance measurement model to report on the results of the strategy. Explain your recommendation.

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Case: Forestics Insurance Company
Forestics Insurance Company is a medium-sized U.S. property and casualty (P&C) insurance company,
with headquarters in New York City. The company has been in business for 55 years and has been
moderately successful. Forestics has shown steady growth in net premiums and regularly reports a
small gain from operations. Over the last several years, premiums for P&C insurance have declined,
which has made it more difficult to maintain profitability. Deregulation has led to mergers and
acquisitions and the creation of very large firms that compete on price. Investment income is another
component of Forestics’s earnings, but since the company has a very conservative investment
philosophy, investment income is relatively small percentage of total income. A majority of the
company’s investments are in fixed-rate securities, and with declining interest rates in the U.S., total
return has been relatively low.
Forestics’s book of business is exclusively in the United States, and primarily focused on individual
consumers. The company does, however, sell commercial P&C policies as well. One specialized
insurance line for home-based businesses has not done well. Premiums for home business insurance
have been low and losses high; however, this is a small percentage of the overall book of business.
The insurance rating agency, A.M. Best, gave Forestics a rating of A, or Excellent, one level lower than
A+, or Superior. In addition to other factors, A.M. Best evaluates leverage, liquidity, and profitability
when evaluating insurance companies. Forestics has a solid reputation and has never had a problem
paying claims. For high-risk policies, the company enters into reinsurance contracts with several large
reinsurance companies.
In general, the insurance industry is becoming highly competitive. Although it is not easy to enter the
insurance business from the outside, other financial services firms can create competing products. Also,
other insurance companies can offer comparable products at low prices to capture market share.
Individual consumers do not have a significant impact on prices, but they do have a choice and often
move their insurance needs to the company with the lowest price. Large corporate consumers do have
influence on the price of insurance and have negotiated their liability premiums down to historically low
levels. Capital and employee expertise are the resources that drive success for insurance companies.
The longtime CEO of Forestics has recently retired and the Board of Directors has hired Shelly Thomas as
the new CEO. The Board wants Thomas to deliver higher earnings growth and a higher stock price. The
shareholders enjoy a steady but moderate annual dividend, but the stock price lags the overall market
and underperforms compared to some of the other insurance industry stocks. Its price earnings (PE)
ratio is 8.4, while the average industry PE ratio is 23.2. The average return on equity (ROE) for the
insurance industry is 12.1% and Forestics’s most recent reported ROE is 4.6%.
The VP of Planning met with Thomas and recommended that the company diversify into other related
business, such as life insurance and investment products. He also recommended expanding into
markets outside the U.S., like Europe, the Middle East, and Asia. He believes that becoming a multiline
global insurance company is the only way to grow as a business and sustain that growth well into the
future. Life insurance companies, many of which have global business customers, are currently
undervalued, according to several industry securities analysts. Many of these life insurance companies
have also diversified into investment products, such as annuities.
Thomas shares the recommendations with the company’s Chief Risk Officer (CRO). The CRO believes
that although there is additional profit potential in diversification of products and markets, the risk
would be too high for Forestics. The company recently added to its loss reserves because management
initially underestimated losses on a particular piece of business. The CRO argues that insurance is an
inherently risky business and adding new unfamiliar businesses and selling into unfamiliar markets
would increase the company’s risk profile.

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