Cheng
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| Total Posts: 2363 |
| Joined: Feb 2005 |
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How do people value insurance companies from a fundamental point of view ? I was poking around a little bit and read that the usual DCF and earnings multiple stuff doesn't work here. Instead it seems that one looks at tangible book value (Total assets - Total liabilities - Goodwill), apply some multiplier to it and adds the float. Makes sense imo (since if a default happens this is what you get when you liquidate the company) as long as you ignore potential haircuts. But I'm not sure whether this is the best / most meaningful approach and if so where the multiplier should lie ?
Any suggestions ? |
"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"
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chiral3
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| Total Posts: 4528 |
| Joined: Mar 2004 |
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| Doing some elephant hunting I see??? I've been involved quite a bit in the reinsurance / capitalization / recapture / hedge arb game over the past few years. It is very difficult to answer your question simply. First it is important to distinguish what kind of ins co because their liabilities may have anywhere from simple to really complex cashflow models. The risk neutral versus real world premia can be very large and even disagreements within the real world arise (different interpretations, assumptions). Generally you would look at an actuarial valuation versus a market valuation because there is additional capital required to maintain the ins co. In general it is what you wrote above but may be in a tail to maintain solvency depending on where the co is domiciled (US statutory versus P1 of Solvency2, etc.). Anything above this threshold can be used as rating agency capital or to distribute, so these become important in valuations. So, in general, you need to have the CFs and all the complex and often needlessly murky actuarial mumbo jumbo to do the valuation. There are companies that specialize in this, like towers watson, milliman, etc. |
Solipsism (Listeni/ˈsɒlɨpsɪzəm/; from Latin solus, meaning "alone", and ipse, meaning "self") is the philosophical idea that only one's own mind is sure to exist. |
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Cheng
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| Total Posts: 2363 |
| Joined: Feb 2005 |
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Maybe  .
I will give some more thorough comments tomorrow but to give you an idea: I look at an US shop that generated underwriting profits over the last couple of years  . |
"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"
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Cheng
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| Total Posts: 2363 |
| Joined: Feb 2005 |
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Ok, some more details as promised.
The ins co is active in auto insurance and reinsurance. Auto insurance is pretty straightforward imo as long as you stick to your underwriting standards (which they seemed to do for the last couple of years). The reinsurance part is pretty tricky otoh since they do lots of retroactive reinsurance for other reinsurance cos. The risks vary from property/casualty to environmental and asbestos which means that you have veeeeeeeeeeeeery long tails (some decades I would think). The capital base seems pretty strong which is probably the reason why they can write retroactive reinsurance in size (we talk about several bn per ticket).
My first shot was indeed to take tangible book value + float. Tangible book has been growing nicely over the last couple of years and so has float (and since they generated underwriting profits over the last couple of years the float is pretty much a free loan for the time being). This should give a reasonable lower bound to start with but my concern was that I might be overly conservative. Dunno though. |
"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"
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