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Valuing Insurance Companies
'Valuing Insurance Companies' begins by examining property-casualty companies and what factors hinder an accurate valuation and ways of overcoming these obstacles. The emphasis then shifts to life and health companies. Different methods of profit recognition will be described and then used to illustrate how these help to value a life company.
Course overview
'Valuing Insurance Companies' begins by examining property-casualty companies and what factors hinder an accurate valuation and ways of overcoming these obstacles. The emphasis then shifts to life and health companies. Different methods of profit recognition will be described and then used to illustrate how these help to value a life company.
Summary of course content
- Unravel the mysteries of the insurance sector
- Understand a range of first-hand valuation techniques for insurance companies
- Understand the strengths and limitations of different valuation methods
- Appreciate the implications of different accounting systems
- Acquire the necessary skills to understand, analyse and value insurance companies
METHODOLOGY
A mixture of presentations and many practical examples to ensure you understand and can analyse a set of accounts to value an insurance company.
- Brief overviews will be given on how property-casualty and life and health companies work, however the emphasis throughout the course will be heavily on valuation techniques
- Frequent references will be made to current valuations in the stockmarket and prices paid for insurers in M&A transactions
- Many worked examples will be provided to illustrate the valuation techniques being described
- Practical exercises of how to conduct valuations. The results will be compared with actual market values
Supporting publications
DAY ONE
Introduction
- Structure of course
- Insurance - a misunderstood sector
- Insurance - a mis-priced sector
How a Property-Casualty (P-C) company works
- Products sold
- How profits are earned
- Profit analysis - complicating factors
- Analysing the balance sheet
- Assessing risk in a P-C company
Analysing claims reserves
- What data is available?
- Reserve-development tables
- Calendar tear / accident year / underwriting year
- Triangular table of loss development
- Key ratios
Case study: assessing the claims reserves of a P-C company
Valuation methods for a P-C company
- Price-earnings ratios
- Yield, payout ratios
- Return on equity vs. cost of capital
- Dividend discount model
Case study: valuing a P-C company
DAY TWO
Products of a life company
- Overview of main products
- Profit signatures
- Differing accounting treatments
- Financial options and guarantees
- New business measures
IFRS accounting
- Overview
- Main principles
- Using IFRS accounts to value a life company
- Embedded Value Accounting (traditional EV)
- Profit recognition
- Tying up the P&L account and the balance sheet
- Cash profits
- Problems
Using embedded value information to value a life company
- Price / embedded value ratios
- Appraisal values
- Return on embedded value vs. cost of capital
Case study: extracting EV information from the reports and accounts
Comparison between traditional EV and marketconsistent EV
- Description of market-consistent EV
- Differences between two methods
- Advantages / disadvantages
- Setting the discount rate
- Inconsistencies in assumptions
DAY THREE
Valuing a life company using cash profits
- Why cash profits matter
- How to estimate cash profits
- Using cash profits as a valuation tool
- Dividends and yield
Assessing risk in a life company
- Capital requirements
- Financial options and guarantees
- Mis-match of assets and liabilities
- Credit risk
- Debt gearing
Case study: valuing a life company
Other key factors
- Capital requirements
- Orphan assets
- Asset management operations
- Run-off life companies
Valuing conglomerate insurance companies
- Sum-of-the-parts approach
- Capital allocation
- Leverage
- Cost of equity vs. cost of capital
Course summary and close
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David Nisbet
Recently Managing Director and joint head of pan-European insurance research at Merrill Lynch David Nisbet has extensive experience in valuing insurance companies in the three areas of stockmarket analysis, the pricing of IPO transactions and M&A deals. His most recent position has been Managing Director and joint head of pan-European insurance research at Merrill Lynch (2001-2007) – top-three ranking from 2003 onwards.
Prior to Merrill Lynch David worked for three years in a UK insurance company Scottish Widows’ Life Assurance Society, where he qualified as an actuary. In 1980 he joined a stockbroker, Wood Mackenzie (ultimately part of Deutsche Bank), where he spent the next 21 years, analysing financial stocks, developing his career from lead analyst of UK life assurance companies to a position in charge of global insurance research.
Throughout his 27-year career as an insurance analyst, he was consistently ranked as one of the leading analysts in the sector and, in particular, built up a formidable reputation for “making a complicated sector appear simple”. He has been involved in over a dozen IPO’s and also advised on the pricing of several corporate transactions. David co-authored an actuarial paper, “Analysing the financial strength of life companies”, and has served on examination and accounting committees. Having retired from the city in 2007, David now undertakes consultancy work and lecturing.
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This course has now expired please email us to find out when the course will next be running.