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Latest Research
VFIC Sponsors Research on the
Valuation of P&C Insurance Companies
by Claus S. Metzner, Member, Committee on Valuation, Finance and InvestmentsTwo papers dealing with the fundamental valuation of property/casualty insurers for merger and acquisition purposes have recently been completed as part of a funded research project sponsored by the Committee on Valuation, Finance, and Investments (VFIC). Research teams from the Czech Republic and the United States authored the studies.
The Czech team, Jaroslav Danhel and Petr Sosik of the University of Economics in Prague, provide the background of the various valuation methods and then show the application to a specific merger from the Central Eastern European region. The focus is on the Economic Value Added (EVA) concept. The paper "Acquisition Value of P&C Insurance Companies" is available for download.
The United States team, Wayne E. Blackburn, Derek A. Jones, Joy A. Schwartzman, and Dov Siegman, contrast the EVA and the Discounted Cash Flow (DCF) methodologies and discuss the conditions under which equivalent answers to the valuation problem are obtained. Their paper, "The Application of Fundamental Valuation Principles to Property/Casualty Insurance Companies" is available for download.
Both papers present a well-ordered approach to the valuation problem, moving from first principles to an application of the principles. The papers are well designed to foster understanding among those actuaries who do not engage in valuation activities on a day-to-day basis. The bibliographies provide additional sources of information for those readers who wish to pursue the subject matter in more depth.
The papers present the valuation process from the economic/financial viewpoint. While the papers deal with fundamental valuation issues, the concepts presented are applicable to the evaluation of any financial transaction undertaken by a company. For example, the pricing structure can be subjected to the valuation test: is shareholder value increased or decreased given a specific pricing strategy and considering the potential market reaction? Similarly, investments in marketing initiatives and other potential management actions can be subjected to the test: is shareholder value increased or decreased?
Applying the techniques as illustrated in the papers can also provide additional, more refined insights into a company's financial progress than the usual calendar/accident year management reports. The use of EVA techniques for such reporting can also place the management reporting between the life and property/casualty operations of a multi-line company on a more comparable basis—a significant advance in management reporting.
Because of the universal applicability of the concepts discussed in the papers for evaluating the longer-term consequences of decisions, VFIC recommends these papers to all actuaries.
