Comments (5)

 
Jan 17, 2013 - 10:33am

I'll preface this by saying that insurers are pretty hard to value correctly, and you shouldn't use one multiple (or even a set of multiples). Like diversified banks, they incredibly complex. But, if you are looking for some quick metrics:

Price to Book, excluding accumulated other comprehensive income. Run that against ROE (based on operating EPS; GAAP net income is not a great representation of earnings) to get a regression.

Also look at more ordinary measures such as P/FCF, P/E, etc. Looking at underwriting ratios (e.g. the Combined Ratio) is important for both, but more for P&C due to its decreased reliance on investment income.

For Life Insurers, also look as Risk Based Capital ratios, excess capital, product mix, portfolio vs product durations, etc. Life insurers are very sensitive to interest rates; interest rate movement will affect their earnings and multiples.

For P&C, look at Incurred but not Reported claim to Net Reserves, where the industry is with regards to the pricing cycle (P&C is cyclical), geographic distribution, and seasonality.

I assume you are not interested in bond or mortgage insurers; they have their own valuation methodologies.

 
Jan 17, 2013 - 2:08pm

West Coast rainmaker:
I'll preface this by saying that insurers are pretty hard to value correctly, and you shouldn't use one multiple (or even a set of multiples). Like diversified banks, they incredibly complex. But, if you are looking for some quick metrics:

Price to Book, excluding accumulated other comprehensive income. Run that against ROE (based on operating EPS; GAAP net income is not a great representation of earnings) to get a regression.

Also look at more ordinary measures such as P/FCF, P/E, etc. Looking at underwriting ratios (e.g. the Combined Ratio) is important for both, but more for P&C due to its decreased reliance on investment income.

For Life Insurers, also look as Risk Based Capital ratios, excess capital, product mix, portfolio vs product durations, etc. Life insurers are very sensitive to interest rates; interest rate movement will affect their earnings and multiples.

For P&C, look at Incurred but not Reported claim to Net Reserves, where the industry is with regards to the pricing cycle (P&C is cyclical), geographic distribution, and seasonality.

I assume you are not interested in bond or mortgage insurers; they have their own valuation methodologies.

Correct, more of the standard industry players that offer Life, P&C, and other types of insurance.

 
Jan 17, 2013 - 10:37am

In markets outside the US most Life Insurance companies trade around a multiple of (or discount to) embedded value. This is almost like a book value for the insurance company as it adds the discounted profits expected to emerge from the current book of policy holders to the NAV for the shareholder funds. There is also MCEV and European EV which differ.

I think US insurers might trade off earnings multiples but EV reporting is becoming more important. Not really sure on the US market though. Hope this helps

 
Jan 17, 2013 - 2:09pm
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