Analysis and Valuation of Insurance Companies


"During 2008 and 2009, the insurance industry experienced unprecedented volatility. The large swings in insurersí market valuations, and the significant role that financial reporting played in the uncertainty surrounding insurance companies during that period, highlight the importance of understanding insurersí financial information and its implications for the risk and value of insurance companies. To facilitate an informed use of insurersí financial reports, this manuscript reviews the accounting practices of insurance companies, discusses the financial analysis and valuation of insurers, summarizes relevant insights from academic research, and provides related empirical evidence.

The paper contains three sections. The first section describes the insurance business, including activities and organization of insurance companies, products and services, distribution channels, competition, regulation, taxation, and risks and risk management. The second section discusses how insurance activities are reflected in financial reports. Specifically, for each key line item from insurersí financial statements, the study provides evidence on the economic significance of the item, reviews the related US accounting principles, discusses earnings quality issues, describes analyses and red flags that inform on the itemís quality, reviews selected research findings, and describes the primary differences between International Financial Reporting Standards (IFRS) and US GAAP.

Building on the discussion and analyses in the previous two sections, the third section addresses the valuation of insurance companies. The section starts by discussing the primary drivers of insurersí intrinsic value, including profitability, growth prospects and cost of equity capital, as well as accounting quality indicators that inform on the reliability of the measured drivers. It then describes relative and fundamental valuation models that translate those fundamentals into value estimates. Finally, in the context of fundamental valuation models, the study presents a template for forecasting the key financial statement line items of insurance companies.

This document is rather long and its efficient use, therefore, requires an understanding of the structure and content of the different sections. The first two sections of the document are mostly descriptive, while the final section is primarily prescriptive. All three sections discuss academic papers, often with significant details. To increase the usefulness of the literature review, the papers are discussed in separate categories by main focus. However, many of the studies provide evidence relevant to multiple categories. The subsections containing detailed discussions of academic research usually follow a summary of the main findings and can generally be skipped without loss of continuity."

Reference: Nissim, Doron. "Analysis and Valuation of Insurance Companies" Columbia Business School. (2010): Page 2. Print. .

The full report and analysis from which the overview originates, which is very interesting, can be found at the following URL:
Analysis and Valuation of Insurance Companies

The contents of the full report contain the following:
Activities and Organization; Products and Services; Distribution Channels; Competition; Regulation; Taxation; Risks and Risk Management
Financial Reporting and Line-Item Analysis
Common-Size Financial Statements; Insurance Reserves and Related Expenses; Revenue and Related Accruals; Deferred Policy Acquisition Costs and Related Expenses; Reinsurance; Investment Assets; Separate Accounts; Debt; Derivatives
What Drives Value?; Profitability; Accounting Quality; Growth; Cost of Equity Capital; Macro, Industry-Wide, and Line-Specific Drivers; Valuation Models

# Last Updated 2013