Insurance Forecasting and Valuation

This course enables participants to build a full sum-of-the-parts valuation of a real insurance company based on separate modeling and valuation of the life and non-life insurance businesses

Economics of Life Insurance

• Overview of the sector
• Traditional life vs. unit-linked
• How do life insurance companies make money?
• Life technical account
• Non-technical account
• Measurement of life insurance liabilities

Forecasting Life Insurance Companies’ Performance

• Identifying appropriate growth rates for gross written premiums
• Key profitability drivers
• Claims ratio and expense ratio
• Financial return on reserves and shareholders’ funds
• Risk margin on reserves
• Building-up reserves
• Linking investments
• Forecasting the non-technical account and completing the model

Embedded Value to Measure Performance

• Problems with statutory accounts for life insurance
• Potential impact of new standard IFRS 4
• Embedded value: concept and calculation
• From shareholders’ funds to NAV
• Value of in-force business
• Embedded value earnings
• The unwinding of the discount rate
• New business value
• Return on embedded value

Economics of Non-Life Insurance

• Overview of the sector: short vs. long-tail business
• How do non-life insurance companies make money?

Forecasting Non-Life Insurance Companies’ Performance

• Forecasting gross written premiums
• Key profitability ratios
• Reinsurance ratio
• Combined ratio
• Financial return
• Reserve ratio
• Completing the forecasting model

Solvency Requirements for Insurance Companies

• Composition of solvency capital
• Minimum solvency requirements
• Life insurance: traditional vs. unit-linked business
• Non-life insurance
• Minimum solvency expected by the market
• Potential impact of the Solvency II project
• Timing
• Identification and new measurement of risks for insurers
• Minimum Capital Requirement vs. Solvency Capital Requirement

Comparable Company Analysis for Insurance Companies

• Life insurance trading multiples
• P/EV
• P/EV earnings
• Implied franchise value/new business value multiple
• Non-life insurance trading multiples
• P/E
• P/Book
• P/NAV
• Potential pitfalls of multiple analysis

Stand-alone Valuation Models for Insurance Companies

• Sum-of-the-parts valuation
• Capital allocation to different businesses
• Life insurance
• Appraisal valuation = EV + franchise value
• P/EV valuation
• Non-life insurance: P/E valuation
• Unallocated costs and corporate centre
• Valuation of excess capital or capital deficit
• Discussion of DCF to equity and residual income valuation methods

Conclusions

• Reality check of forecasts and valuation
• Impact of credit crisis on insurance companies