Acquisition Valuation of P&C Insurance Companies

This paper presents a general approach and specific aspects of the valuation of P/C Insurers. It combines corporate finance, the economics of P/C Insurers, and actuarial versus financial views. Although the primary purpose of the paper is to investigate the acquisition valuation of P/C Insurers, its conclusions are applicable to other areas as well.

We discuss aspects such as the purpose of valuation, motivation for acquisitions, status quo valuation, valuation of synergy, valuation of control, valuation of embedded (real) options, and so forth.

We introduce the main valuation methods and the applications to the P/C Insurance Industry. We develop the application of the EVA-based valuation approach. We examine the accounting versus the economic approach, the determination of Net Asset Value, Cost of Capital, cash flow projection, scenario testing versus stochastic analysis, the inputs of cash flow modeling, sensitivity analysis, the valuation of embedded options, and so on. A special focus will be limitations on the valuation, including critical analysis of key assumptions.

The appendix includes a case study of the acquisition of a P/C insurer from the Central/Eastern European region (CEE). Practical aspects of experience with the CEE are presented.