The Application of Fundamental Valuation Principles to Property/Casualty Insurance Companies

This paper explores the concepts underlying the valuation of an insurance company in the context of how other (noninsurance) companies are valued. Among actuaries, the value of an insurance company is often calculated as (i) adjusted net worth, plus (ii) the present value of future earnings, less (iii) the cost of capital. Among other financial professionals (e.g., chief financial officers, investment bankers, economists), value is often calculated as the present value of future cash flows. This paper will discuss both methods and explain under what circumstances the two methodologies derive equivalent value and under what circumstances the results of the two methods diverge. This paper also addresses recent developments in the insurance industry that could affect valuation, including the NAIC’s codification of statutory accounting principles, fair value accounting, and the Gramm-Leach-Bliley Act of 1999.