Appraisal Values for Property and Casualty Insurance Companies for Merger or Acquisition

The proposed CAS "Statement of Valuation Principles" indicates that the valuation of a property and casualty insurer should be based on the present value of a projected cash flow to be generated by that insurer. The detail of the specific cash flow to be valued is not defined in the Principles - this paper proposes that for merger and acquisition purposes, the appropriate cash flow is the maximum distributable earnings of the insurer. These earnings can be regarded as either the maximum stockholder dividend, or as modified statutory earnings where the modification is so as to ensure that policyholder surplus is maintained at the required level. The valuation process is prospective. Merger, acquisition and divestiture are all events which can signal substantial changes in the future direction and performance potential of an insurer. A key element in determining the appraisal value of a property and casualty insurer under such conditions is the identification and assessment of the likely changes in the future operations and results of the insurer. The paper proposes that the macro model of the insurer's operations be produced by aggregating micro models which are based at the individual policy level. The micro models are similar to profit tests which are used to design, develop and evaluate life insurance products.