Investor's Valuation of an Insurance Company

The paper discusses the items an investor should consider to determine the purchase value of a property-casualty insurance company. These items include both strategic considerations and financial measurements. The strategic discussion makes distinctions among defensive, offensive, and diversification strategies. Also, the paper makes the point that property-casualty insurance companies are heterogeneous, and so the acquisition Target's strengths should match the strategic requirements or operational weaknesses in the investor (or Buyer). The return on investment (ROI) requirement that the investor should demand from the acquired insurance company depends, in part, on whether the acquisition strategy is defensive, offensive, or a diversification. The financial discussion values an insurance company based on total returns. An example is given. Comparisons are made to the Sturgis paper in PCAS 1981, as well as to the common practices of consulting actuaries. The point of view in the paper is that investors should measure value in terms of maximum stockholder dividends. Actuarial studies are criticized that ignore the effects of taxation and the costs of maintaining surplus at required levels.