Valuation of a Non-Life Insurance Company for Purchase

The paper discusses the main factors involved, and the procedures to be followed, in the valuation of a non-life insurance company for acquisition purposes. Two distinct strands of valuation methodology are identified. The first is concerned with direct valuation of the insurer's assets and liabilities and hence net assets, while the other concerned with an assessment of the future earnings likely to flow from the continued employment of those assets and liabilities in the insurance business. The asset related valuation is carried out on a wind-up basis, and provides a minimum value of the insurer. This valuation will require an assessment of the insurer's balance sheet, with adjustment being made where necessary. The earnings related valuation, taken in its bare essentials, consists of projection of expected future profits and calculation of the present value of this sequence of profits. In recognition of the CAPM, the rate of return involved in the present value calculation must reflect the volatility of the profits whose expectation is being valued. Constraints on the release of profits are considered because they are likely to reduce the value of the insurer to its owner(s). Particular reference is made to the capital requirements of the insurer, and their effect on profitability is quantified.