Can anyone point me to an article that shows the main points in valuing insurance companies? Aka, what are the relevant metrics etc. Any help is much appreciated. * Especially when said firm has (Investment portfolio -Total Liabilities) > MCapitalization
Try googling “embedded value”.
what you really need is an S&P Industry report on insurance companies. These are like gold, give metrics and valuation tips as well as economic drivers. You need a subscription but here’s one from 2008 for P&C http://www.scribd.com/doc/48695602/S-P-Industry-Surveys-Property-Casualty
Key: relationship b/w sustainable ROE and P/BV (ROTE and P/TBV, if you prefer) holds up over time. If you’re not earning cost of capital, you get a discount to book value, which is the reality for most of the industry. For P&C, the problem is it’s hard to figure out what the true E and BV are from current loss reserves and risk exposures. Additionally, there’s too much capital industry-wide, which depresses pricing to the point that most lines of business are not profitable. This is why you see consolidation and hopes that large loss events will take capital out of the system to see healthier pricing, i.e. a “hard market”. For Life, the business depends heavily on interest rates and the yield curve. Given the interest rate outlook, you should expect margins to get crushed and returns below cost of capital. For Brokers, they are a more traditional cash flow business that depends on industry pricing environment to grow. Consolidation and growth into under-penetrated markets is story here. Valuation is P/E or EV/EBITDA. This is a more defensive place to hide out for financials investors when they are afraid of balance sheets.
Keefe Bruyette and Woods puts out primers on all the financial/insurance industries and various subgroups. If you can get your hands on one, they’re excellent as a starting point in explaining industry drivers and the most common crap looked at in valuation.