Insurance Companies Valuation
The valuation of insurance companies does not differ substantially from the valuation of banks. The considerations we made about the reasons that set bank valuation apart from the valuation of non-financial corporations hold for insurance companies as well. In fact, insurers transform liabilities in investments, and the liabilities (and associated risks) are not, strictly speaking, a source of financing for insurers but rather a raw material to be transformed in financial assets. Therefore, similarly to what we have seen for banks, the valuation of insurance companies is equity-side, and the cost of capital for insurers can be estimated using the CAPM without requiring any adjustments for the leverage.
The DDM, DCF, and Excess Return Models as well as most of the multiples presented in Chapter 5 can be applied to insurance companies in the same way they are to banks. We will therefore focus here on what is peculiar to insurance companies' valuation, and redirect the reader to the presentation of bank valuation approaches in Chapter 5. Naturally, while the structure and logic of valuation is the same, the definition of regulatory capital is industry-specific and country-specific as discussed in Chapter 7. We will present at the end of the chapter a detailed case of an insurance company valuation using the Discounted Result Models.
We will discuss the specific insurance business multiples, but our focus will be first on a valuation approach ad hoc ...