Valuation Metrics for Insurance Companies

Valuation Metrics for Insurance Companies
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Valuation Metrics for Insurance Companies

From a reader:

I have enjoyed reading your blog for the past few years. I started researching some insurance companies and went to some of your posts to help me get a better understanding of their financials. In one of your posts you talk about RGA trading below TBV and TBV ex AOCI. Why do you exclude AOCI from TBV?  Do insurance companies trade on ex AOCI multiples or regular BV and TBV multiples?

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  • BV -> Book Value
  • TBV -> Tangible Book Value
  • RGA -> One great life reinsurer, Reinusurance Group of America.
  • AOCI -> Accumulated Other Comprehensive Income

We typically exclude AOCI from book value, because AOCI stems from one time events, or things that may revert.  That said, insurance stocks they tend to react to book value prior to any adjustments.  Maybe the answer is this: unless we think the AOCI should revert, the AOCI should be credited to the value of the firm, though ignored by its operating income.

In this low interest rate environment, many bonds trade above the prices at which they were purchased.  Unrealized Capital Gains are usually one of the biggest items in AOCI.  Sadly, only the asset values rise when rates fall, because liabilities aren’t publicly traded, and as such have no price to mark to market.  With life companies, because of the longer tail of obligations, and the capitalizing of deferred acquisition costs (DAC, which is a discounted measure) the unrealized capital gains are applied to reduce the DAC.  DAC, though intangible, is a hard intangible, because there are are cash flows behind it, and if those cash flows are insufficient to repay the DAC asset, the asset gets written down.

Most insurance analysts as a result exclude AOCI from book value for valuation purposes; they think it will disappear when rates rise.  Now that said, I have read research that indicates that insurance stocks track unadjusted book value more than BV less AOCI.  If true, I think that works better for short-tail insurers, because discounting of liabilities does not have so much impact.

I look at it all and kind of shrug.  After that, I do some digging to analyze whether some components of AOCI might be more permanent than otherwise considered.

Insurance stocks mostly trade in line with their book value.  I have been around long enough to see the average multiple move in the range of 0.5x to 2.0x.  Be aware of where we are in the range, and whether pricing power is rising of falling.

From another reader:

I stumbled upon your blog post regarding generating ideas. I too use google alerts to fill the inbox. Unfortunately, I have been unhappy with the results so far. I have attached my alerts (with some culling of personal ones), which can be generated from the bottom of the manage alerts page. 

 I was hoping that you would do likewise and send me your fruitful query strings. 

It would be greatly appreciated.

My Googlebots use the following phrases:


  • CEO resigned
  • CEO “Steps down”
  • CEO fired

Now, creating good Googlebots takes time and effort, trial and error.  I typically create them for a specific task, and when that task is complete, I retire them.  My biggest success with Googlebots occurred in 2005, when they detected the peak in the housing market.  I had about 10 Googlebots working to pick up market chatter.  In October 2005, they went through a dramatic change, where the chatter was confused, and the speed of the closing for housing sales dropped dramatically.  After that, the chatter was subdued.  I posted my result at RealMoney’s Columnist Conversation sometime in October, and told my boss that though credit conditions were still loose, the wind was now at our back on housing prices.  We were “too early” bears on housing, and I was the one skeptic in the shop on the timing of that.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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