msimon wrote:selah wrote:This year we will be seeing a record of some kind being made when listing of several insurance companies commences, I think starting from next month.
Its obvious this avalanche of listings is brought about by the new insurance regulation rules limiting ownership of these companies.
Now how do we get a good valuation of this companies without solely relying on their prospectus and how do you measure a true worth of an insurance company.
another thing how will the regulation on share holding affect the already listed insurance companies esp.Kenya-re.
Selah...valuing and insurer is easy. I think insurers are the easiest companies to value. But you have to understand their value drivers. The main value driver for an insurance company is the Underwriting margin. You want an insurer that will retain a good portion of the annual premiums written to add to the float.
The second value driver is income/ returns on invested capital. So assuming a company can earn say 10-15% per annum on the invested funds and it retains say btn 8-15% of its net premiums written over a given period. Its safe to assume that the management is doing a great job in writing and managing insurance risks. And they are doing a similar job at investing the insurable funds. With that in mind, next will come the valuation. You may consider buying the company below tangible book. You can also consider the low cost provider in a basket of many good insuarers.
Or you can use the average premiums written over the past 5yrs, convert them into per share values and use that against the earning power. Say if it has written an average of 4bn per year(General business), and has outstandting stock of 600m, that would mean that the average pershare figure is 6.7. Now assuming historically it retains 8% of premiums written and earns about 0.3 from the investable funds. It would give it a total of 0.83. Now you can attach a conservative PE to that so that you determine the estimated intrinsic value.
Now, there is the control experiment, where you assume that the investable funds are invested at the long term yields in the market. This is to help you use a worst case senario. So if after using long term yields it gives you a return on investable funds of say 0.1. You add that to the 0.536 to get 0.63 and add the conservative PE to give you value. These are pre-tax values so the pe used should be a one that would reflect a proper pre-tax estimate.
I hope you understand.
Very well put: Returns on Invested Capital & Underwriting Margins do give us the investment efficiency & inherent risks in the company's liability book...
However, an insurer is still more a business and less a security since it is a giong concern. It needs to make money and stay solvent in the long run.
You may want to further consider:
1.Market: competition / consumer incomes (including projections) / product positioning etc
2.Sales & strategy: budget projections / new markets
3.The nature of the liabilities book: savings plans (simple) / pensions (easy to manage) / life (not too bad) / general (complex to value) / health (varies from hard - impossible to project using kawaida statistics) etc. Please note that Kenya has under 10 actuaries...
4.The nature of the assets book: reals estate / common stock / bills & bonds / cash etc.
5.Cashflows: past & prospective
6.Capital structure & implications to profitability: common stock / bonds / debt / gearing ratio
7.Associates: Shareholders / directors / management / Brand image / related companies, institutions or personalities.
In my opinion, insurance companies are in place to absorb, mitigate, transfer or eliminate all the risks that have financial implication in the entire economy. In school we were taught that where there is risk, you find return. These companies (especially the smaller ones) are (& should be) watched keenly by regulators and investors (like you and me).
Frankly i might only get in for speculation purposes. Insurance companies in Kenya are historically a disappointing lot... like i had noted earlier, Barclays bank (K) made more money than the entire insurance industry last year... yet they manage far less resources.
Jubilee is good though... short, medium & long term
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