How to value life insurance company ?

[king888]

I have been trying to rationalize investment in Life Insurance Company.

This is good paper for embedded value(ev) valuation and also value of new business (VONB) . 

http://www.mediafire.com/view/?n4qkoy4dkyvxjyn

 

So value of any life insurance companies is

  Appraisal Value (AV) =  Embedded Value (EV)  + [VONB x Capital Factor]

 

But my concern of using this valuation method is it seems too obvious because most of life insurance provides their own EV and VONB

For example , AIA 

http://investors.aia.com/phoenix.zhtml?c=238804&p=irol-presentations

 

The valuation swing from the capital factor.

In case of AIA, current market capt is about $47 billion .

$47 B  = $29 B  + [ $1B x CF ]  ( EV & VONB  taken from latest AIA interim presentation  )

CF = 18x  .  And my friend told me that for AIA using 15-18x CF is reasonable. 

 

AIA just bought ING Malaysia for  17x Capital Factor .So current market valuation of AIA is fairly priced.

 

What could go wrong with this valuation method ?  Is it good enough to replace PE ,PB matrix when comes to life insurance company?

[FrankArabia]

the embedded value is there to account for some of the value gaap/ifrs accounting doesn't capture...however it is by no means a substitute

 

the underlying problem with life insurance accounting is based on the fact life insurance is essentially a long tail business and therefore heavy assumptions must be made. Inherently this is unreliable and EV doesn't improve on this one bit. the issue is even more complicating when annualties and guarantees are made which brings interest rate/market risk into the fold.

 

When someone is calculating the EV it is similar to calculating reserves. They assume a level of mortality and experience losses and the profits that come along with this. Therefore, it is also guess work but more sophisticated guesses per se. Not surprisingly, EV normally shows that a lifeco is worth more than what is stated on book because it captures profits overtime (value of in force business).

 

life companies generally do not earn more than 10% of their capital overtime (neither does P&C). Therefore, buy one significantly under book and one where premiums written are low in relation to equity. in addition, make sure guarantees in force is low with rates that are reasonable. avoid companies that have a lot of guarantees written in bull markets. finally, you have to trust management.

 

 

[ubuy2wron]

It seems to me that lifeco's are the ultimate long tail insurance companies. Lifeco's are at least on a nominal basis cheap and pretty much hated right now. Neither Warren nor Prem has ventured into these waters even though the float for lifeco's is generally pretty massive. Are there any lifecos out there where great capital allocators /investors are driving the bus. Lifecos that have gotten into trouble have pretty much always been because they got the investments wrong not because they screwed up on the mortality tables.

[uncommonprofits]

It seems to me that lifeco's are the ultimate long tail insurance companies. Lifeco's are at least on a nominal basis cheap and pretty much hated right now. Neither Warren nor Prem has ventured into these waters even though the float for lifeco's is generally pretty massive. Are there any lifecos out there where great capital allocators /investors are driving the bus. Lifecos that have gotten into trouble have pretty much always been because they got the investments wrong not because they screwed up on the mortality tables.

 

BRK and White Mountains have a control position in Symetra (SYA).  As for a good capital allocator:  White Mountains & affiliates manage both the fixed income and equity portfolios.  More info here:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/sya-symetra-financial/msg54803/#msg54803

 

[king888]

Frank, thanks for great insight.  Most of analysts using EV and VONB as a valuation method for lifeco .That's why I am curious because this methodology involve largely to company's guidance. So it can be misleading easily by lifeco itself or optimistic assumption. 

 

 

ubuy2worn,  it seems to me that lifeco is a superior investment than p&c insurance. But this is too obvious. Generally , in emerging market lifeco has higher valuation (PE,PB) than p&c insurance co.  AIA Group looks very solid . (DB research here -  https://ger.db.com/csa/pubdoc/9sed1ztz00wf5s7 )  .  But Bruce Berkowitz has sold all of AIA to support the outflow cash. 

[PlanMaestro]

Nice for current shareholders but also time to start being more watchful on their accounting practices. Current practices worked very well in 2008.

 

Insurers Add Reserve Power

http://online.wsj.com/article/SB10001424127887323401904578155191984992264.html

 

State regulators Sunday approved new rules for how U.S. life insurers set reserves for future claims, a decision that may ultimately free up billions of dollars for acquisitions, stock buybacks, dividend increases and other uses designed to boost the industry's flagging returns.

 

Under the new rules, insurers would move to a "principles-based" system for determining the size of reserves. The current rules rely heavily on formulas the industry has long maintained are far too conservative.

 

[LC]

Under the new rules, insurers would move to a "principles-based" system for determining the size of reserves. The current rules rely heavily on formulas the industry has long maintained are far too conservative.

 

If anyone is interested on the principles-based approach (PBA) to reserve calculations: http://www.actuary.org/content/principle-based-approach-pba-project