From an Underwriter’s perspective
Financial Underwriting Involves the developments and Interpretation of financial information It attempts to analyze the motivation behind the purchase of insurance and the ability to continue to pay renewal premiums
Businesses can afford to pay higher premiums Life insurance premiums are often a deductible business expense
According to the National Institute on Mental Health, suicide was the 10 th leading cause of death in 2007 According to the High Face Amount Mortality Study, published by the Society of Actuaries in April of 2012, suicide represented 40% of the non-medical causes of death for term insurance and the third leading cause of death
Cause of Death Product Type TermWhole LifeULVUL/ EILOtherTotal Cancer Cardiovascular Respiratory Mental & Nervous Stroke Digestive Infectious Genitourinary Childbirth Diabetes & Metabolic Blood & Immune Motor Vehicle Accidents Other Accidents Suicide Homicide Other Total
Book Value – Total assets minus total liabilities Capitalization of earning – future earnings ÷ capitalization rate Discounted Cash Flow – present value of a company’s future cash flow Terminal Value – present value at a future point in time of all future cash flows when we expect stable growth rate forever
Discount Rate – represents the total expected rate of return that an investor would likely require from a potential investment. The discount rate is directly related to the level of risk inherent in the investment The Capitalization Rate – more often used in valuations where the cash flows are stable or in situations where the future cash flows are not available. It’s derived by subtracting the growth rate from the discount rate.
The probable price at which a willing buyer will buy from a willing seller when: 1.) both are unrelated 2.) both parties know the relevant facts 3.) neither party is under any compulsion to buy or sell
Asset Market Income
Restating the balance sheet using the fair market value of assets and subtracting the fair market value of the liabilities
Entails direct comparison of the company being valued to similar companies. Comparisons to publicly traded companies or use actual sales transaction for similar businesses Results are often expressed in ratios – Price-to-earnings ratio – Price-to-revenue ratios – Price-to-EBIDTA
Focuses on the analysis of the future economic benefits of an entity. Capitalization of earnings IBDT÷ Cap rate
Annual of earnings = $100,000 Capitalization Rate = 25% Growth rate = 0 Valuation = $100,000 ÷ 25% = $400,000
Annual of earnings = $100,000 Capitalization Rate = 25% Growth rate = 5% Valuation = $100,000 ÷ (25% - 5%) = $500,000
Annual of earnings = $100,000 Capitalization Rate = 20% Growth rate = 10% Valuation = $100,000 ÷ (20% - 10%) = $1,000,000
DCF = CF 1 /(1+r) 1 + CF 2 /(1+r) 2 + CF 3 /(1+r) CF n /(1+r) n + PV of terminal value Where: CF 1 = cash flow in period 1 CF 2 = cash flow in period 2 CF 3 = cash flow in period 3 CF n = cash flow in period n r = discount rate (also referred to as the required rate of return)
Price = I ÷ (R-g) Where I = the annual cash flow at the end of the discrete period R = Discount rate g = growth rate
Cover Valuation Summary (including assumptions and limiting conditions) Valuation Assignment Economic outlook Industry outlook Business overview Conclusion
QUESTIONS?