Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
technical reserves in the balance sheet are to add back the reinsurers’ share and
to include a provision for that part of gross written premiums that relates to as yet
unearned income. This is modelled on page eight as a proportion of gross written
premiums.
4.3.2.5 Investments
Investments are shown on page nine of the model. They are assumed to represent
70 per cent of gross technical reserves and equity, the surplus over and above this
figure being in effect allocated to other assets. Given their need for predictable
cash flows from their investments, insurance companies tend to maintain a fairly
high proportion of their investments in bonds, rather than equities. But the
allocation, and the expected returns from each asset class, again represent an
important actuarial assumption and management decision.
4.3.2.6 Debtors and creditors
As already mentioned, when we discussed the balance sheet, the debtor and
creditor items on page ten of the model are derived as a proportion of gross
written premiums.
4.3.2.7 Cash flow and taxation
As a general rule the statutory accounts of an insurance company reflect cash
flows. As we have seen, earned premium income is a cash item as are claims and
expenses. In the case of Sundance, however, we are carrying large deferred tax
assets in the balance sheet that it is expected will be relieved against future tax
liabilities. This is modelled on page eleven, and the technique used is identical to
that which would apply for an industrial company in the same situation.
To the extent that the company creates losses, these add to the deferred tax asset,
and to the extent that it makes profits these reduce it. The opening balance for
each year is relieved against tax charges until it is exhausted, at which point the
company starts to pay tax. The consequence is that there may be a run of years,
as in this case, where there are tax charges in the profit and loss account, but no
tax payments made, to the benefit of the cash flow.
The cash flow figure derived here is prior to retentions, which represent that
proportion of earnings that are not distributable if the company is to maintain its
required solvency ratio.
4.3.2.8 Valuation
After a lot of comment on the forecasting of the accounting items we have
nothing to say about the mechanics of the valuation on page twelve. The cost of
equity is derived in the usual fashion, and the cash flows to equity and residual
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