PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 269cision and sample size. While the analysis could be restrictedto only those insurers that were virtually identical to the subjectcompany, the sample size would likely be too small to yieldmeaningful results.Valuation BasesThe market multiple valuation method estimates the “marketprice” of the subject company by reference to the multiples of itspeer group. For example, if the average ratio of price to earningsper share is 15.0 for the peer group, and the subject company’smost recent annual earnings are $10 million, then the estimatedmarket value of the subject company is $150 million. Typically,several alternative ratios will be used in performing a marketmultiple valuation. In most instances, the ratios employed includean operating multiple (such as the price-to-earnings ratio),a revenue multiple (such as price-to-premium or price-to-totalrevenues), and a balance sheet multiple (such as the price-tobookvalue ratio).A relative valuation is more likely to reflect the current moodof the market because it is a measure of relative value, not intrinsicvalue [7]. While these methods serve a valuable purposein the formulation of an opinion on the price the market may bewilling to pay, they provide little guidance on the returns thatwill be achievable and the extent to which capital outlaid nowcan be repaid.3. VALUATION RESULTS: EVA VERSUS DCF3.1. IntroductionThe following examples illustrate the DCF and EVA valuationmethodologies and derive relevant conclusions related to the useof the two methods. This section focuses on the mechanics andproperties of the DCF and EVA valuation calculations. AppendixA will provide a property/casualty insurance company example.We will demonstrate two equivalent forms of the EVA model.The first form, EVA(a), will follow the basic EVA formula struc-