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

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 3056. CONCLUSIONThe valuation of property/casualty insurance companies is animportant feature of actuarial work. Much of the actuarial literatureon valuation focuses on the method referred to throughoutthis paper as economic value added. Other financial serviceprofessionals, however, often rely on a discounted cash flow approachto valuation. One of the principal intentions of this paperis to demonstrate that, with a common set of assumptions, theEVA and DCF modeling approaches will produce equivalent values.For both methods, the key factors underlying value are (i)the projection of future income, (ii) the required capital, and (iii)the hurdle rate. Developing future income estimates, appropriategrowth assumptions (and the resultant capital needs), andthe appropriate hurdle rate for the entity requires sophisticatedanalysis. Furthermore, there are aspects of valuation, such as thedetermination of adjustments to the starting capital of the entity,for which experts have varying points of view. Recent changessuch as the development of fair value accounting principles willprovide further ideas on the valuation of assets and liabilities ofa property/casualty insurance company. We hope that this paperwill help actuaries and other financial professionals to explainthe valuation process for property/casualty insurance.