Most investors avoid trying to inform financial companies due to their complex nature. However, many ways to understand the exact value and metrics can help you quickly decide if it will be worthwhile to go deeper into the work of understanding. These specific strategies and metrics work for insurance companies, but there are also other ways of understanding the specific industry.
A brief introduction to insurance
At first glance, the concept of the insurance business is simple. The insurance company collects the premiums that customers pay to cover the risk of loss. This risk of loss can be applied to many different sources, which explains why health, health, property and injury (P&C) and specialty insurers (unusual insurance where there are many difficult to assess). The difficult part of being an insurer is determining exactly what future insurance claims and establishing premiums will meet these claims, and will leave a huge benefit to shareholders.
In addition to the previous insurance operations, insurance providers administer and manage investment portfolios. The funds for these portfolios come from the reinvestment of earnings (such as the premium received, where the premium is maintained because no claim occurs during the policy period) and the premiums before they are paid as requested. This second phase is a concept known as floating and it is important to understand it. Warren Buffett often describes what floats in the annual commitment letters that are held at Berkshire Hathaway. In 2000 he wrote:
First of all, flotation is money that we own but is not yours. In insurance operations, it arises because premiums received before losses are paid, which are generally more than one year. That leaves it running "loss of writing", which is the cost of floating.
An insurance business has a reasonable value if its floating costs are less than the cost that a company would incur to obtain cash. But an entity is a mediator when its floating cost is greater than its market value. "
Buffett also addresses what makes it difficult to claim an insurance company. The investor must expect the experts of his company to make a reasonable and appropriate assumption that measuring his incoming premiums and future claims should be paid as insurance premiums. Big mistakes can harm a company, and accidents can last for years, or even decades, in the context of life insurance.
Insight Rating Rating
Some key metrics can be used to inform insurance companies, and these metrics are a common occurrence for financial companies in general. These are reserve prices (P / B) and return on capital (ROE). P / B is a basic valuation that compares the value of the shares of the insurance company with the value of your book, either in the net amount of the company or per share. The book value, which is only a shareholder value, is the representation value of the company if it ceases to exist and is permanently eliminated.
The fair value of the book recognizes good consistency with other intangible assets to provide the investor with a more accurate estimate of the remaining assets when the company closes the store. The immediate general rule is for insurance companies (and, again, in general finance stores) that it is worth buying with a P / B ratio of 1 and on the positive side with a P / B ratio of 2 or more . For an insurance company, a book value is a solid measure of most of its balance sheet, which contains bonds, stocks and other securities that can be trusted for its given market value.
ROE measures the income rate of the insurance company as a percentage of the share, or the carrying amount. A ROE of around 10% suggests that the company hides its cost of money management and generates huge profits for shareholders. The bigger, the better, and the average among teenagers is better for a more efficient insurance company
Another wide-ranging effect (OCI) is also worth examining. This ratio shows the results of an investment investment portfolio. The OCI can be found on the balance sheet, but the rate is now in its own statement on the insurance company's financial statements. It gives a clear indication of the unrealized benefit of investing in an insurance portfolio and the change in equity or book value, which is important to measure.
A series of well-defined metrics for the insurance industry. The pooled index measures the loss and expenses incurred as a percentage of the premiums received. More than 100% rate means that the insurance company loses money on its insurance services. Below 100% raises operating profit.
The investment bank report emphasized the focus on premium growth potential, the ability to introduce new products, integrated business index and anticipated payment of future reserves and investment-related revenue relative to the new insurance company business (due to the time difference between premiums and future applications). . Therefore, the nature of the resolution and the emphasis on the value of the book are very important. In addition, comparative methods that compare a company to its peers (such as ROE rates and trends) and sales transactions are helpful in obtaining insurance.
Depreciated cash flow (DCF) can be used to inform an insurance company, but it is less important because cash flow is more difficult to measure. This is due to the influence of the investment portfolio and cash flow that is present on the statement of cash flows, which makes it difficult to measure the cash generated by the insurer. Another aforementioned problem is that this move requires many years of production.
An example of an experiment
Below is an example to provide a clear picture of the previous test dialog. Life Insurer MetLife (NYSE: MET) is one of the largest in the industry. It is the largest insurance based on all US goods. UU., And its market-rate deviation from August 2013 was $ 53 billion, surpassing only China Life Insurance Co (NYSE: LFC) by $ 71 billion. Prudential plc (from the United Kingdom) is another major player with a market cap of less than $ 50 billion.
MetLife ROE has averaged around 5% in the last five years, but suffered during the financial crisis. This was below the industry average of 8% during this period, but the MetLife rate is expected to reach 10.2% this calendar year, and the company intends to increase it to 15% for the following years. China's proposed ROE is about 13%, while Prudential's is 13.9%. MetLife currently sells at 0.9 P / B, which is below the industry average of 1.3. China / P Life's P / B is 1.8 and Prudential's 3.1.
According to the above, MetLife looks like a reasonable bet. Its ROE returns to double digits and is above the industry average. P / B is also less than 1, which is usually the best entry point for investors according to P / B history China and Life and Prudential have higher ROE, but P / B is also higher. This is where it is important to go into the financial statements of each company. OCI is important in the investigation of investment portfolios, and it will need to analyze growth strategies to decide if it is appropriate to pay a high P / B ratio.
As with any balancing act, there is art and science to arrive at the right amount. Historical numbers are easy to calculate and to estimate, but to estimate the correct estimates for what the future holds. In the insurance space, accurate estimates of metrics such as ROE are important, and paying a low P / B can help put some disagreement on investors.
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