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 10th 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
Product Type
Cause of Death
Cancer
Cardiovascular
Respiratory
Mental & Nervous
Stroke
Digestive
Infectious
Genitourinary
Childbirth
Diabetes & Metabolic
Blood & Immune
Motor Vehicle Accidents
Other Accidents
Suicide
Homicide
Other
Total
Term
476
216
32
24
22
9
6
5
1
2
3
74
131
166
33
62
1262
Whole Life
363
240
71
49
46
15
8
15
7
2
16
51
18
3
115
1019
UL
463
324
121
68
61
23
20
14
3
4
3
25
43
29
6
52
1259
VUL/ EIL
200
116
37
21
16
8
6
2
7
3
11
57
35
7
16
542
Other
133
65
7
6
12
9
8
1
18
1
12
23
22
2
1
320
Total
1635
961
268
168
157
64
48
37
22
20
12
138
305
270
51
246
4402




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 = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 ...+
CFn/(1+r)n + PV of terminal value
Where:
CF1 = cash flow in period 1
CF2 = cash flow in period 2
CF3 = cash flow in period 3
CFn = 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?