Embedded value

Abstract: This article investigates the creation and monitoring of the fundamental value of a company, the methods of its valuation, and capital market responses to changes of the funda- mental value. The author uses the basic theory of discounted cash flows as his main theoretical model. This theory states that the investment value equals the net present value of future cash flows that is created as a result of this investment. Other theories referred to in the article are de- rived from the aforementioned model. The article contains an empirical analysis of correlation dependence between the fundamental value and the market capitalization. The figures obtained from international companies during a 5-year time period showed that the highest indices of fundamental value increase were used as output data. The article argues that the total business return has the highest correlation index with respect to a company's market value. The reasons affecting the results of the empirical research have been analyzed. The author gives some rec- ommendations on the appreciation of a company's market value.

Abstract: In this paper, a simple regression model was constructed to track the variation of insurance company stock prices. Ohlson's residual income valuation model (1995) was used to create a new financial ratio P/V (price to intrinsic value) to be compared with P/B (price to book value) and P/E (price to earning) ratios. Ohlson's model helped to incorporate the clean surplus relationship to estimate the intrinsic value of insurance firms. It was found that the Ohlson's estimation has a minor improvement of book value under abnormal earning forecasting for finite future periods and does not have an obvious difference under the various discount factors. The regression model with high R-square results from the stable increment of book value and estimation of intrinsic value V.

Abstract: Strategic planning in non-life insurance companies must consider differing demands from the company’s various stakeholders. While investors and shareholders require growth in equity market value, rating agencies, costumers and the authorities focus on the company’s solvency, that is, the amount of capital covering the business risks. In that regard, growth in premium income and business profitability are critical, but opposing drivers for operative management. In this article, we model profitability in the insurance business in dependence on premium growth and analyse the impact of the underlying growth strategy on shareholder value and solvency for a non-life insurance company. In a multi-period framework, we find that an optimal growth strategy, maximising net present value and fulfilling a solvency constraint can be derived in dependence on the initial insurance portfolio mix of new and renewal business. The results of the analysis further demonstrate that higher growth rates can lead to lower equity values and vice versa, and that the solvency constraint can prohibit a shareholder-value-maximising strategy. Therefore, the approach is useful in supporting strategic decision-taking and value-based management in non-life insurance companies.