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

Cause of DeathProduct Type

Term Whole Life UL VUL/ EIL Other TotalCancer 476 363 463 200 133 1635Cardiovascular 216 240 324 116 65 961Respiratory 32 71 121 37 7 268Mental & Nervous 24 49 68 21 6 168Stroke 22 46 61 16 12 157Digestive 9 15 23 8 9 64Infectious 6 8 20 6 8 48Genitourinary 5 15 14 2 1 37Childbirth 1 3 18 22Diabetes & Metabolic 2 7 4 7   20Blood & Immune 3 2 3 3 1 12Motor Vehicle Accidents 74 16 25 11 12 138Other Accidents 131 51 43 57 23 305Suicide 166 18 29 35 22 270Homicide 33 3 6 7 2 51Other 62 115 52 16 1 246Total 1262 1019 1259 542 320 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 unrelated2.) both parties know the relevant facts3.) 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 1CF2 = cash flow in period 2CF3 = cash flow in period 3CFn = cash flow in period nr = 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?