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How to Value Insurance Companies Beyond the Numbers

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Attempting to value an insurer with the same yardstick as a manufacturer is like trying to measure time with a ruler—you’re using the wrong tool for the job. Traditional playbooks, built for companies that sell physical products, simply don’t apply here. The insurance model operates on a different logic, where assets are promises and liabilities are future possibilities. This isn’t just an academic exercise for analysts; it’s a strategic imperative for leaders. Understanding how to value insurance companies correctly reveals where to invest, how to innovate, and what it takes to build a brand the market truly rewards. This guide provides a new framework.

Insurtech company Lemonade has had a remarkable ascendancy of growth. It became the best IPO debut of the year in 2020 after gaining 140% on its first day of trading in July. Investors gave a huge thumbs up for its model of contents and personal liability insurance powered by tech and a giving-back plan for unused user fees to promote social good. It marked a significant milestone for the insurtech industry, which received an astonishing $15.4 billion in investment in 2021, according to EY. Rather than adopt a defensive mindset, insurance companies should study the approach of innovators like Lemonade and embrace new thinking. Through focusing on creating “shared value” and building new interactions, they can remain relevant and insure themselves against an unpredictable future.

From a Pipeline to an Interaction Field  

In the traditional model, insurance companies focused on competitive advantage, differentiation, and growth. Companies existed very much in their category lanes, a “world of walls.” This was usually evaluated in terms of tangible assets, revenue, and profit. Within this “pipeline model,” insurers would gain advantage by lowering costs and increasing efficiency. The focus was on minimizing claims. However this would often create a groundswell of negative feelings from consumers, as the industry failed to respond to their actual needs. Today we’re in a digital age — an era of continuous disruption, characterized not only by networks but by data-driven technologies, including artificial intelligence (AI), machine learning, and quantum computing. We need to think differently about how businesses create value.    Companies that succeed have to focus on building new interactions and touchpoints, outside of their narrow categories. At Vivaldi we call this an “interaction field.” Key to becoming an interaction field company is the value creation participation by a host of different players. This includes customers, stakeholders and even competitors.   There are several key areas insurers should focus on to build their “interaction field”: 

How to Value Insurance Companies: A Guide Beyond the Numbers

To build a resilient interaction field, insurance leaders must first understand how value is measured in their unique industry. Traditional valuation playbooks, designed for companies that make and sell physical products, simply don’t apply here. The insurance model operates on a completely different logic, where assets are financial, liabilities are promises, and the flow of capital creates its own momentum. Attempting to measure an insurer with the same yardstick as a manufacturer is like trying to measure time with a ruler—you’re using the wrong tool for the job. This isn’t just an academic exercise for analysts; it’s a strategic imperative for leaders. A deep understanding of how your company’s value is truly calculated reveals where to invest, how to innovate, and what it takes to build a brand that the market rewards. It requires a shift in perspective from tangible assets to the sophisticated management of risk, capital, and future obligations.

Understanding the Unique Insurance Business Model

The insurance business model is fundamentally distinct from almost any other industry. Its balance sheet isn’t built on factories, inventory, or equipment; it’s constructed from financial assets and liabilities. The core asset is a portfolio of investments, and the core liability is the promise to pay future claims. This structure creates a dynamic where the company’s health depends less on operational efficiency in a traditional sense and more on sophisticated financial stewardship. Recognizing this difference is the first step toward a meaningful valuation. It moves the conversation away from outdated industrial-era metrics and toward a framework that appreciates the intricate dance between underwriting discipline and investment acumen. This unique structure is what makes the industry both resilient and complex, demanding a specialized lens to accurately gauge its worth and potential for growth.

The Centrality of Financial Assets

Unlike companies that produce tangible goods, an insurer’s worth is primarily held in its investment portfolio. The balance sheet is a collection of stocks, bonds, and other financial instruments, weighed against the projected cost of future claims. This reality means that the company’s ability to manage its investments is just as critical as its ability to write profitable policies. The value isn’t in what the company makes, but in how it manages its capital. This financial-first structure makes metrics like book value especially relevant, as the assets can be marked to market with relative ease, providing a clearer picture of the company’s tangible worth at any given moment.

The Concept of “Float” as a Value Engine

One of the most powerful yet misunderstood concepts in insurance is “float.” This is the capital an insurer holds from collecting premiums long before it needs to pay out claims. In essence, customers are giving the company an interest-free loan. This pool of capital, or float, is then invested to generate returns, creating a potent secondary revenue stream. A well-managed insurer uses this float as a powerful engine for value creation, turning its core business of risk management into a platform for profitable investment. Understanding the size, cost, and performance of this float is critical to grasping an insurer’s true earning power beyond its underwriting activities.

Why Traditional Discounted Cash Flow (DCF) Models Are Insufficient

For most industries, the Discounted Cash Flow (DCF) model is a go-to valuation method. However, it breaks down when applied to insurance companies. The reason is simple: an insurer’s cash flows are notoriously difficult to predict. Between the volatility of investment returns and the unpredictability of catastrophic loss events, forecasting future cash flows becomes an exercise in speculation. As Investopedia notes, this makes traditional DCF an unreliable tool. Instead of trying to force a square peg into a round hole, strategists must turn to methods that are tailored to the industry’s unique financial structure and revenue streams, focusing on what can be measured reliably.

Key Financial Metrics for Insurance Valuation

While the big-picture model is unique, a set of specific financial metrics can provide sharp clarity on an insurer’s performance and health. These aren’t just numbers on a spreadsheet; they are vital signs that tell a story about underwriting discipline, investment strategy, and capital efficiency. For leaders, mastering this dashboard is essential for making sound strategic decisions and communicating value to the market. These metrics cut through the complexity to reveal the core drivers of profitability and sustainability. They provide a common language for assessing performance and comparing it against peers, forming the foundation of any credible valuation analysis. By focusing on these key indicators, you can get a clear, data-driven view of a company’s operational strength and financial resilience.

Price-to-Book (P/B) Ratio

The Price-to-Book (P/B) ratio is a cornerstone metric for valuing insurers because their assets are primarily financial and have transparent market values. This ratio compares the company’s market capitalization to its book value—what would be left if all assets were sold and all liabilities were paid. A P/B ratio greater than 1 suggests the market believes the company can generate value beyond its tangible assets, signaling confidence in its brand, management, and future growth prospects. For insurers, book value provides a much more stable and meaningful baseline than it does for tech or manufacturing firms, making P/B a reliable starting point for any valuation.

Combined Ratio

The combined ratio is the ultimate measure of an insurer’s core business performance. It is calculated by adding incurred losses and expenses and dividing them by the earned premium. A ratio below 100% indicates an underwriting profit, meaning the company is making money from its policies alone, even before accounting for investment income. A ratio above 100% signals an underwriting loss. As a strategic indicator, the combined ratio reveals the discipline and effectiveness of a company’s risk assessment and operational management. A consistently low combined ratio is a hallmark of a high-performing insurer with a sustainable competitive advantage.

Return on Equity (ROE)

Return on Equity (ROE) measures how effectively an insurer is using its shareholders’ capital to generate profits. It answers the fundamental question every investor asks: what is the return on my investment? A higher ROE indicates greater efficiency and profitability. In the insurance industry, an ROE of around 10% is often considered a benchmark for a healthy, well-run company. This metric is critical because it synthesizes both underwriting performance and investment success into a single, powerful number that reflects the overall ability of the business to create value for its owners. It’s the final scorecard on capital allocation and strategic execution.

Other Comprehensive Income (OCI)

Other Comprehensive Income (OCI) is a crucial, often overlooked, component of an insurer’s financial story. It captures the unrealized gains and losses on the company’s vast investment portfolio. Because these assets haven’t been sold, the gains or losses aren’t reflected in the standard income statement, but they represent real changes in the company’s value. According to a guide from Eqvista, monitoring OCI is essential for understanding the full impact of market fluctuations on an insurer’s financial position. It provides a transparent look at the volatility and potential of the investment strategy, offering a glimpse into future earnings or potential write-downs.

Core Valuation Methods for Insurance Companies

No single method can capture the complete value of an insurance company. A strategic approach requires triangulating insights from several methodologies to build a comprehensive and defensible valuation. This is less about finding a single “right” number and more about understanding the range of potential values based on different assumptions and market conditions. By blending the market, income, and asset-based views, leaders can develop a holistic picture of their company’s worth. This multi-faceted approach provides the robust insight needed to guide critical decisions, from M&A activity and capital allocation to long-term business strategy and transformation. Each method offers a unique lens, and true strategic clarity emerges when their perspectives are integrated.

The Market Approach

The market approach determines value by comparing the company to its publicly traded peers or to recent M&A transactions in the industry. This method is grounded in the principle of substitution—a buyer will not pay more for a business than what it would cost to acquire a similar one. Analysts use multiples like the Price-to-Book (P/B) or Price-to-Earnings (P/E) ratios of comparable companies and apply them to the target company. This approach provides a powerful external reality check, reflecting current market sentiment and competitive positioning. It answers the question: what is the market willing to pay for a business like this right now?

The Income Approach

The income approach focuses on the future earning potential of the insurance company. While traditional DCF is problematic, more sophisticated models are used to project value. These can include dividend discount models, which forecast future dividends paid to shareholders, or excess return models, which calculate the value generated above the cost of capital. This forward-looking method is essential for capturing the intangible value of a strong brand, a loyal customer base, and a superior underwriting process. It assesses the company not just on its current assets, but on its ability to generate profits and cash flow over the long term.

The Asset Approach

The asset approach calculates a company’s value based on the fair market value of its assets minus its liabilities. For an insurer, this often translates to its adjusted book value. This method essentially determines the company’s liquidation value, providing a foundational “floor” for its valuation. While it is useful for establishing a baseline, the asset approach typically fails to capture the significant intangible value of an ongoing business, such as its renewal book, distribution network, or brand reputation. It’s a conservative and essential piece of the puzzle, but it rarely tells the whole story of a thriving enterprise.

1. Embrace Purpose

The fact that Lemonade has “big heart” as part of its strapline indicates how much they have shaken up the traditional perspective of insurance companies. Rather than bolting on a purpose, it is very much integral to the raison dʼetre of the company. The company reverses the traditional insurance model as a public benefit corporation and certified B-Corp with social impact embedded in its legal mission and business model. The company takes a flat fee and gives back what is left to causes its customers care about. In doing so, customers are invested in not falsifying claims and also becoming part of the value creation of the company. They are invested in its success and their values are intimately tied up with the company’s value. By creating this synergistic shared value, the company has built itself a strong and sustainable future. As their IPO highlighted, it has also created enormous benefit for the traditional measure of value: the monetary one. 

2. Think Outside of Your Narrow Category

As mentioned, the traditional approach to insurance is very much focused on a pipeline: boosting users, competing on margins and perhaps bundling on some other product as part of the mix. This may have been viewed as “innovation” some years ago, but to truly embrace innovation a new mindset is needed. Rather than viewing themselves solely as “an insurance company,” insurers should reframe their thinking to see themselves as companies focusing on the health or security of their customers. One company that has done this brilliantly is Vitality Health. Vitality Health is now one of the top five providers of Private Medical Insurance (PMI) in the UK. Its parent company Discovery was founded in South Africa in 1992 as a startup insurance provider but transitioned to an interaction field company by addressing the industry’s overarching challenge: How do we make people healthier?   Vitality was built on the idea that people could be incentivized to lead healthier lifestyles, which would create a more sustainable insurance market, and, in doing so benefit society as a whole. To achieve this, Vitality offers gym memberships, health reviews and an activity tracker. It then rewards people who boost their health. In doing so, the company has thought outside its narrow category and is also building new interactions and touchpoints with customers. This is bringing in more data to help Vitality Health understand its customers better and create even more momentum.

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3. Look at Collaborative, Not Competitive Advantage  

It is incredibly difficult for businesses to move away from the established norm of “competitive advantage,” but a new narrative is needed in a world of increasing interdependence. The pandemic brought home the need for collaboration and companies need to embrace “collaborative advantage.” Participants in an interaction field feel as if they are part of a supportive community, rather than consumers transacting with a pipeline company. One example of a growing community whose needs have been thrust into the spotlight is the freelance workforce. This is a community traditionally underserved by the insurance industry. To address this Allianz Insurance partnered with on-demand insurtech startup Dinghy to provide business insurance to freelancers. Allianz perceived the shifting sands of the employment market and collaborated with Dinghy to allow freelancers to have access to fair-priced insurance for the periods of cover they want. Rather than viewing each other as a threat, they shared their mutual expertise in providing flexible business insurance solutions for this fast-growing sector of the economy. 

4. Develop Cultural Clairvoyance  

The pandemic shone a light on what the industry should have been grappling with all along, namely its capacity to sense and adapt to cultural and technological changes, what I call “cultural clairvoyance.”  What it has revealed is that the “organizational capacity to execute innovation is slower than the rate of change dictates.” Too often companies have relied on market research that merely tells you what consumers think today, when they themselves don’t know what they will think/do in the future. Of course you can rely on stated consumer preferences and needs. You can quantify these. You can observe consumers. But, it is not the consumers’ job to understand how they will feel in five years’ time.   To give yourself the best protection against the unpredictable future, the two questions you need to ask are: how are your consumers’ expectations changing? Secondly, how will the consumer relate to our business, brand, product in five years’ time if we don’t adapt to a specific trend or series of trends?   The right approach is to develop a series of robust trends and hypothesize what their consequences could be across a business portfolio. This creates a series of scenarios, and by consequence, a series of opportunity spaces that inform every innovation. We call them “cultural planning platforms.”   So how do you do it?  You need to understand:   a. Strength: Shortlisted important and substantiated trends, that will shape consumer expectations.  b. Confluence: What the interrelationship of several trends means in terms of the customer/consumer.  c. Consequence: What the consequence of these changes in expectations and behavior will be for how consumers relate to your business, brand, and products.    Insurance is at the coalface of the disruptive change impacting business and society. Rather than reacting belatedly to events and new challengers, insurance companies should instead focus on building their interaction fields. This is the best way they can survive and thrive. 

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A Special Case: How to Value an Insurance Agency

Valuing a large insurance carrier often involves dissecting a fortress of financial assets and complex liabilities. But valuing an independent insurance agency is an entirely different challenge. Here, value isn’t found in a corporate balance sheet but in a living ecosystem of relationships and recurring commissions. The valuation process must shift from assessing a static financial structure to measuring the dynamic health of a relationship-driven enterprise. This requires a perspective that looks past simple revenue figures to understand the loyalty, profitability, and growth potential embedded in its book of business.

Applying Rules of Thumb: Commission Multiples

For years, the go-to method for valuing an agency was the commission multiplier—a straightforward rule of thumb where annual commissions are multiplied by a factor between 1.0 and 3.5. While simple, this approach is a relic of a bygone era. It’s a blunt instrument that measures scale but ignores substance. It treats a dollar of low-margin, high-churn business the same as a dollar from a deeply loyal, multi-policy client. This legacy metric provides a snapshot of past activity but offers little insight into future profitability or the resilience of the agency’s customer base.

Using EBITDA Multiples for a Modern Valuation

The strategic conversation around agency valuation has rightly shifted toward EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples. This isn’t just a change in formula; it’s a change in philosophy. An EBITDA-based valuation focuses on operational health and true profitability, revealing how effectively an agency converts revenue into sustainable earnings. It moves the question from “How big is the book of business?” to “How profitable and efficient is the business engine?” This is the language spoken by sophisticated buyers and is critical for any serious discussion about mergers and acquisitions.

Factors That Influence an Agency’s Final Value

An agency’s final valuation is ultimately determined by the qualitative drivers that formulas cannot capture. A professional valuation must analyze the intangible assets that signal long-term stability and create a competitive moat. These factors include the diversity of its product lines, the stability of its income, and its debt structure. More profoundly, value is tied to the strength of its team, the loyalty of its customers, and the power of its brand in the community. These are the core components of any successful business strategy and transformation, as they represent the true, defensible assets that generate enduring enterprise value.

Frequently Asked Questions

Why are standard valuation methods like DCF a bad fit for insurance companies? It comes down to using the right tool for the job. A Discounted Cash Flow (DCF) model works well when you can reliably predict future income, like for a company selling widgets. But an insurer’s cash flow is inherently unpredictable. It’s influenced by volatile investment markets and the possibility of major catastrophic events. Trying to forecast that is more speculation than strategy, which is why we lean on methods that are grounded in the unique financial structure of the insurance industry itself.

You mentioned “float” as a value engine. How does that actually create value? Think of float as the money an insurer holds between collecting premiums and paying out claims. Essentially, customers provide the company with a massive, interest-free loan. The insurer then invests this capital to generate returns. This creates a powerful secondary profit center that is completely separate from underwriting. A company that manages its float well can be highly profitable even if its core insurance business just breaks even.

If I could only look at one metric, what’s the best indicator of an insurer’s core performance? Without a doubt, it’s the combined ratio. This single number tells you if the company is making money from its fundamental business of writing policies, completely separate from its investment income. A ratio under 100% means it’s running an underwriting profit, which is the hallmark of a disciplined and well-managed insurer. It’s the clearest signal of operational health you can get.

What’s the difference between valuing a company based on its assets versus its “interaction field”? Valuing a company on its assets, like its book value, gives you a solid but static picture of its worth today. It’s a liquidation snapshot. Valuing its “interaction field” is about assessing its future potential and momentum. It measures the strength of its relationships with customers, its collaborative partnerships, and its ability to create value beyond its category. One tells you what the company owns; the other tells you where the company is going.

Is valuing a small insurance agency really that different from valuing a large carrier? Yes, it’s a completely different exercise. A large carrier’s value is tied to its massive balance sheet and complex financial portfolio. You’re analyzing its ability to manage capital. An agency’s value, on the other hand, is found in its relationships and its recurring commission stream. You’re not valuing financial assets; you’re valuing the loyalty of its customer base and the profitability of its book of business.

Key Takeaways

  • Rethink the valuation playbook. Insurers operate on a logic of financial assets and future promises, not physical inventory. Standard models like Discounted Cash Flow (DCF) are ineffective because they can’t properly account for this unique capital structure.
  • Master the metrics that matter. A true picture of an insurer’s health comes from a specific set of indicators. Focus on the Price-to-Book (P/B) ratio for asset value, the combined ratio for underwriting discipline, and Return on Equity (ROE) for capital efficiency.
  • Build value beyond the numbers. A strong valuation is the outcome of a smart strategy. The most resilient insurers create enduring value by building an “interaction field”—a system of purpose, collaboration, and customer engagement that transcends their category.

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