Financials · Insurance
Insurance Sector Primer
A 42-page primer plus Excel model on insurance valuation: the combined ratio, float, P/BV through ROE, reserve development, and the life spread business.
2026 Edition · data as of June 2026
- pages
- 42
- sections
- 16
- model sheets
- 13
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The full primer
£25 / ~$32
- 42 pages, 16 sections
- Worked examples and applied cases
- 2026 Edition, data as of June 2026
Excel model
Valuation template
£45 / ~$58
- 13 sheets (.xlsx)
- Runs the primer's worked valuations live
PDF + Excel model Best value
Both files together
£59 / ~$76
- The 42-page primer
- The 13-sheet Excel model
- £70 bought separately · £11 less
Complete Financials Library
All three Financials industries: three primers, three Excel models (Banks, Insurance, and Alternative Asset Managers).
Inside the primer
The 16-section contents, a worked valuation page, and the Excel dashboard.
Contents
- 01 How Insurers Make Money
- 02 Listed Insurer Types
- 03 The Underwriting Cycle and Stage Ladder
- 04 Segments and Sub-Markets
- 05 Revenue Drivers: Generic Build
- 06 Cost Structure: Combined Ratio and Float
- 07 Valuation Frameworks
- 08 Worked Example: Residual-Income Valuation
- 09 Valuation Sensitivities
- 10 Insurers Outside the United States
- 11 Applied Cases: Combined Ratio, Float and P/BV
- 12 Applied Cases: Yields, Reserves and Life Spread
- 13 The Companies in This Primer
- 14 Key Metrics and Screening
- 15 Risks, Benchmarks and Case Study
- 16 Glossary and Cheat Sheet
Worked examples and applied cases · 42 pages · 16 sections · 3 worked valuations
The Excel model
Educational material. This primer and its model are not investment advice or a recommendation to buy or sell any security, and they are not personalised. Worked valuations use illustrative calibrations, not fair-value estimates for any company.
Insurers price risk and invest the premium they collect before they have to pay claims, so two levers decide profitability: how well the underwriting is priced and how much return the float earns while it sits on the balance sheet. The combined ratio measures the first; anything below 100% means the underwriting itself made money before investment income is added. Return on equity ties the two together, and price-to-book value follows sustainable ROE the same way a bank's price-to-tangible-book follows ROTCE. Reserve adequacy sits underneath both: an insurer that has under-reserved is reporting a return on equity it has not actually earned yet.
Insurance valuation benchmarks by sustainable return
An insurer's price-to-book follows the return on equity it can sustain once catastrophe years and reserve releases are stripped out. These are the primer's reading bands, beside the no-growth check at its 10.0% cost of equity.
| Sustainable ROE | Typical P/BV | No-growth check (ROE / 10.0%) | How the market reads it |
|---|---|---|---|
| Below 8% | Below 1.0x | Below 0.8x | Discount, unless a recovery is priced |
| 8-12% | About 0.9-1.3x | 0.8-1.2x | Around book |
| 12-16% | About 1.3-1.8x | 1.2-1.6x | Normal large-insurer band |
| 16-22% | About 1.8-2.5x | 1.6-2.2x | Quality commercial franchise |
| Above 22% | Above 2.5x | Above 2.2x | Personal-lines outliers go higher still |
For property and casualty books the return starts with the combined ratio. Below 100% is an underwriting profit and below 95% is the primer's strong-underwriting screen; preliminary FY2025 industry ratios were 92.2% (AM Best) and 92.9% (Verisk), with catastrophe losses adding about 7.6 points. Industry association estimates put equilibrium near a 95.5% combined ratio for roughly a 12% return in 2024 conditions. An insurer moves up its band on underwriting discipline that survives stripping out favourable reserve development; life books move on general-account spread, never on a combined ratio.
Worked example: an insurance residual-income valuation
Take the primer's hypothetical quality P&C insurer: $65 billion of book equity, $50 billion of net earned premium and an 86% combined ratio. Reserves run at 1.4 times premium and are invested with book equity at 4.50%. Tax is 20% and the payout 45%.
| Year-1 step | Amount |
|---|---|
| Underwriting profit ($50B x 14%) | $7.00B |
| Investable assets (1.4 x $50B of reserves, plus $65B of book) | $135B |
| Investment income at 4.50% | $6.08B |
| Pre-tax profit | $13.08B |
| Net income after 20% tax | $10.46B |
| Average book equity ($65B opening, $70.8B closing) | $67.9B |
| Return on equity | 15.4% |
| Residual income (net income less 10.0% of average book) | $3.67B |
Underwriting and investment income contribute almost equally, and the 86% ratio means the insurer is paid to hold policyholder money even before investment income. The primer carries the build for ten years with premium growing 6%, adds a terminal at a 13% steady-state ROE with 3% growth, and reaches $114.4 billion of intrinsic value: 1.76x opening book. The one-line check, 15.4% divided by 10.0%, gives 1.54x because it capitalises one year of return and cannot see growth.
Reserving quality then moves the answer. Hold the combined ratio two points worse, at 88%, in every forecast year and the justified multiple falls to 1.66x; two points better gives 1.86x. The primer adds the full schedule, a growth insurer, a life insurer built on spread, and grids on combined ratio, cost of equity and yield; the Excel model runs them on your own insurer.
Which insurance valuation method fits which company
| Company type | Primary method | Check with | Why |
|---|---|---|---|
| P&C commercial specialty | Combined ratio plus P/BV against ROE | Favourable prior-year development trend | Underwriting discipline is the edge |
| P&C personal lines at scale | Sustainable combined ratio plus premium growth | Float yield on the scale of the book | Growth has to stay inside margin guardrails |
| P&C turnaround | Core ROE path plus P/BV | Buyback accretion below book | GAAP ROE understates the recovery |
| Life spread | General-account spread in basis points | New-business metric, where disclosed | Spread is the recurring earnings engine |
| Life conglomerate | Operating ROE plus segment yields | No spread figure forced onto the mix | Retirement and asset-management mix adds noise to GAAP |
| Insurer reporting under IFRS 17 | The same book-value lens plus the contractual service margin roll-forward | Solvency ratio against its own regime | Profit is released from the balance sheet over time, so earnings do not compare line for line |
What the full primer adds
The primer builds the tools in order: the listed insurer types, the underwriting cycle and stage ladder, the segment and revenue build, then the combined ratio and float side of the cost structure. A worked residual-income valuation and its sensitivities run from first input to the resulting multiple for a P&C underwriter, before applied cases on Chubb, Progressive, Travelers, AIG, MetLife and Prudential Financial. Screening closes with P/BV bands against sustainable ROE, the combined ratio ladder and reserve development.
Free guides on the site cover the individual pieces, so you can revise one idea without reopening the PDF: combined ratio, P/BV vs ROE, float and investment income, reserve development, expense ratio benchmarks and life spread. Research profiles for CB, PGR, TRV, AIG, MET and PRU run the same screens on filed results. The companion Excel model spans thirteen sheets, from three worked insurer tabs through the combined ratio and reserve development screens to a live sensitivity grid, so swapping in your own insurer rebuilds the valuation from the combined ratio up.
Sheets: Quick Start, Instructions, Assumptions, Insurer 1, Insurer 2, Insurer 3, Valuation Summary, Combined Ratio, Float & NII, Reserve Development, Sensitivity, Comps, Dashboard.
Insurance valuation: free guides
- Combined Ratio: the P&C Scoreboard
- P/BV vs ROE for Insurers
- Float and the Investment-Income Engine
- Reserve Development: Favourable vs Adverse
- The Life Insurance Spread Business
- Combined Ratio Benchmarks 2026: Progressive to AIG
- Loss Ratio, Expense Ratio, Combined Ratio: Which Matters
- Insurer Expense Ratio Benchmarks: FY2025 Ranked
- Accident Year vs Calendar Year Combined Ratio
Insurance valuation FAQ
- How do you value an insurance company?
- On book value and the return on equity (ROE) the insurer can sustain on it. A residual-income model forecasts earnings, rolls book forward, and values the profit earned above the cost of equity plus a normalised terminal; intrinsic value over opening book gives the justified price-to-book (P/BV). Property and casualty earnings are built from the combined ratio and investment income on reserves and book. Life earnings come from the general-account spread and fees instead.
- What is a normal price-to-book for an insurer?
- It follows sustainable ROE. The primer's bands run from below 1.0x for ROE under 8%, through about 0.9-1.3x at 8-12%, 1.3-1.8x at 12-16% and 1.8-2.5x at 16-22%, to above 2.5x beyond 22%. Use book value excluding unrealised bond marks (ex-AOCI) so a rate move does not distort the multiple.
- What is a good combined ratio for an insurer?
- Below 100% is an underwriting profit and below 95% is the primer's strong-underwriting screen. Preliminary FY2025 industry ratios were 92.2% (AM Best) and 92.9% (Verisk), with catastrophe losses adding about 7.6 points. Strip favourable prior-year reserve development and normalise the catastrophe load before treating any calendar-year ratio as the forward margin.
- Why do some insurers trade below book value?
- When GAAP ROE sits below the cost of equity, the identity puts the insurer below 1.0x book. Turnaround names can trade around book because the market prices recovery in core operating return. Below book, a buyback retires more than a dollar of book per dollar spent, so it adds to book value per share.
- How does float affect insurance valuation?
- Float is the premium an insurer holds before it pays claims, and it earns investment income in the meantime. With a combined ratio below 100% the insurer is paid to hold that money; at 100% the float is free, and above it the float has a cost. On the primer's generic $10 billion book, a 95% combined ratio earns $0.5 billion of underwriting profit and $15 billion of float at 4.50% adds $0.68 billion, so float carries more of the profit than underwriting.
See this methodology applied to a real company:
Chubb (CB) →