CAS Exam 7 Spring 2016, Question 20
Study guide: Exam 7
Given the following information for a property & casualty insurer:
- 2015 Earnings: $700,000,000
- Book value at December 31, 2015: $6,000,000,000
Also given the following information for a sample of other insurers:
| Insurer | Capitalization ($ billions) | Price to Earnings | Price to Book Value |
|---|---|---|---|
| Life Ins Co 1 | 20 | 16.2 | 1.8 |
| P&C Ins Co 1 | 15 | 12.9 | 1.4 |
| P&C Ins Co 2 | 9 | 11.7 | 1.5 |
| Health Ins Co 1 | 6 | 13.4 | 1.5 |
| P&C Ins Co 3 | 3 | 11.1 | 1.2 |
| P&C Ins Co 4 | 1 | 19.0 | 1.9 |
Part a (1 point)
Estimate the firm's value by incorporating both the price to earnings and price to book value multiples.
Part b (0.5 points)
Describe a risk of using market multiples to value a company.
Part c (0.5 points)
Describe a way to counter the risk identified in part b. above while still using market multiples.
Part d (0.75 points)
Transaction multiples offer an alternative method of valuation to market multiples. Briefly describe one advantage and two weaknesses of using transaction multiples.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution