Economic Valuation and Financial Management of an Insurance Firm

46 Pages Posted: 4 Aug 2018 Last revised: 29 Apr 2019

See all articles by Pablo Koch-Medina

Pablo Koch-Medina

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Santiago Moreno-Bromberg

University of Zurich - Department of Banking and Finance

Claudia Ravanelli

Center for Finance and Insurance

Mario Sikic

University of Zurich

Date Written: April 26, 2019

Abstract

We use a dynamic framework to address the questions: i) when should an insurance firm pay out dividends and raise (costly) capital and ii) when should an insurance firm take (liquid) investment risk. Financial decisions are made by a manager who strives to maximize firm value and operates in the presence of financial frictions and regulatory capital constraints. We show there is a unique pricing measure that is consistent with market prices and a broad ownership base and use it to compute the risk-adjusted net present value of cash flows to shareholders. We describe the capital and dividend strategies of the firm and show that, from a shareholder perspective, investment in risky assets can be value adding. Risky investments may add value by boosting the value of the option to default or, sometimes, by increasing the firm's franchise value.

Keywords: Insurance Firm, Default Option, Franchise Value, Dividend Payments, Investment Strategy, Market-Consistent Valuation

JEL Classification: G21, G28, G32, G35

Suggested Citation

Koch-Medina, Pablo and Moreno-Bromberg, Santiago and Ravanelli, Claudia and Sikic, Mario, Economic Valuation and Financial Management of an Insurance Firm (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=3211146 or http://dx.doi.org/10.2139/ssrn.3211146

Pablo Koch-Medina (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Santiago Moreno-Bromberg

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Claudia Ravanelli

Center for Finance and Insurance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 29 81 (Phone)

HOME PAGE: http://www.bf.uzh.ch/cms/en/ravanelli.claudia.html

Mario Sikic

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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