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QuestionsCategory: Financials QuadrantAssessing Insurance & Finance Company
Ka Fatt Chan asked 8 months ago

Hi Victor,
I have the following doubts while assessing the company associate with insurance & financial investment which would like to seek your assistance:

  1. What is the cost of goods for these type of company since they don’t provide this information.
  2. These company do not provide breakdown of their current assess and liability, how can we score them in term of current & quick ratio? is there any way to get these data?
  3.  in term of valuation, do we use PE as the best way? if not, what are the good way to value a company.
  4. What are the key things that you would look out for in term of valuation and financial health.

Thx & Regards,
 
Ka Fatt

2 Answers
Victor Chng answered 8 months ago

Hi Ka Fatt,

Do note that Investment Quadrant method is use to analyse general operating type of business. It cannot be use to analyse insurance and finance companies as they required different sets of perspective, ratios and analysis.

Please see my reply to your questions above:

1.There is no COGS for insurance or finance companies. Usually investors look at their operating income which is revenue minus operating expense.

2.For such companies, you don’t use current/quick ratio to analyse them. It is different sets of ratios like solvency ratio, leverage ratio, CET1 ratio and many others. Do note that the ratios to analyse insurance is also a slight different from finance companies.

3.PB ratio is the best way to value insurance and finance companies since they are asset type business.

4.As mentioned above, first you need to understand the business model of insurance/finance companies before knowing how to analyse them. Based on your understanding, then you can understand how each ratios work.

Here are some links that you can refer to:

https://www.valueresearchonline.com/stories/48901/how-to-analyse-life-insurance-companies/
https://www.aana.com/docs/default-source/insurance-web-documents-(all)2/determing-the-financial.pdf?sfvrsn=f13246b1_0
https://www.ambest.com/review/UnderstandingInsuranceGuide.pdf

Ka Fatt Chan replied 8 months ago

Hi Victor,

Thx for your advice.

One last question is the following companies consider as finance investment company and we will use PB to valuate them ( they are not like bank which do have money coming from deposit account):

1) Moelis(MC)
2) T Rowe price (TROW)
3) Encore (EVR)
4) Ifast

Thx

Ka Fatt Chan replied 8 months ago

Hi Victor,

Thx for your advice.

One last question is the following companies consider as finance investment company and we will use PB to valuate them ( they are not like bank which do have money coming from deposit account):

1) Moelis(MC)
2) T Rowe price (TROW)
3) Encore (EVR)
4) Ifast

Thx

Victor Chng answered 8 months ago

Hi Ka Fatt,
 
For Investment banking business (Moelis & Evercore), you can use PB and PE to gauge them.
 
As for asset management business (T Rowe price & Ifast), you can value them based on PE and percentage of AUM (typical fund should be able to sell at around 5%-9% of AUM depending on how good the fund or manager).