Are You a Shareholder of an Insurance Company?
Then let Williams Business Law help you deal with your buyout offer when a merger disappoints you. Dissenters' rights statutes in Colorado help you to avoid having to take stock in a merger you don't like. But what good is that when you don't know what either business is really worth?
We don't profess to be experts in business valuation. There are plenty of companies which charge hefty fees to appraise businesses. But you should know the basics as an insurance company investor in order to avoid being taken advantage of.
Insurance Fundamentals: Underwriting and Investing
Insurance companies are two businesses. One takes premiums and holds them until claims for a certain contingency are made. Claims cost money and so do the sales and expenses of offering insurance policies. Together, these costs of selling and paying claims, eat up most of the premium income. If you can keep these expenses lower than the amount of premiums you take in, presto, you have a profitable underwriting business and you are paid money to hold the 'float'. This is a wonderful place to be, but most good folks who advertise as a 'business lawyer Denver' know that this is a state of affairs likely to be short lived, as other insurance companies come in and offer cheaper policies, take in a bit less in premiums, take market share, and put up with slightly less profits left over, or even tolerate a small loss on underwriting...in order to have the privilege of investing the float. This brings us to the second part of the business...investing.
Investing is the second business insurance companies. Underwriting provides a float of premiums to invest. The investment side of the company must invest this float so that it makes money, is readily available to pay premiums when needed, and satisfies the rules and limits imposed by insurance regulators. If a company's underwriting department has operated at a profit, the investment profit simply augments that profit, assuming the investments make money and are not written down or, heaven forbid, subject to default. The investment side therefore has a mighty responsibility. Invest the float, keep it ready, and do not lose it, rather make money, ideally more than the underwriting loss, if any.
Therefore, the value of the insurance business will be related to not only the price to earnings of a given year, but also to its history of underwriting profits, growth of the float over the years, ability to earn above average returns on investments safely (think sharpe ratio, for one metric), and the total return on equity. Debt levels (beyond the float, which is of course debt) count as well. Consider all of these items in determining whether the Colorado Dissenter's Rights statute is helpful. Only you can adequately determine whether the insurance company whose stock you are being offered for shares of your present company is appropriately valued in the transaction. If not, call us. We want to speak with you.