Allowing for asset, liability and business risk in the valuation of a life company

  • Shyam Mehta
  • Phelim Boyle
Part of the The New York University Salomon Center Series on Financial Markets and Institutions book series (SALO, volume 1)


Traditional life company appraisal methods use projections of reported profit rather than of cash flow, and use discount rates typically selected without any theoretical underpinning. The theme of this paper is that life company valuation can be based on an analysis of the characteristics of the individual cash flows which form the net cash flow. Projected future cash flows may be compared with the income and gains expected from traded securities, such as common stock and government bonds, in order to assess their values. Individual rather than overall cash flows are selected for this market value based analysis because of their generally simpler distribution characteristics. Cash flow interactions are taken account of separately. Standard asset pricing models enable one to allow for lapse, mortality and other risks, and for option features. The resulting overall value is an estimate of the value of future returns discounted at risk rate(s) consistent with the estimated risk/return trade-off implicit in the capital markets.


Discount Rate Cash Flow Option Price Call Option Asset Return 
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Copyright information

© Springer Science+Business Media Dordrecht 1998

Authors and Affiliations

  • Shyam Mehta
    • 1
  • Phelim Boyle
    • 2
  1. 1.Merrill Lynch InternationalUSA
  2. 2.Centre for Advanced Studies in FinanceUniversity of WaterlooCanada

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