Project Quailridge — Insurer Dividend Discount Valuation
A 2-hour FIG / Insurance Take-Private case study with a complete model answer
Modeled After
Deutsche Bank
Special committee materials for an insurance take-private: a dividend discount model used in place of a DCF, price-to-tangible-book against return-on-tangible-equity and price-to-book against ROE regressions, a cost-of-equity framework with no WACC anywhere, combined and loss ratio walks, reserve-change sensitivity, and precedent squeeze-outs screened to insurance
Structure and exhibit set are modeled after Deutsche Bank. The company, the financials and every figure in this case are entirely our own.
The Situation
Quailridge Casualty Group, Inc. (NYSE: QRCG) is a Delaware corporation headquartered in Columbus, Ohio whose principal insurance subsidiary is domiciled in Ohio.
Quailridge Casualty Group, Inc.
- Sector
- Property and casualty insurance — excess and surplus casualty, commercial automobile, and a small workers' compensation book, written through an Ohio-domiciled insurance subsidiary
- Size
- Geography
- United States only. Delaware incorporation, Ohio headquarters and Ohio insurance domicile, with casualty and automobile business written across the Midwest and the mid-Atlantic and a workers' compensation book in four states
- Ownership
- Situation
The Prompt
You are the Special Committee's financial advisor. 50 per share is adequate for the unaffiliated stockholders.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
Blank model template
Raw data extract
ExcelUnlockSpecial committee presentation
Completed model
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
The combined ratio walk and the investment engine
PART 2
Reserves, and the one piece of independent evidence
PART 3
Statutory capital and what can actually be paid out
PART 4
The dividend discount model and the reserve sensitivity
PART 5
Market evidence, the ladder and the recommendation
Attempt It First
Blank modelling template
The answer model with every produced cell cleared — the shell you build your attempt in. Work it in Excel against the clock, then check yourself against the model answer below.
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Throw away the industrial toolkit before you start
- 02
Decompose the loss ratio and find the line that is not a forecast
- 03
Work out which capital test binds before you compute a dividend
- 04
Value the dividends, and get the terminal value right
- 05
Regress rather than apply a median, and screen on the fit
- 06
Hold both precedent yardsticks up at once
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Why an insurer has no enterprise value and no EBITDA
Enterprise value works when debt is financing and cash is idle: value the operating assets independently of funding, then add the debt and subtract the cash to get back to equity. Neither assumption holds for an underwriter. The invested assets are the float — money policyholders paid in premiums, held against the reserves it will eventually pay out — and they are one of the two engines that produce earnings, not a store of idle cash. Holding company debt funds statutory capital rather than working capital. And there is no EBITDA, because investment income is an operating item on the asset side and the depreciation an insurer carries is immaterial to its economics. Earnings are underwriting income plus net investment income, less interest and tax, which is a net income figure.
The dividend discount model as the correctly specified DCF
The value of an insurer is the stream of cash it can pay to its owners while holding enough capital to write the business it intends to write. Distributable earnings are net income less the increase in required statutory capital that premium growth consumes, plus any capital held above the binding requirement that can be released. That is a cash flow belonging to the common stockholder and to nobody else, so the only rate that can discount it is the return the common stockholder requires. Discounting it at a weighted average cost of capital would blend in an after-tax cost of debt to discount a cash flow the debt has no claim on, and de-levering a peer beta to get there requires deciding whether an insurer's reserves are debt — a question with no good answer.
The combined ratio walk, and prior year development inside it
The combined ratio is the loss and loss adjustment expense ratio plus the expense ratio, all struck on net premiums earned, and a walk that prints a single loss ratio has hidden its most interesting line. Built properly it starts with the current accident year pick excluding catastrophes — the underwriter's view of the business being written this year — then adds catastrophe losses, then adds prior year development. That last line is the only one that is an estimate about the past rather than a forecast about the future: it is the amount by which reserves set in earlier years are being revised in the current period. A plan that runs it at zero is asserting the carried reserves are adequate, and that assertion belongs on the reserve exhibit rather than buried in a ratio.
Two capital tests and the binding one
Regulators measure capital adequacy against authorized control level risk-based capital, and a company can look enormously overcapitalized on that test while having very little genuine surplus. Most underwriters also run an internal operating target expressed as net premiums written to statutory surplus, because the premium a book can support is what actually constrains how much business gets written. The two tests do not ask for the same amount of capital, and the harder one governs. Redundant capital is the excess over the binding requirement, not over the flattering one, and since that release is typically the first and largest cash flow in a dividend discount model, quoting the wrong test can inflate the answer materially.
Ordinary and extraordinary dividends
An insurance subsidiary cannot simply upstream cash to its holding company. State law permits an ordinary dividend in any twelve month period up to a formula — in Ohio, the greater of ten percent of prior-year statutory surplus and prior-year statutory net income — without prior approval, and anything above that is an extraordinary dividend requiring the Superintendent's consent. A model that releases redundant surplus in year one is very likely proposing an extraordinary dividend. The right treatment is to compute the ordinary limit, show how much of the distribution sits above it, and disclose that the largest cash flow in the valuation depends on a discretionary regulatory approval. Modeling it and saying nothing hides a real risk inside a spreadsheet.
Regressing price to book on return on book
Applying a peer median multiple of book assumes the subject company deserves the same multiple as the median peer, which is only true if it earns the same return. It rarely does. The relationship a regression measures is that the multiple of book a company deserves rises with the return it earns on that book — the same identity a justified price to book calculation expresses from first principles, which is why the regression and the dividend discount model are not independent methodologies and why a document should say so. Run it on tangible book against return on tangible equity as the primary cut, because goodwill is not capital a regulator recognizes, cannot absorb a loss and cannot be paid out as a dividend, and run the price to book version alongside it rather than showing only the one that flatters your conclusion.
Three book denominators, and why all three get printed
Book value per share, tangible book value per share, and book value per share excluding accumulated other comprehensive income are three different numbers, and an insurer holding available-for-sale fixed maturities bought at lower yields will carry a large unrealized loss inside accumulated other comprehensive income. A buyer who holds those bonds to maturity collects the pull to par; a buyer who marks them does not. Printing only the denominator that produces the friendliest multiple is the oldest trick in insurance valuation, and a price ladder that shows all three lets the reader see how much of the answer depends on which one you believe.
Reserve development as the dominant sensitivity
For a long-tail casualty underwriter the carried reserve estimate is larger than equity, so a small percentage change in reserve adequacy moves value further than a substantial move in the discount rate does. The charge hits twice: it reduces GAAP net income by the after-tax amount, and it reduces statutory surplus by the same after-tax amount, which reduces any redundant capital available for release. Model the earnings effect alone and the sensitivity is understated by roughly half. The reserve question is also the one on which a special committee may hold independent, contemporaneous, third-party evidence, in the form of a consulting actuary's opinion.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Dividend discount model in place of DCF
- —Combined, loss and expense ratio walks
- —P/TBV versus ROTE regression
- —Cost of equity framework without a WACC
- —Reserve development sensitivity
- —Precedent insurance squeeze-outs
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Quailridge — Insurer Dividend Discount Valuation
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Why is there no DCF or EV/EBITDA analysis in an insurance case?
Because an insurer has no unlevered free cash flow to discount and no meaningful enterprise value to strike a multiple on. Cash is released from an underwriter by holding less capital, which is a balance sheet decision rather than an operating one, and the invested assets that would be netted against debt in an enterprise value bridge are the float standing behind policyholder reserves. There is also no EBITDA: investment income is an operating item on the asset side and interest on holding company notes is a real charge against the stockholder's return. The dividend discount model is the discounted cash flow for this business, correctly specified — it discounts the cash that can actually be paid out, at the return the people receiving it require.
What exactly are distributable earnings for an insurer?
Net income for the year, less the increase in statutory capital that the year's growth in net premiums written consumes at the target premium-to-surplus ratio, plus any capital held above the binding requirement that is released. Growth is not free for an underwriter: writing more premium requires more surplus behind it, and that surplus cannot simultaneously be paid to stockholders. Where a company starts the forecast with more capital than the binding test demands, that excess can be released — which is usually the largest cash flow in the model, and is also the reason book value per share can fall in the first forecast year without anything being wrong.
Why is the terminal value not a Gordon growth on the dividend?
Because a book multiple is what a buyer of an insurer negotiates on, and a Gordon growth on the terminal dividend produces a number that cannot be reconciled to one. The cleaner construction is terminal book value multiplied by the justified price to book an insurer earning that return, growing at that rate, at that cost of equity is worth — terminal return on equity less terminal growth, over cost of equity less terminal growth. That is the same identity the price to book regression estimates from market data, which means the two methodologies in the case speak to each other rather than past each other. It also makes the terminal assumption legible: state what share of the answer sits beyond the forecast period rather than leaving a reader to work it out.
How should the reserve position be tested and sensitized?
Set the carried reserves against the independent consulting actuary's central estimate and reasonable range, and quantify the gap in dollars and as a percentage of carried reserves. Carried reserves inside the range are why an opinion is unqualified, but being inside a range is not the same as being at the center of one. Then sensitize development as a percentage of carried reserves and push the after-tax charge through both GAAP net income and statutory surplus, so that the capital released in the first forecast year moves with it. Finally, run the model once at the actuary's own central estimate — that single scenario is the one adjustment to management's plan supported by independent third-party evidence.
Why regress instead of applying the peer median multiple?
Because a median assumes the subject deserves the same multiple of book as the median peer, and that is only true if it earns the same return on book. When a company's forward return on tangible equity sits below the peer median and its combined ratio sits above it, it should trade at less than the peer median multiple, and the amount by which is exactly what the regression measures. The regression also tells you something the median cannot: how tightly the relationship holds. The R-squared and the standard error of the fitted value are what set the width of the range this methodology contributes, and they are what a screen has to be checked against.
Does the MFW structure change what the Committee should do?
It changes the standard of review and it changes the Committee's leverage, but it does not change the price analysis. Marchmont's first written proposal conditioned the transaction on approval by an independent committee empowered to say no and to retain its own advisors, and on a non-waivable majority-of-the-minority vote, both before any substantive economic negotiation. If the framework is satisfied on the facts, review is under the business judgment rule rather than entire fairness. The practical consequence is that the Committee can say no, and that ends the transaction, which is a materially stronger position than a committee handed the conditions after the price has already been agreed. Separately, Rule 13e-3 applies, and these materials would be filed as an Item 1015 report to the Schedule 13E-3.
About This FIG / Insurance Take-Private Case Study
FIG / Insurance Take-Private case study for investment banking interviews. 120-minute format covering dividend discount model in place of dcf, combined, loss and expense ratio walks, p/tbv versus rote regression. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Financial Institutions. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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