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📈 '''Vendor financial model''' is a detailed, seller-commissioned financial projection model built to accompany an insurance [[Definition:Mergers and acquisitions (M&A) | M&A]] process, providing prospective buyers with a structured, internally consistent view of the target's expected future financial performance, capital needs, and value drivers. In the insurance sector, these models are more complex than their counterparts in most industries because they must integrate [[Definition:Actuarial analysis | actuarial]] assumptions — [[Definition:Loss ratio | loss ratios]], [[Definition:Loss development | development]] patterns, [[Definition:Reserve | reserve]] run-off schedules — alongside traditional revenue and expense projections, all while reflecting the capital constraints imposed by [[Definition:Regulatory capital | regulatory frameworks]] such as [[Definition:Solvency II | Solvency II]], [[Definition:Risk-based capital (RBC) | RBC]], or [[Definition:China Risk Oriented Solvency System (C-ROSS) | C-ROSS]].

⚙️ Construction of a vendor financial model for an insurance target typically begins with a historical financial rebuild — reconciling [[Definition:Statutory accounting | statutory]] and [[Definition:US GAAP | GAAP]] or [[Definition:IFRS 17 | IFRS]] financials, normalizing for non-recurring items, and segmenting results by [[Definition:Line of business | line of business]], geography, and distribution channel. The projection engine then layers in management's assumptions about [[Definition:Gross written premium (GWP) | premium]] growth, [[Definition:Combined ratio | combined ratio]] trajectories, [[Definition:Expense ratio | expense ratio]] improvements, investment yields, and [[Definition:Reinsurance | reinsurance]] program costs. A well-built model allows buyers to toggle key assumptions — for example, testing what happens to distributable earnings if the [[Definition:Loss ratio | loss ratio]] on a long-tail [[Definition:Casualty insurance | casualty]] line deteriorates by five points, or if a major [[Definition:Binding authority agreement | binding authority]] is not renewed. The model is usually prepared by the seller's financial advisors or a specialist insurance modeling firm and is shared alongside the [[Definition:Vendor due diligence report (VDD report) | VDD report]] in the virtual data room, giving bidders a common quantitative framework rather than forcing each to build a model from scratch.

💡 For buyers — especially [[Definition:Private equity | private equity]] sponsors less familiar with insurance accounting intricacies — the vendor financial model serves as an indispensable starting point. It encodes the seller's narrative about the business's trajectory in a format that can be interrogated, stress-tested, and compared against the buyer's own assumptions. Disagreements between the vendor model's projections and a buyer's independent view often surface the key valuation debates: Is the assumed improvement in the [[Definition:Loss ratio | loss ratio]] achievable? Are the [[Definition:Expense ratio | expense]] savings realistic given the technology investment required? Does the [[Definition:Capital requirement | capital]] forecast account for potential adverse [[Definition:Loss development | development]] on legacy reserves? These questions, structured around the model's outputs, become the analytical backbone of bid pricing and [[Definition:Value creation plan | value creation plan]] development. A transparent, well-documented vendor financial model also accelerates the negotiation of [[Definition:Earn-out | earn-out]] structures and [[Definition:Purchase price adjustment | purchase price adjustments]], since both parties are working from a shared quantitative foundation.

'''Related concepts:'''
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* [[Definition:Vendor due diligence (VDD)]]
* [[Definition:Vendor due diligence report (VDD report)]]
* [[Definition:Vendor assist report]]
* [[Definition:Valuation report]]
* [[Definition:Value creation plan]]
* [[Definition:Discounted cash flow (DCF)]]
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Definition:Vendor financial model - Revision history

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