Measuring the value of Lincoln Re's R&D

Author： DeTore Arthur Clare Mark Weide James

ISSN： 1469-1930

Source： Journal of Intellectual Capital, Vol.3, Iss.1, 2002-02, pp. : 40-50

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Abstract

This case study of the valuation of intangible assets compares an internally generated estimate of discounted cash flow (DCF) with an estimate of knowledge capital (KC). It describes Lincoln Re's mortality research and development (R&D) capability, the knowledge management (KM) strategies used to leverage it and the management decisions that were made to create economic value. This paper reviews a theory of KM and a valuation approach with DCF measures. The decisions to invest in R&D and the Lincoln Mortality System, an expert system for product development, produced a 23.9 percent growth in DCF and created substantial value for Lincoln Re. Using Baruch Lev's approach to KC, it is suggested that 0.45 percent is a good working figure for the return on asset for life insurance firms versus the previously published 10.5 percent due to the overwhelming percentage of financial assets on the balance sheet of financial companies and the fact that the return on financial assets is imbedded in product pricing. The correlation between DCF and KC measures is approximated by a DCF/comprehensive value ratio and the results show 70-80 percent correlation at the enterprise, division and asset levels.