Measuring the value of Lincoln Re’s R&D

Publication Date01 Mar 2002
AuthorArthur DeTore,Mark Clare,James Weide
SubjectAccounting & finance,HR & organizational behaviour,Information & knowledge management
Journal of Intellectual Capital,
Vol. 3 No. 1, 2002, pp. 40-50.
#MCB UP Limited, 1469-1930
DOI 10.1108/14691930210412836
Measuring the value of Lincoln
Re's R&D
Arthur DeTore, Mark Clare and James Weide
Lincoln Re, Fort Wayne, Indiana, USA
Keywords Intellectual capital, Information, Managment, Valuation, R&D, Reinsurance
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.
Purpose and approach
The research and development (R&D) capability of a firm is an important type
of intangible asset. This paper presents a detailed case illustrating how to use
discounted cash flow measures combined with a formal theory of knowledge
management (KM) to make effective management and investments decisions
about such intangible assets. The measurement framework is developed
further by exploring the relationship between the cash flow measures used to
value R&D and the knowledge capital (KC) that results from the knowledge
assets generated by R&D.
The paper begins with a brief overview of Lincoln Re's KM program. The
importance of valuation as it relates to formally modeling the link between
knowledge and the economics of the firm is emphasized. Baruch Lev's
approach to KC measurement is introduced and it is suggested that 0.45
percent is a good working figure for the return on asset for firms in the life
reinsurance industry.
With this as background, the case study is presented by describing Lincoln
Re's mortality R&D capability, the three KM strategies used to leverage it and
the management decisions that were made between 1994 and 2000 to turn it
into economic value. The discounted cash flow (DCF) and KC associated with
these decisions is calculated and discussed to the extent that data is available
and can be shared publicly. The results show the effectiveness of using cash
The current issue and full text archive of this journal is available at
A paper prepared for the 4th Intangibles Conference at the Stern School of Business, New York
University, May 18-20, 2001.

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