Many insurers disclose Embedded Value reports, a 'capital market-consistent' valuation framework for their life insurance business, to provide investors with additional information. We examine the incremental and relative information content of Embedded Value components in comparison to the existing mandatory accounting standards. Our findings can help to predict the capital market effects of the new insurance accounting standard IFRS 4 Phase II, which will be introduced in 2018 and is based on similar principles as the EV framework. Our results show that the incremental information content of the EV framework is limited and even decreasing since 2009. The current IFRS framework seem to have more explanatory power for insurers' stock prices and returns in the current economic environment which casts doubt about benefits of IFRS 4 Phase II. Our comprehensive analysis of the incremental value relevance of EV and EV earnings subcomponents shows that investors would profit from an explicit valuation of options and guarantees and a presentation scheme of earnings which differentiates between inforce and new business.

Value Relevance of Life Insurers' Embedded Value Disclosure and Implications for IFRS 4 Phase II

Purpose




This paper aims to examine the capital market effects and predominance of unregulated embedded value (EV) financial reporting in the life insurance industry in foreign domestic markets, and US markets for foreign firms that cross-list in the USA.




Design/methodology/approach




Recent empirical archival data are analyzed and evaluated to determine the incremental and relative value relevance of an unregulated valuation metric that is disclosed by life insurers.




Findings




The findings support the proposition that EV is valuable supplemental information in foreign domestic markets, and in US markets for foreign life insurers that cross-list in the USA. Given that International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are engaged in projects to improve accounting standard for insurance companies, and have faced criticism with the existing drafts on this issue, the two institutions ought to consider the valuation relevance of EV disclosures. Moreover, this analysis strongly suggests that financial analysts in the USA should consider EV in valuing life insurers’ stocks.




Practical implications




The findings discussed in this paper are of special interest to financial reporting policy makers, financial analysts, firm compensation committees and managers, and academics.




Originality/value




This paper contributes to the extant literature by providing recent evidence that suggests that EV, an unregulated fair value market-driven metric, is more value-relevant than traditional earnings metrics such as earnings and book value. It is the only study that we are cognizant of that critically examines the recent empirical literature on this evolving issue.

Evolution of financial reporting of life insurers

This paper investigates the association between life insurers’ voluntary disclosure of embedded value (EV), an unregulated market-driven fair value measure, and analyst forecast accuracy and dispersion. EV is an estimate of the present value of future net cash flows from in-force life insurance business. Advocates of this disclosure believe that EV is a better measure of economic performance than traditional GAAP measures. Others argue that corporate management has discretion in estimating and reporting EV. Further, analysts may have access to information that allows the development of possibly more accurate estimation metrics in the absence of EV disclosure. It is then an empirical issue to determine whether EV disclosure has any incremental effect on analysts’ forecast properties. Using a multi-country setting, we find that EV disclosure is positively associated with analysts’ earnings forecast accuracy and negatively related to forecast dispersion. This result is consistent with the alternative hypothesis that disclosure of EV provides a richer information set that enriches analysts’ forecasts beyond their own in-house developed surrogates. As guidance for insurance accounting and disclosure evolves, our findings support the value of continuing to provide EV information to the public.

Unregulated Corporate Financial Disclosure and Analysts’ Forecast Properties: The Case of Embedded Value Reporting by Life Insurers

The research examines the impact of applying the IFRS 17 International Financial Reporting Standard on the development of accounting measurement and disclosure to improve the quality of financial reports when considering compliance with the requirements of applying the IFRS 4 International Financial Reporting Standard for Jordanian insurance companies. Achieving the objective, previous studies were examined which related to the impact of applying the IFRS 17 Financial Reporting Standard on the development of accounting measurement and disclosure for improving the quality of financial reports when considering compliance with the requirements of applying the IFRS 4 International Financial Reporting Standard for Jordanian insurance companies. Moreover, the researcher linked the theoretical aspect to the practical aspect. Therefore, the researcher designed a questioner, distributed, and then analyzed the results obtained from the relevant parties. The study found the need to conduct increased research related to the impact of adopting the IFRS 17 International Financial Reporting Standard in improving the quality of reports and overcoming obstacles such as current laws, professional qualifications of those preparing reports for insurance companies, and the situation of auditors. Including the IFRS 4 and IFRS 17 standards in the content of accounting courses can be beneficial for linking academic study with practical practice in several ways: Real-world application, Industry relevance, Compliance and regulation, Career opportunities, Evolving nature of accounting. The need to adjust accounting practices of the International Financial Reporting Standard IFRS 17 is an important step in the field of insurance activity to improve the quality of financial reporting. Owing to the fact that the standard has been allocated only to insurance activity and not to all economic operations, means the application of the standard is limited to all insurance contracts for the duration of contracts, regardless of the nature of the activity of the entity issuing those contracts. Therefore, the study recommends increasing attention on disclosure and improving accounting methods in relation to IFRS 17; this is considered a major step in the insurance business in order to improve the quality of financial reports. Additionally, relevant information is provided for financial reports and similar; this helps improve the level of transparency and quality of the information presented in the core of the reports. Thus, it enables companies to assess the impact of contracts about the current financial position, financial performance, and cash flow.

/pdf/the-impact-of-ifrs-17-on-the-development-of-accounting-1euiocj3.pdf

The Impact of IFRS 17 on the Development of Accounting Measurement and Disclosure, in Addition to Improving the Quality of Financial Reports, Considering Compliance with the Requirements of IFRS 4—Jordanian Insurance Companies-Field Study

Purpose - This paper investigates the impact of generally accepted accounting principles (GAAP) and non-GAAP voluntary disclosures on equity returns for im-portant financial reporting dates. Design/methodology - Using hand-coded archival data, we developed 2,329 matched pairs consisting of non-GAAP (control) and GAAP (treatment) quarterly observations and compared the equity returns for each group around the earnings release and SEC filing dates. Findings - Our findings suggest that the valuation relevance of GAAP disclos-ing firms significantly exceeds that of non-GAAP firms in the case of earnings and cash flow surprises. These results support the notion that investors perceive GAAP-compliant disclosures as necessary, complementary information about a firm's performance and equity value. We also reveal that the market revaluation of equi-ty on the earnings release date significantly exceeded that on the SEC filing date. This finding confirms that the more comprehensive disclosure provided by GAAP firms on the earlier date preempted at least some of the information subsequently disclosed on the SEC filing date. Value - Extends the voluntary disclosure literature, in particular the valuation relevance of GAAP versus non-GAAP disclosures. The findings discussed in this paper are of special interest to policymakers and regulators, financial analysts, corporate managers, firm stakeholders, and academics interested in financial re-porting as they continue to study voluntary disclosure rules and practices. 

GAAP-compliant versus non-GAAP voluntary disclosures relative to critical reporting dates

Many life insurance companies outside the US disclose embedded value (EV), an actuarial estimate of the present value of the future net cash flows arising from the company’s in-force life insurance business. Industry surveys have shown that EV is used by analysts for valuation purposes. However, there is little empirical research of EV disclosures. This study fills that void by testing the valuation relevance, information content and reduction in information asymmetry associated with the reporting of EV. We provide evidence supporting the premise that the market prefers EV to traditional accounting metrics in assessing security prices. This study advances our understanding of the valuation effects of corporate voluntary disclosures, and should be of interest to financial reporting standard setters such as the IASB and the FASB who are currently working on harmonizing financial reporting in the insurance industry.

The valuation effects of embedded value disclosure by life insurers

SYNOPSIS: European life insurers began disclosing embedded value information (EV) over a decade ago due to concerns with traditional local accounting standards. EV is an estimate of the present value of future net cash flows from in-force life insurance business. However, U.S.-based life insurers have yet to adopt this disclosure, although several surveys and empirical studies suggest that EV disclosure provides valuable information in assessing life insurers' performance. This paper examines the incremental valuation effects of EV disclosure in the presence of U.S. GAAP. We utilize a sample of cross-listed life insurers as surrogates to assess the valuation effects of EV disclosures for U.S. life insurers. Our empirical results show a higher association between EV and stock market prices than those of traditional accounting metrics such as earnings or book value. The results also show that EV has incremental explanatory power beyond those of traditional U.S. GAAP accounting measures. Our findings provide...

The Relative and Incremental Valuation Effects of Embedded Value Disclosure by Life Insurers: Evidence from Cross-Listed Firms in the U.S.

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The valuation effects of embedded value disclosure by life insurers

Evolution of financial reporting of life insurers

The Relative and Incremental Valuation Effects of Embedded Value Disclosure by Life Insurers: Evidence from Cross-Listed Firms in the U.S.