Embedded value

Abstract: Purpose – The purpose of this paper is to transfer the concept of market‐consistent embedded value (MCEV) from life to non‐life insurance. This is an important undertaking since differences in management techniques between life and non‐life insurance make management at the group level very difficult. The purpose of this paper is to offer a solution to this problem.Design/methodology/approach – After explaining MCEV, the authors derive differences between life and non‐life insurance and develop a MCEV model for non‐life business. The model framework is applied to a German non‐life insurance company to illustrate its usefulness in different applications.Findings – The authors show an MCEV calculation based on empirical data and set up an economic balance sheet. The value implications of varying loss ratios, cancellation rates, and costs within a sensitivity analysis are analyzed. The usefulness of the model is illustrated within a value‐added analysis. The authors also embed the MCEV concept in a simplified...

Abstract: Part 1: Introduction 1 Introduction: The Nature of Fair Value 2 The Use of Fair Value in IFRS 3 What SFAS 157 does and does not Accomplish 4 The Case for Fair Value 5 Fair Values: Imaginary Prices and Mystical Markets Part 2: Theoretical Analysis 6 Recent History of Fair Value 7 Fair Value and Valuation Models 8 Whither Fair Value?: The Future of Fair Value 9 Between a Rock and a Hard Place 10 Fair Value and Capital Markets 11 Fair Value: The Right Measurement Basis? 12 Measurement in Accounting and Fair Value 13 CCA: An Unsuccessful Attempt to Change the Measurement Basis 14 Alternatives to Fair Value 15 The Relevance and Reliability of Fair Value Measurement 16 The Fair Value Principle and its Impact on Debt and Equity Part 3: Fair Value in Practice 17 Fair Value: A Cautionary Tale from Enron 18 The Insurance Industry and Fair Value 19 Fair Value Measurement for Corporate Entities, Insurance Companies and Retail Banks from an Investment Banker's Perspective 20 Fair Value and the Auditor 21 Fair Value Accounting in the USA 22 A Japanese Perspective on Fair Value 23 Pension Accounting and Fair Value 24 Fair Value in IFRS: Issues for Developing Countries and SMEs 25 Fair Value and Financial Instruments 26 Fair Value and IAS 36

Abstract: This paper examines the value relevance of earnings and book value of equity (individually and in aggregate), relative to price and return models, for Jordanian industrial companies for the period 1992 to 2002. The main findings of this paper are twofold. First, relative to price model, the value relevance of both earnings and book value (individually) have increased, whilst the value relevance of earnings increased and book value became irrelevant in their combination. Secondly, relative to return model, the value relevance of earnings either individually or in aggregate has increased while that of book value has declined. Overall, it is found that earnings are more important in explaining the variance in share price and return than book value. Furthermore, the results indicate that earnings and book value individually are more value relevant in price model. In contrast, these variables in aggregate are more value relevant in return model. The study shows that earnings help more in explaining market values in Jordanian industrial companies. This paper is the first in using price and return models in one study in Jordan.

Abstract: Under the common assumption of constant interest rates, we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value. Furthermore, our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand-alone value of the lease-end purchase option is, on average, about 16% of the market value of underlying used vehicles, or about $1,462 per contract. Finally, we examine the sensitivity of our option value estimates to model parameters and default risk. RECENT YEARS HAVE WITNESSED A DRAMATIC GROWTH in the leasing of automobiles. For instance, overall industry sales data indicate that about a third of the new vehicles and trucks sold in the United States are leased (Hendel and Lizzeri (2002), and Miller (1995)), and the Federal Reserve Board survey of family finances reports that the use of leased vehicles by individuals (nonbusiness consumers) has risen from 2.9% to 5.8% over the 1992 to 2001 period (Azicorbe, Kennickell, and Moore (2003)). Consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract. The first is a cancellation option that allows the lessee to terminate the lease early. The second is a European call option, which gives the lessee the right, but not the obligation, to purchase the leased (used) vehicle at the scheduled termination of the lease at a predetermined exercise price. Both of these options are simple examples of real options because the asset underlying these options is a used car, that is, a real asset; however, these options constitute a special case of real options since they are embedded in the lease contract, which is a financial (credit) instrument. Theoretical analyses of lease contracts show that the cancellation option is quite valuable (Schallheim and McConnell (1985)). With respect to the purchase option, Hendel and Lizzeri (2002) argue that they can play an important role in