Embedded value

Abstract: This study investigates the effects of releasing embedded value (EV) reports and EV report disclosure quality on life insurance companies’ credit risks, using issuer credit rating and bond yield sp...

Abstract: IFRS requires that for purchase accounting purposes, insurance liabilities are measured at their “fair value”. Purchase accounting for insurance contracts proves to be a challenging topic for standard setters, preparers, and users, given the absence of specific guidance in IFRS for this particular case. Recent developments, in particular the 2010 IFRS Insurance Contract Exposure Draft, the 2010 Solvency II QIS 5 Technical Specifications and the 2009 Market Consistent Embedded Value (MCEV) Principles, may be seen as providing relevant techniques in this context but do not present clear guidance specifically for fair values as required for purchase accounting purposes. This paper compares fair value as required for purchase accounting within the current IFRS Phase II process, the proposed Solvency II regulations and the practical actuarial concept of MCEV. Potential investors may benefit from this as discretionary elements in M&A transaction accounting, and their implications should be taken into account early in the transaction process of insurance companies.

Abstract: (ProQuest: ... denotes formulae omitted.)IntroductionIndustrial revolution changed the economic, trade and business environments. The business entities entered a new stage of increasing number of shareholders and the impossibility of direct supervision by all of them with respect to the use of resources. Later, the growth of organizations after the World War II resulted in the appointment of professional managers who run companies for salary instead of profits. In the long run, economists believed that all the stakeholders of a business firm, such as managers and shareholders, would reach a common goal. But since the 1960s, many cases of profit paradox have been observed between these groups, which indicate that managers do not always try to maximize profits for shareholders. The shareholders can adjust existing profit by payment of salaries and rewards in accordance with managers' performance after analyzing it with a proper system. But for that they need to understand the utility of their managers' strategic decisions and need to ensure that these strategic decisions build value for the company. Existence of such demands from shareholders forces managers to install new measurement frameworks in their companies, which would reflect the value and profitability of the firm in the best possible manner. For this, finding an index is necessary, by which the company's performance is logically explored to assess the performance of managers and to measure the value created for the shareholders. Several indexes like Earning Per Share (EPS), Return on Investment (ROI), and Economic Value Added (EVA) have been studied in this paper for understanding their role in the Tehran Stock Exchange (TSE) and the relationship between well-known better index and value creation for shareholders investigated. The organization of the rest of the paper is as follows. First, we explain the idea of value creation; then review the relevant literature and define the research problem and develop hypothesis. This is followed by a detailed note on methodology and then analysis and finally the conclusion.Value CreationFor understanding the concept of 'value creation', first understanding 'value' is important. Value in business is created by working tools (hardware) and ways (software), resulting in an economic activity. Classical economics theory suggests two cases for value at organizational levels: 'use value' and 'exchange value'. The first type, use value, is related to the utility of consuming a good; the need-satisfying power of a good or service. The second type, exchange value, indicates the monetary value associated with the product if it is to be exchanged. It is essentially the 'price' of the product. This approach indicates that value creation depends on utility value obtained by the customer and value of money that can be obtained by exchanging it. Here, two requirements are introduced that lead to value creation. First, return of money which is exchanged should be more than costs (money and time). Second, rate of money that the customer buys is determinant of performance that leads to the difference between goals of buyers and the newly created value. But value creation for investors is slightly different. According to Copeland et al. (2000), value is created in the real market by earning a return on the investment greater than the opportunity cost of capital. Thus, the more the return that the organization generates above the cost of capital, the more value it creates. This means that growth creates more value as long as the return on the capital exceeds the cost of capital. In order to create value for the shareholders, the manager should select the strategies that maximize the present value of expected cash flows or economic profits.Similarly Dalborg (1999) also suggests that value is created when the returns to shareholder in dividend and share-price increases exceed the risk-adjusted rate of return required in the stock market (the cost of equity). …

Abstract: Purpose This paper examines whether risk disclosure practices affect stock return volatility and company value in the European insurance industry. Design/methodology/approach Using a self-constructed “Risk Disclosure Index for Insurers” (RDII) to measure the extent of information disclosed on risks and employing panel data regression on a sample of European insurers for 2005–2010, it tests: i) the relationship between RDII and stock return volatility; ii) whether this relationship is affected by financial crisis; iii) whether RDII affects insurance companies’ embedded value. Findings The main results indicate that higher RDII contributes to higher volatility, suggesting that “less is more” rather than “more is good”. However, higher RDII leads to lower volatility when the insurer has a positive net income, thus “more is good when all is good” and “less is good when all is bad”. Furthermore, the relationship between RDII and stock return volatility is not affected by financial crisis, raising concerns rega...