Embedded value

Abstract: To weed out emotions from investment analysis, financial analysis is supposed to use a number of objective tools to approximate “the net present value of expected future free cash flows discounted to perpetuity”—the definition of the total market value of a company. Investors do know how to transform a perpetual flow into a “stock equivalent”—in other words, to calculate the net present value equivalent to receiving this flow forever. This is one of the easiest financial tricks available to them. Today, half a century after the emergence of the large-scale asset-management industry, the world is awash with “ways” to value assets and shares—shortcuts, long cuts, narrow passages, and hanging bridges. Investment in a financial sense should just be a replication of the real-world process of arbitrage between market value and replacement value. To decide whether a particular share is worth buying according to the real-world process, investors need more than just a schematic representation of assets, liabilities, or profits. Share prices do react continuously to a perpetual process of arbitrage between market value and replacement value. It is not because accounting-based ratios are unable to capture it that this economic process does not take place. Therefore, investors need to conduct their financial analysis so that they are in a position to measure market value and replacement value without having to build any new capacity.

Abstract: Purpose – Increasing pressure to reduce costs and skepticism of promised value‐added are forcing suppliers to produce tangible proof of the monetary value they create for customers. The academic literature on the practical activities related to value‐based selling remains sparse. This paper aims to bridge the gap between the abundant theoretical customer value frameworks and implementation practices to create a practical foundation for value‐based sales activities in firms that aim to become value creators.Design/methodology/approach – Based on two case studies, the authors map the best practices in customer value quantification from the point of view of industrial customers, and study value‐based sales processes to uncover the value‐based sales activities for implementing and profiting from customer value.Findings – The results suggest a customer‐focused sales process that centers on creating value, quantifying the value created, and creating a situation where customer and supplier maximize their utility...

Abstract: Insurance companies increasingly augment their financial reports by releasing actuarial measures—the so-called embedded value—to supply information about the value of their life insurance activities. Both accounting and actuarial measures differ with respect to the timeliness of profit realisation and its reliability, and their performance in yielding information may differ. This paper asks if and how embedded values help in assessing risk premiums. We estimate multifactor market models in the spirit of Fama and French, and find that actuarial disclosures are superior to financial accounting in estimating these risk premiums. They further add information to financial reports as an estimator for growth opportunities.

Abstract: The purchase of insurance provides a potentially finer informational partition over the distribution of post-loss resolution wealth that may allow favorable adaptation of intermediate consumption, investment, or other decisions. Such a positive informational value does not require consumer risk aversion. Lines of insurance with longer resolution periods should impact relatively more decisions and have higher informational value. Under standard assumptions on preferences, in the absence of informational value, risk premiums paid for insurance by risk averse consumers should not increase as the loss resolution period increases. Empirical tests using data from the property-liability insurance market suggest that the willingness to pay per dollar of coverage (as measured by relative market demand across lines of insurance) is greater for lines of insurance with longer resolution periods consistent with a positive informational value of insurance. The results suggest that other financial assets may also have differential informational value.