What is an 'Embedded Value'

An embedded value (EV) is a common valuation measure used largely by life insurance companies outside North America to estimate the consolidated value of shareholders' interest in an insurance company. It is calculated by adding the present value of future profits of a firm to the net asset value of capital and surplus.The present value of future profits captures projected future profits from in-force policies, while net asset value of capital and surplus represents the funds belonging to shareholders that have been accumulated in the past.

BREAKING DOWN 'Embedded Value'

Embedded value is a standard valuation metric for European life insurers. It is not mandated by the regulatory authorities there, but it has become an industry norm for an insurer to track EV components and manage them to increase the value of the company. With this established standard analysts can study the numbers and make comparisons across the sector. EV serves as a performance metric, a basis for M&A deals, and the basis for executive compensation plans. Very few North American firms currently utilize EV, but some industry consultants believe they can benefit from tracking and reporting it, at least internally.

Importance of Embedded Value

As an example of the importance of EV to European insurers, one can look at Zurich Insurance Group's annual report(s) on embedded value. The 33-page report for 2016 contains an executive summary, an analysis of embedded value earnings and value of business in-force, sensitivities, reconciliation of shareholders' equity to embedded value, regional analysis of embedded value, methodology, assumptions, statement by directors and an auditor's report on embedded value.

RELATED TERMS
  1. Embedded Option

    An embedded option is a special condition attached to a security ...
  2. Cash Value Life Insurance

    Cash value life insurance is permanent life insurance with a ...
  3. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  4. Book Value

    An asset's book value is equal to its carrying value on the balance ...
  5. Market Value

    Market value is the price an asset would get in the marketplace. ...
  6. Present Value - PV

    Present value is the current value of a future sum of money or ...
Related Articles
  1. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  2. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  3. Financial Advisor

    Permanent life policies: Whole versus universal

    If you're looking for life-long security, choosing between these whole and universal life policies is a key decision.
  4. Insurance

    Life Insurance

    Life insurance is an important component of basic financial planning. Find out how life insurance works and how insurance companies are able to profit through providing financial security to ...
  5. Insurance

    6 Ways to Capture the Cash Value in Life Insurance

    Here's how to make the cash value of your life insurance policy benefit you or your beneficiaries instead of the insurance company.
  6. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  7. Retirement

    Life Insurance in a Qualified Retirement Plan

    The opportunity to pay life insurance premiums with pre-tax dollars is appealing, but the additional costs of requirements may outweigh the benefits.
  8. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  9. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  10. Financial Advisor

    How Life Insurance Can Help With Liquidity

    Life insurance can provide liquidity in personal and business situations when access to capital is essential. Learn how to utilize its unique properties.
RELATED FAQS
  1. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Learn about the difference between the Z-spread and option-adjusted spread valuations of future cash flows for bonds, and ... Read Answer >>
  2. How Are Book Value and Market Value Different?

    Book value and market value are two financial metrics used to determine the valuation of a company and whether the stock ... Read Answer >>
Trading Center