Insurance company embedded value is a valuable tool for assessing performance but it's not simple.
Embedded value is a metric designed to measure the performance of life insurance companies. There are two main components to it: a calculation of the present value of future profits (PVFP) and the "hidden profit," which is the difference between the market value of the portfolio of investments and the book value. It's not an exact science, however, and calculations require a number of assumptions where the future cannot be predicted with certainty.
Instructions
Determine Present Value of Future Profits (PVFP)
1. Obtain insurance company cash flow statements.
2. Identify the following elements and add them together:
Inflow of premium and reserves
Income from investments
3. Add the following negative cash flow elements together:
Annuity payments
Expenses
Reserves
Insurance benefits
Bonuses paid
4. Subtract the value obtained for negative cash flow from the value of investment income, reserves and premiums. This is an approximation of net cash flow for one year, absent any special charges or credits that year.
5. Discount that future stream of earnings back to the present day, using your going assumed rate of interest as a discount factor.
Determine Adjusted Net Asset Value
6. Calculate the fair market value of the investment portfolio.
7. Subtract the book value of the investment portfolio. The difference is an approximation of Adjusted Net Asset Value.
8. Add Adjusted Net Asset Value to Present Value of Future Profits. This is an extremely simplified approximation of embedded value.
Tags: cash flow, Adjusted Asset, Adjusted Asset Value, Asset Value, value investment
