Embedded Value


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Embedded Value

The value of a company that is calculated by adding together its adjusted net asset value and the present value of potential future profits. That is, the embedded value considers what the owners of the company have received in the past and what they are likely to receive in the future. Embedded value is an inherently conservative valuation method, excluding intangible assets and assuming that earnings will not increase in the future. The measure is most common outside North America, especially in the insurance industry.
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The majority of foreign multinationals and domestic Indian companies base their EV reporting on the European embedded value (EEV) or market-consistent embedded value (MCEV) principles laid out by the CFO Forum, while domestics and Asia-based multinationals report on a traditional embedded value (TEV) basis.
Ultimately, the IPO price and its valuation is determined by the company and its underwriters, who gauge the specific embedded value figure that mutual fund investors are comfortable with, hoping to find a number that encourages the best demand.
Embedded value is a key measure of an insurance company's underlying worth, and embedded value life insurance (EVLI) helps put a value on future profits expected from existing insurance contracts.
Some companies have started implementing an economic capital approach and others have initiated limited pilot studies to begin gauging the impact of market-consistent embedded value and aspects of International Financial Reporting Standards and Solvency II.
We are very excited to have completed the very first Canadian embedded value securitization," said Alan Ryder, President and CEO of Aurigen Capital Limited.
The report compares practices followed by major European companies and discusses embedded value reporting issues in the broader environment of Solvency II and International Financial Reporting Standards.
The Indian insurance sector had already witnessed two deals, valuations of which stood at over threefold of the embedded value.
Embedded value also benefited from favorable currency movements, in particular a strengthening of the US dollar against the euro.
Operating profit on the less forgiving market consistent embedded value fell to pounds 978million from pounds 1.
Embedded value has long been used, especially in Europe, to measure the underlying risk and value of insurance liabilities.
The update on its saving strategy, launched in March, came as Standard Life unveiled a better-than-expected lift in half-year operating profits, up 71% to pounds 353m, on a European embedded value basis.
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