The valuation effects of embedded value disclosure by life insurers

El-Gazzar, Samir M.; Jacob, Rudolph A.; McGregor, Scott

doi:10.1504/ijea.2013.050592

Cited by 6 publications

(10 citation statements)

References 16 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Within the insurance sector, company value is estimated using embedded value, a special version of the discounted cash flow model, offering an actuarial estimate of the present value of the future net cash flows arising from the company's life insurance business. Embedded value is used by analysts, preferred over traditional accounting measures for valuation of insurance businesses, and represents a robust measure of firm value (El-Gazzar et al, 2013). …”

Section: Disclosure and Company Valuementioning

confidence: 99%

The effectiveness of risk disclosure practices in the European insurance industry

Malafronte

Starita

Pereira

2018

RAF

View full text Add to dashboard Cite

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 regarding the effectiveness of insurers' risk disclosure to reassure the market. Moreover, higher RDII is found to impact positively on embedded value, thus contributing towards higher firm value.Practical implications -The findings could drive insurers' choices on communication and transparency, alongside regulators' decisions about market discipline. They also suggest that risk disclosure could be used to strengthen market discipline and should be added to the other variables traditionally used in stock return volatility and firm value estimation models in the insurance industry.Originality/value -This paper offers new insights in the debate on the bright and dark sides of risk disclosure in the insurance industry and provides interesting implications for insurers and their stakeholders.Keywords Risk disclosure, Insurance companies, Financial crisis, Volatility, Embedded value JEL Codes G22, G14, G01 Paper type Research paper Page 1 of 24Review of Accounting and Finance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 R e v i e w o f A c c o u n t i n g a n d F i n a n c e 2 IntroductionIn recent years, several factors, including the global financial crisis, firms' need for capital, and market pressure, have led to an increased need for transparency and communication in the financial system. New and updated regulations have stressed this point, too, by introducing disclosure requirements (i.e., Basel III, MiFID II, and Solvency II). From this point of view, it is fundamental to investigate the impact of disclosure, as its effects could influence companies' ex ante choices on when, how, and what to communicate, as well as policymakers' initiatives on market discipline. This has important implications for stakeholders and companies themselves, thus raising the need to further investigate this phenomenon by testing whether a chan...

show abstract

Section: Disclosure and Company Valuementioning

confidence: 99%

The effectiveness of risk disclosure practices in the European insurance industry

Malafronte

Starita

Pereira

2018

RAF

View full text Add to dashboard Cite

show abstract

“…These results suggest that mandatory disclosure of EV by US life insurers may enhance investors’ assessment of security prices. The results also indicate that life insurance accounting standard-setting bodies should consider the reporting of EV as a complementary revelation of the underlying economics of life insurers’ operations (El-Gazzar et al , 2013). The major findings of this study are summarized here in Tables I–IV and discussed below.…”

Section: The Usefulness Of Ev Metrics For Investorsmentioning

confidence: 83%

“…In a recent empirical study of life insurers across the globe, the authors find that EV disclosure had information content and reduced information asymmetry in the marketplace. Further, the authors show that EV disclosure provides incremental information content in valuing stock prices beyond the traditional GAAP measures of earnings and book value (El-Gazzar et al , 2013). In addition, the inclusion of EV as an independent variable significantly increases the explanatory power of the model under different settings.…”

Section: The Usefulness Of Ev Metrics For Investorsmentioning

confidence: 99%

See 1 more Smart Citation

Evolution of financial reporting of life insurers

Jacob

El-Gazzar

McGregor

2017

JFRC

Self Cite

View full text Add to dashboard Cite

Purpose This paper aims to examine the capital market effects and predominance of unregulated embedded value (EV) financial reporting in the life insurance industry in foreign domestic markets, and US markets for foreign firms that cross-list in the USA. Design/methodology/approach Recent empirical archival data are analyzed and evaluated to determine the incremental and relative value relevance of an unregulated valuation metric that is disclosed by life insurers. Findings The findings support the proposition that EV is valuable supplemental information in foreign domestic markets, and in US markets for foreign life insurers that cross-list in the USA. Given that International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are engaged in projects to improve accounting standard for insurance companies, and have faced criticism with the existing drafts on this issue, the two institutions ought to consider the valuation relevance of EV disclosures. Moreover, this analysis strongly suggests that financial analysts in the USA should consider EV in valuing life insurers’ stocks. Practical implications The findings discussed in this paper are of special interest to financial reporting policy makers, financial analysts, firm compensation committees and managers, and academics. Originality/value This paper contributes to the extant literature by providing recent evidence that suggests that EV, an unregulated fair value market-driven metric, is more value-relevant than traditional earnings metrics such as earnings and book value. It is the only study that we are cognizant of that critically examines the recent empirical literature on this evolving issue.

show abstract

“…Nissim (2010, 2013) contends that analysts typically use earnings, cash flows and/or book value (BV) or combinations of the measures, but analysts often place less emphasis on earnings when valuing insurance companies (Nissim, 2013). Outside of the USA, many life insurance companies also report embedded value[4] with studies finding greater value relevance for the measure than traditional accounting measures (El-Gazzar et al, 2013, 2015), and greater value relevance for BV than EPS. If EPS becomes more difficult to estimate after ASU 2016–01, analysts and investors may make greater use of other measures for valuation purposes, further reducing the value relevance of earnings.…”

Section: Development Of Hypothesesmentioning

confidence: 99%

Fair value accounting impact on decision-usefulness of accounting information: evidence from accounting standards update 2016–01 on the US insurance industry

McGregor

2021

JFRA

Self Cite

View full text Add to dashboard Cite

Purpose The purpose of this study is to evaluate the impact of ASU 2016–01 on the predictive value, the confirmatory value and the value relevance of earnings. One of the key provisions of ASU 2016–01 is the requirement that all changes in unrealized gains and losses on all equity securities are recognized in income instead of other comprehensive income (OCI) as under prior guidance (SFAS 115). Because many companies in the insurance industry are large holders of equity securities, the sample for this study consists of firms from the insurance industry. Design/methodology/approach The author compares the change in earnings volatility and analysts’ forecast error for the periods before and after adoption of ASU 2016–01, and the relationship between the percentages of assets invested in equity securities for both earnings volatility and analysts’ forecast error. Further, the author tests the price reaction at the time of the release of earnings using an event study. The author also tests the value reliance of earnings measured by the correlation of earnings and stock prices, as well as the change in earnings and stock returns. The association between investment gain/loss components of earnings, and OCI, with stock prices and returns is tested for value relevance. Findings The findings of this study show that earnings volatility and analysts’ forecast errors increased in the period after adopting ASU 2016–01 and an initial overreaction to earnings releases. Further, the investment gain/loss components of earnings and OCI are not value-relevant in this study and including unrealized gains/losses on equity securities in income decreased value relevance of earnings in the post-adoption period, particularly for firms with large equity investment portfolios. Research limitations/implications This study is limited to one industry and only represents the impact of ASU 2016–01 on that industry. Thus, there are opportunities to extend the research to other industries. Furthermore, the time-period of study since adopting ASU 2016–01 is limited to only two years and with the passage of time, a greater sample of post-ASU 2016–01 will be available for testing. Practical implications Standard setters considering recognizing fair value changes on all investment securities in income should consider the findings of this study. Further, industry participants affected by ASU 2016–01 should consider improving explanation of earnings to mitigate the initial misunderstanding of earning announcements found in this study. Originality/value To the best of the author’s knowledge, this is the first study on the effects of ASU 2016–01 on volatility of earnings, earnings forecast errors, market reactions to earnings releases and the value relevance of earnings. This paper fills a gap in prior research by studying the effects of fair value on reported earnings, which is limited in prior research. This study contributes to the growing field of research on fair value accounting.

show abstract

The valuation effects of embedded value disclosure by life insurers

Cited by 6 publications

References 16 publications

The effectiveness of risk disclosure practices in the European insurance industry

The effectiveness of risk disclosure practices in the European insurance industry

Evolution of financial reporting of life insurers

Fair value accounting impact on decision-usefulness of accounting information: evidence from accounting standards update 2016–01 on the US insurance industry

Contact Info

Product

Resources

About