The valuation effects of embedded value disclosure by life insurers

Many life insurance companies outside the US disclose embedded value (EV), an actuarial estimate of the present value of the future net cash flows arising from the company's in-force life insurance business. Industry surveys have shown that EV is used by analysts for valuation purposes. However, there is little empirical research of EV disclosures. This study fills that void by testing the valuation relevance, information content and reduction in information asymmetry associated with the reporting of EV. We provide evidence supporting the premise that the market prefers EV to traditional accounting metrics in assessing security prices. This study advances our understanding of the valuation effects of corporate voluntary disclosures, and should be of interest to financial reporting standard setters such as the IASB and the FASB who are currently working on harmonizing financial reporting in the insurance industry.