Embedded value

Embedded value is the sum of two things: the adjusted net assets attributable to shareholders that are not required to back existing policies, and the value of business in force, which is the present value of future shareholder profits expected from policies already sold, discounted at a risk adjusted rate and net of the cost of holding required capital.

It exists because a life insurer's profit emerges over decades. A policy sold this year produces a small accounting result now and a stream of margins for many years afterwards. Two life insurers with identical reported book value can therefore have very different economics if one has a larger and more profitable book still running off, and a price to book multiple cannot see that at all.

The forward looking companion is the value of new business, which measures the value created by policies written in the current period. Analysts read it against premiums as a new business margin, because it answers whether the insurer is writing profitable business now rather than living off a book sold long ago.

It is sensitive by construction, so treat the disclosed assumptions as part of the number. The discount rate, the assumed lapse rate and the mortality or morbidity assumptions all move the answer materially. Note also that IFRS 17 has brought a version of the same idea into the primary statements through the contractual service margin, the unearned profit on in force contracts, released to earnings as cover is provided.