Embedded Value Calculation – Loan calculator

Embedded Value (EV) Calculator

Adjusted Net Worth (ANW) Market value of free surplus + required capital.

PV of Future Profits (PVFP) Present value of projected statutory profits.

Cost of Capital (CoC) The cost of holding required capital.

Calculation Results

Value of In-Force Business (VIF): 0

Embedded Value (EV): 0

Understanding Embedded Value in Insurance

Embedded Value (EV) is a key performance metric used primarily by life insurance companies to estimate the consolidated value of shareholders' interests in the business. Unlike traditional book value, EV accounts for the present value of future profits from existing policies that have not yet been realized.

The Components of Embedded Value

To calculate the Embedded Value, we look at three primary components:

Adjusted Net Worth (ANW): This represents the market value of the assets supporting the free surplus and the required capital. It is essentially the "hard" liquidation value of the company's equity.
Present Value of Future Profits (PVFP): This is an actuarial projection of the profits the company expects to generate from the policies currently on its books, discounted back to today's value using a risk-adjusted rate.
Cost of Capital (CoC): Holding required capital for regulatory purposes comes with a cost (opportunity cost). This value is subtracted from the PVFP to determine the net value of the in-force business.

The Mathematical Formula

            EV = Adjusted Net Worth + (PV of Future Profits – Cost of Capital)
            
            Where:

            Value of In-Force (VIF) = PVFP – CoC

Real-World Example Calculation

Suppose an insurance firm, "Global Life," is conducting its annual valuation. They provide the following figures:

Adjusted Net Worth: 2,000,000 units
Present Value of Future Profits: 5,500,000 units
Cost of Capital: 600,000 units

Step 1: Calculate the Value of In-Force (VIF) Business
VIF = 5,500,000 – 600,000 = 4,900,000 units.

Step 2: Calculate the Total Embedded Value
EV = 2,000,000 (ANW) + 4,900,000 (VIF) = 6,900,000 units.

Why is EV Important for Investors?

Embedded value is more comprehensive than GAAP earnings for life insurers because insurance contracts are long-term. Profit is recognized over 20-30 years, but the expenses (commissions and underwriting) are incurred upfront. EV provides a more accurate "snapshot" of the company's economic reality by capturing the future income stream already secured through existing contracts.