The Implementation of Embedded Value (EV) Reporting in Israel: Myth and Reality

In recent years, we have witnessed increasing acceptance of embedded value (EV) reporting as the most robust measure of shareholder value for life and health insurance businesses. Therefore, the Commissioner of Insurance in Israel decided to request insurance companies to disclose the EV of their life, pension and health insurance business annually, beginning with the annual statements for FY 2007. Even though the insurance and financial community expected the publication of the EV data and emphasized its importance, the reaction of the capital market seemed to ignore the EV data. All things being equal, if an insurer is writing profitable new business, its market capitalization should exceed its EV. However, the market capitalization of all listed insurance companies in Israel is far below their reported EV, and the gap is growing. The purpose of this article is twofold: (a) to suggest several explanations for this apparent EV “puzzle,” both competing and complementary; (b) to argue that although the question of whether the EV report and market-consistent EV methodology really indicate the fair value of the insurance company remains controversial, the EV report contains data that give better insights into the forces driving operating performance and the impact of management actions. “The EV analysis should also be considered when evaluating management performance and remuneration schemes.”