Evolution of financial reporting of life insurers: The predominance of unregulated embedded value disclosure

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.

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.

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.

The findings discussed in this paper are of special interest to financial reporting policy makers, financial analysts, firm compensation committees and managers, and academics.

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.