| In this paper, the object of study is the valuation method of life insurance companies which based on Embedded Value. Valuation methods have the absolute and relative valuation methods. And the valuation method which based on Embedded Value,whose value contains the Embedded Value and the future new business value, Actually, is an absolute valuation method which is carried out via the future cash discount. Relative valuation methods contains the PE method, PB method and P/EV method and so on.What’s Embedded Value? this paper will discuss it, at the some time the absolute and relative valuation methods is described, then points out whether its application is reasonable. Because of the unique characteristics of life insurance companies and the development of life insurance industry in China, using the absolute valuation method, which is the Embedded Value, it’s more truly to reflect the life insurance companies’true economic value, which is the market value.After giving a detailed analysis of Embedded Value, we can come to a conclusion that this method is not good. Enough. To make it perfect, two valuation methods that one is based on DCF model and the other is based on EBO model are given, the DCF model makes the valuation of life insurance companies and the general discounted cash flow method consistent. Which focuses on the company’s future profitability; and the EBO model concerns the value creation and assesses whether the company can create excess returns for shareholders in terms of residual income. Thinking from these two different ways to improve the method, they will help investors out of the valuation errors which are from current Embedded Value, raise awareness of the life insurance industry.At last, put these two improving methods into Chinese life insurance industry, and selected the three biggest life insurance companies,:China Life, Ping An, China Pacific, Then adopted the DCF and EBO, to calculate the assessment value per share of each company, and It provided data to make us understand the different life insurance company’s operations and potentials, which would help us to make investment decisions.This article is divided into five chaptersIn the first chapter, this paper mainly describes the background, purpose and significance. This chapter is divided into three sections, and in the first section, it describes the background and purpose, helps us to assess investment value of life insurance companies, to understand management level of the life insurance business, to judge whether life insurance companies can be healthy, effective, sustainable development, therefore, life insurance companies must be assessed. Because of the unique characteristics of life insurance companies that profit circle is long and the receipts and payments of cash in the accounting, so which makes the valuation lower by the statutory assessment (SAP). To avoid the hostile takeover, Embedded value came into being. That using the method of Embedded Value to assess the performance of life insurance companies is one of the important topics in the global life insurance industry in recent years. Actually, the method of Embedded Value is an effective tool which can help Chinese life insurance companies to improve management decision-making, and enhance competitiveness.The Embedded Value assessment is on the way in the international market, it can help life insurance companies to take into an all-around account, so it can make a qualitative and quantitative analysis accurately on the potential and the operating results of life insurance companies. It plays an important role in internal governance, improving the management level, the interaction of insurance market and capital market, a fundamental change in the mode of growth and so on. Because this method doesn’t considered the insurance policy in the future, therefore, the assessed value of life insurance companies should plus the future new business value. In the Section two, it describes briefly the situation of Embedded Value at home and abroad makes a general assessment for the value of life insurance companies. In the final section, there is a brief description about the types of Embedded Value in life insurance company.The second chapter introduces the concepts of embedded value, which provides theoretical basis for the subsequent chapters. it Contains three sections, in the first section,.it describes the embedded value and the assessed value, first, introduces some existing definitions of the Embedded Value, Canadian Institute of Actuaries, the British Society of Actuaries and European Embedded values and the China Insurance Regulatory The Committee on the definition of embedded value. Although the expressions are different, but the substances are consistent, which is that the embedded value equals adjusted net assets plus Value of Business In Force, on this basis, pointing that assessment value equals adjusted net assets plus f Value of Business In Force plus value of new business.In order to have an overall grasp of the embedded value, there is a brief overview in the second section of this chapter which is about the five steps for calculating the embedded value, there are policy group, the establishment of actuarial assumptions, calculating future profits cash flow, sensitivity analysis, adjusted net assets. On the base of understanding the substance of embedded value, it indicated the applications of embedded value in life insurance companies: assessing of the economic value of life insurance companies, assessing the performance of life insurance companies to help companies manage internal decision-making. As as an accurate financial indicator which describes the operating characteristics of life insurance companies, is better than the existing general indicators, therefore, in many aspects, it can replace the general indicators. The applications of Embedded value is wide. There is a introduction in the Section III which is about the structure of this paper, it would help readers to have a general understanding of the article.The third chapter which is divides into three sections is about the assessment method of embedded value, there are several methods to assess the valuation of a company, which includes the methods of Discounted Cash Flow, Relative Comparison, Adjusted Net Assets, and Claim and Economic Value Added. they can also be classified by its substance, there are absolute valuation assessment and relative valuation assessment.In fact, the method of embedded value in this article is a method of discounted cash flow, so the first section focuses on the method of discounted cash flow, the company’s value is equal the current cash flow plus future cash flow, In insurance companies, the future cash flows occupies an important position, To be able to calculate the company’s future cash flow reasonably, the model of Discounted Cash Flow can be used to calculate the company’s valuation by the future Discounted Cash Flows. When Cash Flow method is used to assess the company’s valuation, equity is the object, which is classified into sustainable models two phases model.Actually there is an extension concept in the two-stage model, when it’s necessary, two-stage can be divided unlimited, split into smaller parts, because the principle is same, there is not more explanation for the two-stage model. Embedded value-based life insurance company valuation method, the company value contains the value of new business, when calculating the value of new business, it is critical to determine the value multiplier of the new business in a year. Which is on behalf of insurance company’s New business of growing ability. In theory, it is equal to the discounted value of new business in each of the coming years. so the good method is to predict new business value in the future point time each year, and then make the point value discounted back.The fourth Chapter is about the amendment and application of Embedded Value, it is divided into three sections. In the first section, it described the shortcoming of this method, because the discounted future cash flows of new business is achieved through the consumption of available net assets, there is a transformation relations between both. in another words, only by Adjusting available net assets to develop new business, and the value of new business can be realized. But now, for gaining the valuation of insurance companies, just get the simple sum of these three items. Apparently, the valuation added by the embedded value and the new business value is clearly more higher than the real valuation of life insurance companies.In the fifth Chapter it is about the conclusions and trends. It is divided into four sections, in the first section, from the example in the previous chapter, it summarized the revised method of Embedded Value, which contained the DCF model and the EBO model, and assessed the value per share of China Life, then came to a conclusion by this instance. In the second Section, according to the summarization, raised useful investment decisions, as well as on further analysis of the company’s operating condition. In the third Section, shortcomings of this assessment method would be pointed out, and the last section is about its future trends.According to the research question, this paper mainly adopts the following methods:theory research and empirical analysis method combining; The comparative analysis, modify it when the value evaluation method, two correction methods are detailed comparison, that its applicable scope; Put two correction methods applied to life insurance industry, Based on the analysis of the model modification DBO contains value method, the China life in different assessed value per share in the year to the results are obtained based on the results, based on the contents of DBO model updating the defects of the value method; The quantitative and qualitative analysis, combining research, So according to different need to adopt a different approach.The innovation of this paper, based on the original containing value evaluation method, on the basis of original method based on modified existing problems, the model modification DCF model and modified EBO model, its application to life insurance industry, and by comparing the two methods, draw two methods of quality and apply their own range. Based on the contents of DCF model model modification,But the EBO model is concerned with value creation, the Angle of residual income for evaluating a company excess return of shareholders. From these two different view of correction method, the idea will help investors out of the current valuations, improve market for understanding of the life insurance industry. |
PDF Full Text Request