APN107

Question 1

Define EV

Answer 1

Embedded Value (EV) is a measure of the consolidated value of shareholders’ interests in the covered business

Question 2

List the components of EV

Answer 2

At a high level the EV consists of the following components:
• The free surplus attributed to the covered business (FS);
• PLUS The required capital identified to support the in-force covered business (RC);
• PLUS The present value of future shareholder cash flows from in-force covered business (“PVIF”);
• LESS the cost of required capital (CoRC).
-The value of future new business is excluded from EV

Question 3

Define Free Surplus

Answer 3

• The free surplus is the market value of any assets allocated to, but not required to support, the in-force business at the valuation date.
• It is determined as the market value of the excess of all assets attributed to the inforce business but not backing liabilities or the required capital to support the covered business

Question 4

Define Required Capital

Answer 4

Required capital should include any assets attributed to the covered business over and above the amount required to back liabilities for covered business whose distribution to shareholders is in practice restricted.

Question 5

Define ANW

Answer 5

The sum of the free surplus and required capital is the adjusted net worth. This is the value of all assets allocated to the covered business that are not required to back the liabilities of the covered business.

Question 6

Define PVIF

Answer 6

The PVIF is the present value of future shareholder cash flows projected to emerge from the assets backing liabilities of the in-force covered business

Question 7

Define the cost of capital

Answer 7

The cost of required capital is the difference between the amount of required capital and the present value of future releases of this capital, allowing for future net of tax investment returns expected to be earned on this capital

Question 8

Define VNB

Answer 8

Value of new business is defined as the present value of the expected after tax shareholder cash flows less cost of required capital arising at the point of sale in respect of new covered business contracts sold in the reporting period