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Finance, Accounting and Control Case Study

Case Title:

Embedded Value Movement: The Key Assumptions

Publication Year : 2010

Authors: S Chaudhuri, A Chakraborty and S Hussain

Industry: General Business


Case Code: FAC0045IRC

Teaching Note: Not Available

Structured Assignment: Not Available

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Ping An, the second largest Chinese Life insurer had used the embedded value (EV) method to calculate its intrinsic value. Research indicated that the improved performance of Ping An's new business product mix had recorded a 35.6% increase in its embedded value (EV), from RMB48,363 million in 2005 to RMB65,573 in 2006. The EV calculation was based on three base assumptions of discount rate, investment returns, and tax rates. These base case rates are highly susceptible to change under different circumstances. Moreover, this EV could not specify the value of different stakeholders of an insurance firm, such as, debt holders, banks, creditors, minority shareholders etc. The adaptability and acceptability of such valuation method also needed to be tested.

Pedagogical Objectives:

  • To understand the strategies adopted by Ping An to sustain its market share in the Chinese insurance market.
  • To have a brief understanding of how the changes in basic assumptions causes change in embedded value (EV).
  • To whether the EV method should be used to calculate the enterprise value of an insurance company.

Keywords :  Chinese insurance market growth, Bankassurance, Security analysis, People's Insurance Company of China (PICC), China Insurance Regulatory Commission (CIRC), Property and casualty insurance, Enterprise value, Adjusted net worth (ANW), Value in force business, Solvency margin, Morbidity rate, Mortality rate, Valuation, Market penetration, Sensitivity analysisy

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