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Understanding Embedded Value (EV) in Life Insurance: Definition & Calculation

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Updated October 07, 2025

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What Is Embedded Value?

Embedded value (EV) is a valuation metric used mainly by life insurance companies outside of North America to estimate the total value of shareholders' interest in the company.

EV is calculated by adding the present value of future profits from existing policies to the net asset value (NAV) of the company's capital and surplus. Because EV excludes potential profits from new policies, it's generally viewed as a conservative estimate of value. Insurers often use EV to assess performance, guide mergers and acquisition decisions, and inform executive compensation plans.

Key Takeaways

Embedded value (EV) is an essential valuation metric used predominantly by life insurance companies outside of North America to assess the shareholder value by calculating the total value of shareholders' interests.
The EV calculation includes the present value of future profits from in-force policies and adjusted net asset value from past accumulated capital and surplus, making it a conservative estimate of a company's worth.
While EV is widely utilized in Europe and often serves as a benchmark for mergers, acquisitions, and performance metrics, it is less frequently used among North American insurance companies.
Differences between embedded value and other valuation metrics, such as enterprise value, lie in their application primarily within the life insurance industry and across various sectors, respectively.
Manulife Financial is an example of a life insurance company that tracks and reports embedded value, demonstrating how changes in this metric can reflect operational value creation over time.

Understanding Embedded Value in Life Insurance

Embedded value is standard for European life insurers. While not mandatory by regulators, tracking EV is an industry norm to boost company value.

The formula for embedded value is:

Embedded Value (EV) = Present Value of Future Profits (PVFP) + Adjusted Net Asset Value (ANAV)

Analysts use this standard to compare companies in the life insurance sector. EV also serves as a performance metric and as a basis for M&A deals and executive compensation. Very few North American firms use EV, but some companies track and report it internally.

Important

Insurance companies use a bottom-up, market-consistent approach in the embedded value methodology to account for market risk.

In particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in capital markets, and options and guarantees are valued using market-consistent models calibrated to market prices.

Where markets have limited data availability, the valuation is based on historical averages. Embedded value excludes any value from future new business. Instead, it is split between shareholders’ net assets and value of business in-force, or the total amount of paid-up policies an insurer carries.

In the UK, insurers often use another valuation known as the annual premium equivalent (APE). Insurers use APE to measure and compare sales of policies with differing premiums. APE compares recurring payment premiums from existing policies with single premium payments of newer policies.

Real-Life Example of Embedded Value Calculation

Manulife Financial is one example of a life insurance company that tracks and reports its embedded value. As of Dec. 31, 2021, Manulife's EV was $64.8 billion, or $33.35 per share, up $3.7 billion from a year prior.

Manulife's New Business Value (NBV) in 2021 was $2,243 million, a $441 million (31%) increase from 2020. It's NBV margin increased to 39.2% in 2021, up from 33.8% in 2020. The company states that it's management uses the change in EV as a measure of the value created by its operations during that reporting period.

What's embedded value of an insurance company?

EV is used by life insurance companies outside of North America to estimate the consolidated value of shareholders' interest in an insurance company. It's calculated by adding the present value of future profits of a firm to the net asset value (NAV) of the firm's capital and surplus.

Why do insurance companies measure embedded value?

Analysts use EV to make comparisons across the life insurance sector. EV can serve as a performance metric, a basis for M&A deals, and the basis for executive compensation plans. Very few North American firms currently use EV, but some industry consultants track it internally.

What is the difference between embedded value and enterprise value?

Embedded value is a metric used by life insurance companies, primarily in Europe. It is used to estimate the shareholders' interest in the company. Enterprise value, on the other hand, can be used across sectors, not just by life insurance companies.

The Bottom Line

Embedded value, though less common in the U.S., is a valuable measure of a life insurer's shareholder interest. By combining the present value of future profits with the net asset value of capital and surplus, EV offers a clear picture of a company's existing business performance. It is widely used for comparing insurers, guiding internal analysis, and supporting strategic decisions such as mergers, acquisitions, and compensation planning.

Article Sources

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Actuary.org. "Embedded Value Reporting."
Dai-ichi-life-hd.com. "Embedded Value."
Manulife. "2021 Embedded Value Report for Manulife's Insurance."