www.insurance-journal.ca/archives/2001/0110050704.asp -
[Cached Version]
Published on: 10/1/2001
Last Visited: 11/13/2008
"The concept of embedded value is certainly valid, and you can make some exceedingly graceful calculations with it," says Mark Sylvia, Managing Partner with Canadian Insurance Marketing Inc., a company that specializes in business valuations, "but they may be meaningless in the real world."
The EV figures are intended to be used as the basis for more accurate indications of an insurer's fair market value than can be obtained through traditional measurements such as price/ earnings (P/E) ratios and net asset value (NAV) calculations.
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"Unfortunately, the market doesn't always use as scientific a method as EV to set the price of a stock," Mr. Sylvia explains.
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"As far as investors go, you need so much information and so much technical skill to use this technique that there's no way for the average guy to apply it with any accuracy," Mr. Sylvia says, and concludes with a note of caution when interpreting the results of any EV calculation.
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"The economic value added calculation can be a wonderful tool," says Mr. Sylvia, "when you need to use it.