Incentives Facing Life Insurance Firms to Report Actuarial Earnings: Evidence from Australia and the UK

During the 1990s, Australian and UK life industry professionals encouraged life insurance companies to provide investors with supplementary financial statements that incorporate the present value of actuarially calculated (“embedded value”) earnings (“PVAE”). However, these reporting practices have subsequently been criticized for potentially misleading investors and for failing to meet the definition of a recognizable asset. The propensity of proprietary UK and Australian life insurers to voluntarily report their PVAE is predicted to be driven by their desire to provide information to investors about their future profit expectations. The empirical tests are based on a sample of 67 Australian and UK proprietary and mutual firms. Consistent with the hypothesis, proprietary firms voluntarily reporting PVAE tend to have relatively higher future profit expectations than nondisclosing firms. These findings have implications for ongoing efforts to develop internationally harmonized financial reporting standards for life insurance companies.