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description
Embedded Value and Analysis of Change
KBC Insurance businessas at 31/12/2002
Agenda
KBC Life Insurance Activity & Scope
Terminology
ANAV (“Adjusted Net Asset Value”) Components Roll forward 2001-2002
VBI (“Value of Business In Force”) Components Assumptions Sensitivities Roll forward 2001-2002
VNB at date of sale (“Value of New Business”)
KBC Life Insurance Activity & Scope
KBC Insurance Group: Life Activity
Technical Provisions KBC Insurance
(part Unit Linked) 2001 2002
KBC Insurance (Belgium) 5 800 356 (2 661 792)
6 567 436 (2 543 975)
Fidea (Brokerage Belgium) 558 305(26 160)
610 730(27 074)
Vitis Life (Luxembourg) 1 127 696(262 853)
985 198(240 433)
Others (CSOB, K&H Life,…) 96 215(1 303)
533 932(1 709)
Total 7 589 874(2 952 108)
8 697 296(2 813 191)
(‘000 EUR)
KBC Insurance Group: Life Activity
Growth in Total Life Premium Income 1998-2002 (‘000 EUR)
1 079 465100%
1 341 980122%
1 867 037170%
1 666 842152%
2 230 521203%
926 707407 478 408 475 437 679
1 259 859
170 758934 502
1 458 562 1 229 163
970 662
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
1998 1999 2000 2001 2002
Non Linked Unit Linked
KBC Insurance Group: Life Activity
Growth in Technical Provisions Life 1998-2002 (‘000 EUR)
8 697 296199%7 589 874
174%6 783 772
155%5 662 602
129%4 373 520100%
4 162 741 4 467 156 4 497 804 4 637 766 5 884 105
1 195 4462 285 968
2 952 108
2 813 191
210 779
0
1 000 000
2 000 000
3 000 000
4 000 000
5 000 000
6 000 000
7 000 000
8 000 000
9 000 000
10 000 000
1998 1999 2000 2001 2002
Non Linked Unit Linked
Main Distribution Channels Life Activity
KBC Bank branches
Savings and investment products Credit-linked risk covers
Insurance agents and other Savings products Group insurance (Mainly SME, partially
based upon referrals from bank branches)
Fidea Brokerage
Vitis Life operation services from Luxembourg
Scope
Subsidiaries under review
KBC Insurance Belgium + Fidea + Vitis Life
total technical provisions : 8 163 364
Modelled: 87 % of the mathematical reserves 92.8 % of the total premium income in 2002 99.7 % of the new premium income in 2002
Subsidiaries not under review
Central European Subsidiaries (CSOB, Warta Vita, K&H Life,…)
total technical provisions : 533 932
Terminology
PV TiedSurplus
Life
Value In
Force
Terminology
“Embedded Value”
ShareholdersEquity
EconomicAdjustments
ANAV
=
Asinvestment
for
Embedded Value
> Equity adjustments> Asset adjustments
> Resilience Reserves > Tax assets and liab.
TiedSurplus
Life
ANAV
Other Surplus
PVFP*VBI**
(PVFP- CostTied Surplus)
TiedSurplus
Lifeor
KBC standard
Embedded Value
Other Surplus
Other Surplus
Other Surplus = Tied Surplus Non Life + Other Tied Surplus
+Free Surplus
*PVFP = Present Value of Future Profits
**VBI = Value of Business In Force
Embedded Value: global figures
(‘000 EUR)
31/12/2001 31/12/2002
VBI LifePVFP
Cost of tied surplus
425 143545 909
(120 766)
365 919511 060
(145 141)
Tied Surplus Life 546 683 588 026
Value In Force 971 826 953 945
Other Surplus 1 989 929 828 716
Embedded Value 2 961 755 1 782 661
ANAV
ANAV : Composition
“Adjusted Net Asset Value” (ANAV) =[+] Shareholders Equity
[+] Equity Adjustments “Provision for financial risks”
[+]/[-] Asset Adjustments Unrealised capital gains on the investments,
except for the bond investments in the life portfolio (“buy-and-hold”-philosophy)
Goodwill is deducted
[+] Additional Reserves Catastrophe and equalisation reserves Additional reserves life
[-] Tax assets and liabilities on the above
ANAV : as at 31/12/2002
('000 EUR)
+8 458
-476 892
+186 752
+259 007
-151 513
1 59
0 9
31
1 41
6 7
42
0200 000400 000600 000800 000
1 000 0001 200 0001 400 0001 600 0001 800 000
shar
ehold
ers
equity
equity
adju
stm
ents
asse
t adju
stm
ents
additi
onal re
serv
es n
on life
additi
onal re
serv
es li
fe
tax
asse
ts a
nd liab
.
ANAV
ANAV Change 31/12/2001 – 31/12/2002
+346 868
-190 080
-1 185 451 -91 207
2 53
6 61
2
1 41
6 74
2
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
3 500 000A
NA
V31
/12/
2001
Pro
fit
in 2
002
Div
iden
ds
Pai
d
Ass
et V
alu
eA
dju
stm
ents
Oth
er
AN
AV
31/1
2/20
02
Value of Business In Force(“VBI”)
KBC RBC requirements for Life business
KBC RBC Requirements
(legal requirements)
% of the reserves
% of sum at risk
Unit Linked with legal SM > 01.25%
(1%)
0.375%
(0.3%)
Unit Linked with legal SM = 00.5%
(0%)
0.0%
(0.3%)
Non Linked invested in a 75 B./ 20 S./ 5 P. mix
9.2%
(4%)
0.375%
(0.3%)
The current RBC for Life activities is 197.9% of the legal required solvency margin for the Life Activity
VBI: Economic Assumptions
2001 2002
10 year bond yield
(Rate from 2005 on)
5.50% pa
(5.50%)
4.40% pa
(5.00% pa)
Risk Prem. on equity 3.30% pa 2.50% pa
Risk Premium used for discount rate 3.30% pa 3.50% pa
Discount rate* (= Cost of Capital) 8.80% pa* 8.50% pa*
Wage inflation 3.79% pa 2.80% pa
*Based on the bond yield in the long run
VBI : Non Econonomic Assumptions
Expenses Expenses are allocated to the different products and activities in
such a way that the total expenses in the study equal the total expenses in the statutory accounts
Expenses increase with wage inflation % (2.80% pa) Future expense reductions programs and synergies are not
taken into account
Mortality Assumptions based on most recent industry experience were
used
Lapses Assumptions based on annual experience, investigations of
surrenders and paid-ups, with a reasonable safety margin Assumptions are set on by product and distribution
channel
VBI Overview
(‘000 EUR, only reserves of modelled business)
PVFP VBI VIF PVFP/reserves
VBI/res.
reserves
2001* 545 909 425 143 971 826 8.65% 6.74% 6 311 493
2002 511 060 365 919 953 945 7.19% 5.15% 7 104 098
*2001 Based on data of KBC Insurance Belgium
+ 10% - 10%
Expenses - 4.24% + 4.24%
Lapses - 2.10% + 2.28%
Mortality - 3.45% + 3.45%
+ 0.5% - 0.5%
Discount rate - 7.16% + 7.64%
Investment Return* + 2.76% - 6.94%
VBI : Sensitivity Analysis
Effect on VBI
* The discount rate is changed consistently with the change in investment return
VBI : Sensitivity Analysis
Current RBC KBC
Insurance
100% of the legal
SM
150% of the legal
SM
200% of the legal
SM
Embedded Value 1 782 661 1 856 103 1 820 250 1 784 387
VIF 953 945 736 570 849 322 962 073
VBI 365 919 439 361 403 508 367 645
Changing the solvency margin
(‘000 EUR)
VBI Change 31/12/2001 – 31/12/2002
(EUR)
425
142
515
365
918
865
+5 664 635
+37 911 029
-57 146 590
+75 793 801
-11 054 525
-42 569 640
-67 822 360
200 000 000
250 000 000
300 000 000
350 000 000
400 000 000
450 000 000
500 000 000
550 000 000
VBI 31/
12/2
001
Change
non eco
n. ass
umptio
ns
Unwindin
g dis
countin
g
Cashflo
w to A
NAV
VNB as
of 31/
12/2
002
Varia
nces
over 2
002
Change
in ta
xatio
n
Change
econ.a
ssum
ptions
VBI 31/
12/2
002
VBI Change 31/12/2001 – 31/12/2002
Effect of changing non economic assumptions: 5 664 635 EUR
(in ‘000 EUR) Total %
Mortality 5 382 1.27%
Lapses - 7 796 -1.83%
Expenses 6 833 1.61%
Other 1 246 0.29%
Total 5 665 1.33%
VBI Change 31/12/2001 – 31/12/2002
Effect of ‘new business’ sold in 2002 (as at 31/12/2002): 75 793 801 EUR
APE (Annualised Premium Equivalent)
PVFP of new business at 31/12
VNB of new business at 31/12
PVFP as % of APE
VNB as % of APE
2002 195 250 104 998 75 794 53.78% 38.82%
(‘000 EUR)
VBI Change 31/12/2001 – 31/12/2002
Effect of deviations during 2002: -11 054 525 EUR
Investment returns in 2002: - 23 206 453 EUR
Lapse, mortality, extra premium income, miscellaneous+ 12 151 928 EUR
Effect of changing prospective economic assumptions: - 110 392 000 EUR
- 42 569 640 EUR
The impact of the tax reform in 2003
-67 822 360 EUR
This amount is due to changing the interest expectations and the change in the expected risk premium on equity.
Value of New Business
VNB New business 2002 at date of sale
APE (Annualised Premium Equivalent)
PVFP VNB PVFP as % of APE
VNB as % of APE
2001* 129 786 53 422 45 095 41.41% 34.96%
2002 195 250 92 872 64 587 47.57% 33.08%
(‘000 EUR)
APE Non Linked = regular premium + single premium / 10 APE Unit Linked = total premium / 10
*Based on data of KBC Insurance Belgium
Review
“B&W Deloitte reviewed the methodology used to calculate the embedded values, the value added by new business and the analysis of change in the value of inforce.”
“B&W Deloitte reviewed the assumptions used in the calculation of the embedded value and the value added by new businesss for reasonableness based on the information available”
“Based on our work and our validation report on the work carried out by KBC Insurance, we consider the embedded values, the value of new business and the analysis of the change in the value of in-force for the life business to be reasonable and suitable for inclusion as supplementary information to the Group’s consolidated accounts”
Cautionary Statements“The calculation of embedded values necessarily makes numerous assumptions with respect to economic conditions, operating conditions, taxes, and other matters, many of which are beyond the KBC’s control. Although the assumptions used represent estimates which KBC Insurance and B&W Deloitte believe are reasonable, actual future experience will vary from that assumed in the calculation of the embedded value results, and such variation may be material. Deviations from assumed experience are normal and are to be expected. Even without any change in perceived environments, and in parameters used to reflect them, actual results will vary from those projected due to normal random fluctuations. Consequently, the inclusion of the embedded value herein should not be regarded as a representation by B&W Deloitte that the stream of future after-tax statutory profits discounted to produce these values will be achieved.
The embedded value presented in this report is based on common actuarial practice with regard to valuation methodology and assumptions. The values are calculated on a deterministic basis. Therefore they do not necessarily capture the cost of any investment guarantees. Our work has not considered the impact of alternative valuation methodologies such as fair values. “
Embedded Value and Analysis of Change
KBC Insurance as at 31/12/2002