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  • Evaluating Wealth Management Businesses - An Investors' Perspective Prepared by Mark Stewart and Anton Kapel Presented to the Institute of Actuaries of Australia 2005 Biennial Convention 8 May – 11 May 2005 This paper has been prepared for the Institute of Actuaries of Australia’s (Institute) Biennial Convention 2005. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions. © 2005 Towers Perrin The Institute will ensure that all reproductions of the paper acknowledge the Author/s as the author/s, and include the above copyright statement. The Institute of Actuaries of Australia Level 7 Challis House 4 Martin Place Sydney NSW Australia 2000 Telephone: +61 2 9233 3466 Facsimile: +61 2 9233 3446 Email: insact@actuaries.asn.au Website: www.actuaries.asn.au
  • ABSTRACT This paper examines the information typically disclosed by Australian wealth management businesses (“AWMs”), with a focus on the economic valuation information. We also present the key findings from a survey of equity analysts which investigates the approaches adopted and information used by equity analysts / professional investors in evaluating these businesses. Finally, we compare the requirements of the European Embedded Value Principles against the economic valuation practices typically adopted by AWMs.
  • Table of Contents 1 INTRODUCTION...........................................................................................................1 1.1 Background................................................................................................................1 1.2 Outline of Paper.........................................................................................................2 1.3 Acknowledgements....................................................................................................2 2 SUMMARY....................................................................................................................3 3 CURRENT DISCLOSURE PRACTICES.......................................................................5 3.1 Introduction................................................................................................................5 3.2 Overview of AWM Disclosures...................................................................................5 3.3 Supplementary Disclosures........................................................................................6 4 THE INVESTORS’ PERSPECTIVE...............................................................................9 4.1 Overview....................................................................................................................9 4.2 Equity Analysis...........................................................................................................9 4.3 Survey Background..................................................................................................10 4.4 Economic Valuation Information Is Used Extensively...............................................11 4.5 Economic Valuation Methods...................................................................................16 4.6 Disclosures Could Be Improved...............................................................................18 5 EUROPEAN EMBEDDED VALUE PRINCIPLES.......................................................21 5.1 Overview..................................................................................................................21 5.2 European Embedded Value Principles.....................................................................21 5.3 Comparison of EEV Principles to AWM Practices....................................................22 6 REFERENCES............................................................................................................27 Introduction...................................................................................................................30 View slide
  • Coverage.......................................................................................................................30 EV Definitions................................................................................................................30 New Business and Renewals........................................................................................31 Assessment of Appropriate Projection Assumptions.....................................................31 Economic Assumptions.................................................................................................31 Disclosure.....................................................................................................................31 View slide
  • Evaluating Wealth Management Businesses - An Investors' Perspective 1 1 INTRODUCTION “International Financial Reporting Standards are meant to bring comparability and transparency but in the short-term could heighten uncertainty and increase inconsistency.” 1 “The [IFRS] information is just going to be used as background because a lot of the talk is going to be about embedded value.” 2 1.1 Background The information provided by a listed company to the market is a key input for investors when making buy and sell decisions about that company. Various items of information are required due to statutory and listing requirements; additional items of information, known as “supplementary disclosures”, are provided voluntarily by the company. From 1 January 2005, Australian companies will commence preparing financial statements under the new IFRS-equivalent accounting standards. This will lead to substantial changes to published financial statements and represents an opportunity for companies to review and consider changes to their supplementary disclosures. The emerging view in some markets is that the introduction of IFRS will lead to a greater need for supplementary disclosures for wealth management businesses, particularly economic valuation information. In light of these developments, we thought that it was now timely to review the information currently disclosed by Australian wealth management businesses (“AWMs”), with a focus on economic valuation information. Central to this review is a survey of ten Australian equity analysts, to canvas their views on the current practices of AWMs in regard to supplementary disclosures. For convenience, we have used the term AWM in this paper to refer to the businesses within an organisation which:  manufacture and distribute funds management and life insurance products; and  provide financial advice. 1 Ian Dilks, a partner at PricewaterhouseCoopers, as quoted in the Financial Times on 14 April 2005 2 Roman Cizdyn, insurance analyst at Oriel Securities, as quoted in the Financial Times on 14 April 2005
  • Evaluating Wealth Management Businesses - An Investors' Perspective 2 This is a narrower definition than the term “financial services business”, which is often interpreted as including banking products and services and general insurance in addition to the activities described above. We note that different companies include different types of business in their economic valuations, hence the definition of AWM adopted for this paper may not precisely align with the businesses included in the economic valuations published by the companies we consider in this paper. However, the majority of companies that publish economic valuation information include at least their life insurance and funds management business in the valuation. 1.2 Outline of Paper The rest of our paper is structured as follows:  Section 2 is a summary of the paper;  Section 3 contains an overview of current disclosure practices for AWMs;  Section 4 outlines certain of the findings of our survey of equity analysts;  Section 5 discusses the recent development of a consistent economic valuation basis in Europe; and  Section 6 contains the references. 1.3 Acknowledgements This paper could not have been written without the input gladly provided by the equity analysts who represented our survey respondents. Much of the survey was undertaken during the reporting season in early 2005 and we appreciate the time made available to us by the analysts during this busy period. We would also like to thank our colleagues who willingly provided assistance when it was required. In particular, we would like to acknowledge Clive Aaron and Mark Turner who set us on our track, provided valuable input along the way and reviewed the resulting paper.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 3 2 SUMMARY According to the Australian equity analysts who participated in our survey, economic valuation information is the most useful component of the information currently disclosed by listed companies with Australian wealth management businesses (“AWMs”). Eight of the ten analysts surveyed expect this economic valuation information to be equally if not more important once the International Financial Reporting Standards are implemented, which is consistent with the views that are emerging in Europe. The analysts use the economic valuation information for a number of purposes, including calibration of their own valuation models, identification of the drivers of shareholder value and as the basis for a measure of intrinsic value. The analysts generally use all of the economic valuation information disclosed by AWMs for these purposes, with the possible exception of new business multipliers. Despite the usefulness of the current economic valuation information, most analysts believe there is substantial scope to improve the consistency and transparency of the information disclosed by AWMs. Our review of current disclosure practices highlighted considerable variation in current practices. Areas identified by the analysts where greater disclosure and consistency between AWMs would improve the usefulness of the economic valuations are:  the definition of new business;  details of economic valuation assumptions;  analysis of change (in respect of both existing business and new business); and  economic valuation sensitivities (in respect of both existing business and new business). All of the areas identified by Australian analysts are considered important in Europe and represent explicit disclosure requirements under the European Embedded Value Principles (“EEV Principles”), which were recently introduced to address a number of criticisms about embedded value reporting in the European market, including the inconsistency of approaches across companies.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 4 The analysts also expressed a desire for the economic valuation results to be broken down into key product groups. Again, this is an area where there appears to be little consistency in current AWM practices. Most AWMs currently do not allow for the cost of target surplus in their economic valuations. This appears contrary to the views of the Australian equity analysts, who would prefer to see this allowed for in the published economic valuation results. In addition to the items discussed above, the EEV Principles provide further food for thought for the owners of AWMs regarding:  the extent to which the economic valuation includes allowance for anticipated improvements in future experience;  the format for presenting economic valuation results;  the techniques used to allow for the costs of options and guarantees; and  the disclosure of an analysis of change in free assets.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 5 3 CURRENT DISCLOSURE PRACTICES 3.1 Introduction To provide some context for the other sections of this paper, we have provided a brief summary of the information currently disclosed by listed Australian companies in respect of their AWM operations. Readers who already have a good understanding of this information may wish to skip directly to Section 4. The information routinely disclosed by each of these companies in respect of their AWM operations varies significantly and is obviously dependent on the relative size of the AWM within the overall group and the manner in which the AWM is held within the corporate structure. 3.2 Overview of AWM Disclosures Based on the timing of release to the market, disclosures for AWMs can be broadly grouped follows:  profit announcement (including any analyst briefing presentation);  annual report; and  regulatory returns under the Life Insurance Act (“Life Insurance Act Financial Reports”). Under ASX listing rules, companies must release a profit announcement shortly after their full-year and half-year end. These profit announcements contain summary financial statements, and are typically accompanied by the bulk of the supplementary disclosures that companies choose to provide to the market. These supplementary disclosures are discussed in further detail in Section 3.3 below. Full annual reports become available some time following the year end profit announcement. The annual report contains extensive information, as required by financial reporting standards, and may include life insurance specific disclosures. Many of the financial results in the annual report are presented at a consolidated level which can hinder analysis of specific segments of the company. We expect that the typical contents of annual reports are well known to most readers of this paper and so have not discussed these in further detail.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 6 Life Insurance Act Financial Reports are typically only available at a later date again, up to three months after the year end. These reports are generally consistent with the general purpose financial statements contained in the annual report. The Life Insurance Act Financial Reports include additional disclosures, and are limited to information about the life insurance company (and its subsidiaries) only. As a result of the timing and frequency of the various disclosures, investors tend to place greatest emphasis and attention on the profit announcement. We note that, in addition to the information provided by the companies themselves, various other parties publish items of information in respect of the operations of AWMs (for example sales and funds flow information, market share statistics and investment returns). We have not considered this information any further, but we do note that it is used by investors when they are researching a particular AWM. 3.3 Supplementary Disclosures As mentioned above, the bulk of companies’ supplementary disclosures typically accompany the profit announcement. We have reviewed the supplementary information provided by AWMs for their 2004 full reporting year. This has not necessarily been an exhaustive review of all data that is provided (for example, additional information may be provided in response to questions posed during analyst briefings). However, we believe we have covered the key items of information provided by AWMs (or their owners) to the market. The content of the supplementary information varied markedly between AWMs. Operational measures, such as adviser numbers, cost to income ratio and details of asset mix for shareholders’ capital, were provided by some AWMs but not others. Only the following items of supplementary information were provided by a large number of AWMs and thus could be considered to represent typical supplementary disclosures in the Australian market:  sales and funds flows during the period;  business volumes and market share information; and  economic valuation information.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 7 The first two of these are essentially statistical measures which, while useful to investors for their analysis, are also readily available from other public sources. We have not sought to analyse or summarise this information further. We have identified fourteen listed Australian companies which have business activities that meet our definition of AWM. As far as we are aware, seven of these companies published AWM economic valuation information in respect of the 2004 year. This information is summarised at a high level in Table 3.1 below. Further details can be found in Appendix D. The AWM operations of three of the seven listed Australian companies are included in the assets that must be “marked to market” in the financial statements at each reporting date. Hence these companies prepare their economic valuations for a different purpose compared to the other four companies who supply economic valuation information purely as a supplementary disclosure. The high level summary in Table 3.1, together with the further details in Appendix D, demonstrates that the economic valuation disclosure practices vary markedly between these seven AWMs.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 8 TABLE 3.1 High Level Summary of Economic Valuation Disclosures1 Information Item Summary Economic Valuation Results Six of the seven companies provide information on the components of embedded value and value of one year’s sales. New business multipliers and appraisal valuations are also published for the three AWMs that are in the mark-to-market environment. Analysis of Change in Four of the seven companies provide an explicit analysis of change in embedded Embedded Value value that allows all of the main items of change to be identified. Analysis of Change in New An explicit analysis of change in the value of new business is provided by two Business companies only. Economic Valuation Practices regarding the publication of sensitivity information vary markedly among Sensitivities AWMs. Three of the companies provide little or no information regarding the sensitivity of their economic valuation results. Geographic Segmentation of Most companies provided details of their economic valuation by major Results region/country in which they operate. Three companies also provide analysis of change and sensitivity information for the same geographic segments. Product Group Segmentation Four companies provide economic valuation information for broad product of Results groupings, however there appears to be little consistency in the product groups adopted by each AWM. Two companies also provide analysis of change and sensitivity information for their product groupings. Economic Valuation Nearly all companies disclose some information regarding the assumptions used Assumptions in the economic valuation, however there is noticeable variation in the level of detail provided. Notes: 1) Data sources are listed in Section 6.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 9 4 THE INVESTORS’ PERSPECTIVE 4.1 Overview In this section, we set out the results of our survey of equity analysts (as representatives of the community of investors) aimed at gathering their views on the information disclosed to the market by AWMs. Section 4.2 contains a brief summary of the methods used by equity analysts to research a company, to provide context for the views expressed by the analysts. Section 4.3 provides further background about the survey. The remainder of Section 4 discusses certain of the key findings of our survey, namely that:  economic valuation information is used extensively, is regarded as the most useful item of disclosure, and will remain important after the introduction of IFRS (Section 4.4);  the analysts would like changes in respect of the methods used to allow for new business and target surplus in economic valuations (Section 4.5); and  the level of detail in disclosures could be improved, and made more consistent across different AWMs (Section 4.6). 4.2 Equity Analysis When researching a company, an equity analyst gathers an extensive amount of information, such as financial statements, industry statistics, press releases, press reports and investor information provided by the entity (such as analyst briefings). Using this information, the equity analyst will then undertake a range of analyses for the purpose of making buy, sell or hold recommendations for that security. Often not all of the necessary information is available for a particular analysis technique, in which case the analyst will either make assumptions, or utilise alternative techniques, or both. A key component of the analysis undertaken will be an assessment of the intrinsic value of the equity security. Equity analysts normally utilise a number of alternative valuation methods for this purpose. The different valuation results are used both to crosscheck other methods and to provide a range of values for the analyst to consider. Common methods include:  discounted cash flow valuations;
  • Evaluating Wealth Management Businesses - An Investors' Perspective 10  capitalisation of future maintainable earnings, using a price earnings ratio; and  asset based valuations. A fourth method in the case of AWMs entails deriving a value based on the economic valuation data published by the company itself. We note that, while the provision of supplementary information is certainly not unique to AWMs, we are not aware of any other industry where analysts routinely rely so heavily on the economic valuations provided by the companies to the market. It should be noted that analysts are not only concerned with an assessment of intrinsic value of an individual company, but rather also need to consider relative measures across companies such as whether Company A is more or less expensive relative to its intrinsic value than Company B. 4.3 Survey Background We surveyed 10 equity analysts from the following 9 Australian research houses:  ABN AMRO;  Credit Suisse First Boston;  Deutsche Bank Australia;  Goldman Sachs JB Were;  JP Morgan;  Macquarie Equities (Australia);  Merrill Lynch;  Morgan Stanley; and  UBS Securities Australia. The surveys were undertaken during February and March 2005. Many of these research houses have separate analyst teams for insurance sector stocks (for example AMP and AXA) and banking sector stocks (for example CBA and NAB). The survey participants comprise representatives from both groups, although there is a greater proportion of insurance analysts.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 11 While the survey sought to obtain views on the content of the current financial statements and the expected impact of IFRS implementation, the focus of the survey was on economic valuation information provided by AWMs as this is a key component of the supplementary disclosures. The survey covered both the disclosure of economic valuation information and the methods used by companies to prepare this data. Please note that the survey results have been summarised for this paper to ensure that the views contributed by the analysts remain confidential and do not refer to specific AWMs. A number of the survey questions requested a score out of 5. In all cases, 5 was the highest/best score and 0 the lowest/worst score. 4.4 Economic Valuation Information Is Used Extensively 4.4.1 Economic valuations are a key item of information for analysts Our survey asked the equity analysts to score the usefulness (for their purposes) of each of the items of information typically disclosed in relation to an AWM. The results are contained in Table 4.1 below.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 12 TABLE 4.1 Usefulness of Items of Information (Score out of 5) Component: Mean Score BASIC FINANCIAL STATEMENTS Statements of Financial Performance, Financial Position and Cash Flows 3.2 ADDITIONAL LIFE INSURANCE SPECIFIC COMPONENTS OF FINANCIAL STATEMENTS MoS Shareholder Profit Analysis 3.5 Components of Policy Liabilities 3.1 Solvency Position Information 2.9 Statutory Fund Segmented Financial Results 2.9 Statement of Actuarial Methods and Assumptions 2.6 SUPPLEMENTARY DISCLOSURES Economic Valuation Information 4.0 Sales 3.5 Market Share 3.3 Adviser Numbers 3.2 Cost to Income Ratios 2.8 The results in Table 4.1 demonstrate that the equity analysts consider the economic valuation information to be the most useful information disclosed by AWMs (for those AWMs that disclose it). The primary reasons noted for this score were that the financial statements do not provide sufficient information, and the nature of this business is such that it can be difficult to forecast future profits from past operating profits. In general, the supplementary information is considered to be more useful than the information contained in the financial statements, highlighting the importance of providing this additional information. It is interesting to note that the statement of actuarial methods and assumptions was considered by the analysts to be the least useful information provided by AWMs. Some analysts did note that information on the changes in methods and assumptions over time was of some use. Cost to income ratios, although used extensively in the analysis of other
  • Evaluating Wealth Management Businesses - An Investors' Perspective 13 industries, were given a relatively low rating by the analysts, who cited a lack of comparability (due to inconsistencies in the definition of “income”) across AWMs for the low score. While economic valuations are considered to be the most useful information, the analysts consider that their usefulness is compromised by a lack of transparency. This is evidenced by their scoring of the transparency of the economic valuation information, which received a relatively low mean score of 2.8 out of 5. A number of respondents cited variations in practices between companies, the lack of detail regarding the assumptions and methods used in the calculations and little detail regarding the drivers of movements in value (by some AWMs) as the causes of this perceived lack of transparency. 4.4.2 Use of published economic valuation information All of the analysts in the survey indicated that they use the published economic valuation information to some degree to calibrate their own valuation models. The economic valuation information is also used by nearly all of the respondents to identify the key value drivers. While one respondent indicated that they frequently adopt the published valuations without adjustment, the remainder of analysts typically apply adjustments to the published information when determining their value estimates. The most common adjustments were changes to the risk discount rate and new business multipliers. These analysts consider a range of factors when determining their adjustments and we did not identify any particular factors that were common to the majority of respondents. However, the following factors were mentioned:  the perceived quality of management;  the perceived integrity of the economic valuation calculations;  the consistency of approaches and assumptions with those of other AWMs; and  the extent of past variations between actual and assumed operating experience. As might be expected, nearly all analysts prefer to receive the components of the economic valuation (i.e. adjusted net worth, value of existing business and value of one
  • Evaluating Wealth Management Businesses - An Investors' Perspective 14 year’s sales) rather than receive a single appraisal value figure. This allows the analyst to more easily apply their adjustments to the published results. Almost all of the surveyed analysts adopt their own new business multipliers, rather than those selected by the AWM. Whilst some analysts are interested in the AWM’s view of the appropriate new business multipliers for its business, there appears to be more interest in understanding the growth rates assumed by the AWM when determining these multipliers rather than the multipliers themselves. In addition to adopting their own new business multipliers, the surveyed analysts indicated that they prefer to be able adjust the published economic valuations to reflect their own assumptions for risk discount rates, future expense levels and, to a lesser extent, economic assumptions. This finding was consistent with the analysts’ views on the usefulness of the economic valuation sensitivity information provided by AWMs, as economic assumptions, risk discount rates and expense assumptions were considered to be the most useful sensitivities as shown in Table 4.2 below. There was also some interest in the discontinuance assumptions sensitivity. The sensitivity of the economic valuation to mortality and morbidity assumptions scored the lowest in terms of usefulness. TABLE 4.2 Usefulness of Economic Valuation Sensitivities (Score out of 5) Assumption: Mean Score Economic Assumptions 4.5 Risk Discount Rates 4.5 Operating Expense Assumptions 4.2 Discontinuance Rates 3.7 Morbidity Assumptions 2.7 Mortality Assumptions 2.6 All of the analysts considered the sensitivity of the value of one year’s sales to be of equal or greater importance than the sensitivity of the value of existing business to the same factors.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 15 These findings contrast to current AWM disclosure practices regarding sensitivities. As can be seen from Table D.1 in Appendix D, only a small number of AWMs currently provide sensitivities for all the assumptions that are rated highly by the analysts. Further, only two AWMs provide explicit information about the sensitivity of the value of one year’s sales. The analysts also make extensive use of the analysis of change information with all survey participants indicating that they regularly use both the embedded value and value of new business analyses of change (if provided). The analysts’ views on the usefulness of specific components of the analysis of change are set out in Table 4.3 below. While the current analysis of change information is considered to be useful, nearly all analysts indicated that they would prefer more detail on the components in the analysis. TABLE 4.3 Usefulness of Components of Analysis of Change Information (Score out of 5) Component: Mean Score EMBEDDED VALUE ANALYSIS OF CHANGE Expected Growth 2.4 Capital Injections and Dividend Payments 4.0 Effect of Experience Variations 4.0 Value of Actual Sales 3.9 Effect of Assumption Changes 3.9 NEW BUSINESS ANALYSIS OF CHANGE Effect of Changes in Sales Volumes and Product Mix 4.1 Effect of Other Assumption Changes 4.0 Effect of Changes in New Business Multipliers 2.4 Again, these findings contrast to current AWM disclosure practices as only two AWMs provide explicit new business analysis of change information and several AWMs do not separately quantify those components of the embedded value analysis of change that were rated highly by the analysts. The analysts expressed some interest in seeing economic valuation results for certain other businesses activities, such as mortgages, and possibly for all businesses in the listed
  • Evaluating Wealth Management Businesses - An Investors' Perspective 16 entity (i.e. including activities that are outside the AWM). However, this was not considered to be a high priority and the key benefit from this information would be that it would allow further benchmarking of other valuation methods against economic valuation techniques. 4.4.3 Published economic valuations will continue to be important Australian companies will commence reporting under IFRS-equivalent standards from 1 January 2005. We asked the analysts whether these financial statements themselves (i.e. without the supplementary information) were expected to be adequate for their purposes. Two analysts answered in the affirmative. Five of the analysts indicated that they were unsure and many of these felt that AWMs had not yet sufficiently explained how their financial statements will change under IFRS. The other three analysts all stated that they expected the IFRS financial statements to be inadequate for their purposes. For this reason, eight out of ten analysts expect the need for published economic valuations to be of equal or greater importance under IFRS. Many of the analysts noted that economic valuations provide continuity during a period of change in the financial reporting regime. Only one analyst had the opposite view, believing that published economic valuations would become less important over time. This analyst considers that the IFRS changes will improve the comparability of AWM financial statements to other businesses, allowing greater weight to be placed on alternative valuation methods. Nearly all of the analysts surveyed indicated that they expect to continue to use the Life Insurance Act Financial Reports, which in the short term will be unchanged, after reporting commences under the IFRS-equivalent standards. The Life Insurance Act Financial Reports will also provide continuity for the analysts while they assess and develop an understanding of the information provided under the IFRS-equivalent standards. 4.5 Economic Valuation Methods 4.5.1 Disclosure of new business basis is important We asked the analysts their views on the methods for allowing for new business in economic valuations. Nearly all of the analysts stated that they believe new business is treated inconsistently by the different AWMs in their economic valuations. We note that
  • Evaluating Wealth Management Businesses - An Investors' Perspective 17 the AWMs’ current disclosures rarely include detail on the definition of new business adopted for the economic valuations. Overall, there was no clear preference for the value of one year’s sales to be based upon last year’s actual sales or next year’s budgeted sales, although many individual analysts had strong preferences one way or the other. Reasons noted by those that favoured recent actual sales were the ability to reconcile the data with published sales information and concerns that budgeted sales can be manipulated. Those that favoured budgeted sales noted the importance of disclosing the assumed new business volumes where this approach is used. The survey asked the analysts to state whether they believed certain items should be included in the value of new business or in the value of existing business. The results tended to support the definition of new business described in Section 4.1.2 of GN 252 “Economic Valuations of Life Insurance Business” issued by the Institute of Actuaries of Australia (“IAAust), where new business is defined as acquired business that has required effort or action from the AWM’s sales force. Some analysts had no particular preferences as to the definition of new business, provided the basis adopted is disclosed. Overall, while the analysts considered new business to be a source of inconsistency, there was little consensus from the survey participants as to the appropriate methods to be adopted. As such, we believe the key finding from this part of the survey is that it is important for AWMs to provide adequate disclosure as to their particular treatment of new business in their economic valuation. 4.5.2 Economic valuations should allow for internal capital targets Our understanding is that most AWMs do not allow for the cost of target surplus (i.e. capital held in excess of regulatory capital requirements) when determining published economic valuations. This is opposite to the views expressed by the analysts, as eight out of the ten analysts surveyed were of the view that an AWM’s economic valuation should allow for the cost of target surplus to the extent that it is effectively “locked-in”. 4.5.3 Risk discount rates and risk allowance methods The survey addressed the topic of how analysts determine risk discount rates for AWMs and their preferred methods to allow for risk in economic valuations.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 18 Most of the respondents stated that they use a CAPM approach to determine an appropriate discount rate for AWMs. The analyst that does not use a CAPM approach uses a fixed hurdle rate as the risk discount rate for AWMs. All of the analysts in the survey use the 10-year Commonwealth Government Bond as the basis for the risk free rate, although half use a smoothed or averaged rate rather than the spot rate at the valuation date. The assumed market risk premium varies between the analysts in the range of 4% to 6%, with an average of approximately 5.1%. There do not appear to be any particular methods or factors that are used consistently by the analysts to vary risk discount rates between different AWMs. The majority of the analysts stated that they believed that risk discount rates should vary by product line to reflect the different risks inherent in the different product lines. However, the analysts were divided when asked if they were comfortable with allowing for risk via the use of a single risk discount rate applied to the best estimate projection of cash flows as per the traditional economic valuation approach (six analysts indicated they were comfortable with this approach). The benefits of a single risk discount rate appear to be related to the simpler presentation of results and ease of use in calibrating the analysts’ own valuation models. There was some support for market-consistent valuation techniques as an approach for allowing for the risks in the business and in each product line, however analysts who favoured these techniques would also like to continue to receive traditional economic valuation results at this stage. 4.6 Disclosures Could Be Improved 4.6.1 Greater disclosure The surveyed analysts indicated a number of different areas where additional disclosure would assist them in their analysis. Whilst nearly all of the analysts requested additional details in one or more areas, it should be noted that several analysts also mentioned that too much information can be counter productive due to the time required to digest the additional data. Only one of the analysts surveyed indicated that AWMs provide sufficient detail regarding the assumptions used in the economic valuation. A common criticism was that
  • Evaluating Wealth Management Businesses - An Investors' Perspective 19 the assumptions are too “bundled” to provide meaningful information for external users. We also note that our review of current disclosures showed that there was considerable variation in the level of detail provided by AWMs regarding their economic valuation assumptions. As mentioned earlier, nearly all of the survey respondents stated that they would like more detail regarding the analysis of change in the economic valuation. The most popular requests were for more details on the basis for assumption changes and the causes of experience variations, and for more details at the product group level, including the impact of changes in product mix on the value of one year’s sales. There was also support for the analysis of change information to be split between the major geographic regions in which the AWM operates, if the AWM does not already provide this. A small number of analysts expressed the view that, in their opinion, there are instances where some best estimate assumptions have not been updated to incorporate all known information at the valuation date. They cited examples of recurring experience profits or losses as the basis for this opinion. This highlights the need for AWMs to explain the basis for their assumptions and the sources of emerging experience profits from period to period. The majority of analysts thought that the AWMs provide sufficient detail regarding the geographic segmentation of the economic valuation. This is consistent with the summary of current economic valuation disclosures in Section 3, where it can be seen that nearly all of the AWMs provide economic valuation information separately for each major region/country in which they operate. However, nine out of the ten analysts surveyed stated that they would like more details of results by broad product group. In their view, the product groupings currently utilised often result in products with different value characteristics being grouped together (such as group risk and individual risk). The inconsistencies in AWM practices regarding the product level segmentation of results can be seen in Table D.1 in Appendix D. There did not appear to be a strong consensus amongst the analysts as to the appropriate level of product groupings and some analysts noted that detailed product results are highly dependent on the assumption setting processes, especially the expense allocation.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 20 We also asked the analysts whether they would be interested in seeing a split of the total economic valuation across the key segments of the value chain. While there was some support for such analysis (seven analysts indicated interest) it was not rated as a high priority and several analysts noted that additional product group details would be more useful in the short term. One analyst also commented that he would like AWMs to provide a better explanation of the relationship of margin on services profit and policy liabilities to the economic valuation, especially where the value of future profits is disclosed as a policy liability component. 4.6.2 Need for greater standardisation across AWMs All except two of the analysts responded that they believed that there was a need for greater standardisation in the methods used by AWMs in preparing their economic valuations. Standardised disclosures in particular appeared to be of high priority amongst those who responded in the affirmative. While the analysts would like consistent methods to be used among AWMs it is difficult for them to identify inconsistencies from published information. One analyst commented that it would be better for the industry to be pre- emptive in this area rather than wait for the market to lose faith in the numbers. Just over half of the respondents were aware of the IAAust economic valuation guidance notes, GN 552 “Economic Valuations” and GN 252 “Economic Valuations of Life Insurance Business”. However, these respondents did not appear to have strong views as to the appropriateness (or otherwise) of the guidance provided. We note that the IAAust guidance notes were not written with public disclosure in mind, and so are not necessarily appropriate for companies to adopt as a basis for external reporting. Also, none of the economic valuations disclosed to the market make any reference to the IAAust guidance notes.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 21 5 EUROPEAN EMBEDDED VALUE PRINCIPLES 5.1 Overview One of the key findings of the survey was a need for standardisation in economic value methodology and reporting, and we thought that it would be useful to consider how the Australian market compared to overseas markets in this regard. While economic valuation information is provided by some companies in North America and Asia, the practice is relatively new in these regions. External reporting of economic values has a much longer history in Europe, and in the UK in particular. In the recent past, the European investment community lost faith in the economic valuations published by companies, with stock prices trading at significant discounts to published embedded values. This prompted companies to review the methodology and reporting formats for economic values, and ultimately led to the adoption of a set of European Embedded Value Principles (“EEV Principles”) by a number of companies. We have compared the requirements of the EEV Principles (including the associated guidance) against the practices typically adopted by AWMs. Based on this comparison, we have identified five areas where the approach adopted by the typical AWM may differ from that required under the EEV Principles, namely:  allowance for favourable future assumption changes;  cost of options and guarantees;  definitions of new business and renewals;  format of results; and  disclosure requirements. We expand on each on these in Section 5.3 below. 5.2 European Embedded Value Principles The EEV Principles were released in May 2004 after being developed by the CFO Forum, a group of Chief Financial Officers from 19 major European insurance companies. A list of these companies can be found in Appendix A.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 22 The CFO Forum agreed to adopt the principles they developed for calculating the embedded values that are included in their companies’ supplementary financial reporting with effect from the end of 2005. The EEV Principles are seen as an important step towards improving the consistency and transparency of life insurance reporting, as:  there is no other international guidance in place for embedded value-based reporting;  embedded values are used by most large European financial services companies both for external financial reporting and as an internal management tool;  analysts of European life insurance companies focus strongly on embedded value reporting;  practices for calculation and disclosure of embedded values were diverse among companies and countries; and  previous embedded value methods had been the subject of criticisms by analysts, particularly in relation to inadequate allowance for the costs of options and guarantees, and these criticisms needed to be addressed. There are 12 key principles and 65 related areas of guidance. The CFO Forum has also produced a “Basis for Conclusions” document which provides commentary on the EEV Principles. Companies will be expected to confirm they fully comply with the EEV Principles, or give reasons for any non-compliance. The EEV Principles provide an excellent summary of the expected practices of European insurers regarding the calculation and disclosure of economic valuations once the IFRS are implemented. It is worth emphasising that the EEV Principles were not developed by any actuarial or accounting professional body, or by any regulator, but rather by the member companies of the CFO Forum themselves. A summary of the EEV Principles can be found in Appendix B. 5.3 Comparison of EEV Principles to AWM Practices 5.3.1 Methodology Much of the calculation methodology contained in the EEV Principles is covered explicitly or implicitly in the economic valuation guidance notes issued by the IAAust.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 23 As such, many aspects of the typical AWM’s economic valuation methodology could be considered to be consistent with the EEV Principles. The following aspects of the EEV Principles warrant further discussion. (a) Allowance for favourable future assumption changes Some AWMs utilise projected (budgeted) expense levels when preparing their economic valuations. This can result in projected unit costs being below their current levels. This may be inconsistent with the EEV Principle 9. Principle 9 states that changes in future experience should only be allowed for when sufficient evidence exists and the changes are reasonably certain. Guidance paragraph 9.4 elaborates, stating that “favourable changes in productivity gains should not normally be included beyond what has been achieved by the end of the reporting period”. Guidance paragraph 9.4 does note that there are some circumstances, such as a start-up operation, where such allowance may be appropriate. However Principle 9 generally does not appear to support allowance for future operational improvements in the embedded value assumptions and the associated guidance can require additional disclosure when such improvements are taken into account as per the following:  “the extent to which changes in unit costs have been anticipated should be separately disclosed”; and  “any exceptional development costs excluded from the unit cost base should be separately disclosed”. (b) Cost of options and guarantees The cost of options and guarantees are discussed at length in the EEV Principles in Principle 7, the associated guidance, and the “Basis for Conclusions”, including specific reference to stochastic techniques. This cost is often a significant item for European life insurers. The explicit costing of options and guarantees represents a major change in European practices and it was designed to address one of the key criticisms of the previous methodologies. AWMs generally do not include any explicit allowance for the cost of options and guarantees in their economic valuations, instead these items have been allowed for implicitly through the risk discount rate. This is an area where Australian practice
  • Evaluating Wealth Management Businesses - An Investors' Perspective 24 appears inconsistent with the EEV Principles, however it should be noted that these costs are not currently expected to be as significant for Australian life insurers as they have been for their European counterparts, and the cost may not be regarded as material for many AWMs. (c) New business and renewals Although the EEV Principles are primarily concerned with embedded value calculations, they include discussion (in Principle 8) of the definition of new business to encourage a consistent split of value between existing business and new business. This is an area where we have also observed divergent practices in economic valuations undertaken in the Australian market. Guidance paragraph 8.2 discusses renewal premiums and new business and it provides the following items as evidence that a premium represents new business:  a new contract has been signed;  underwriting has been performed;  new policy or policyholder details have been entered into the administration system;  incremental remuneration has become due to the distributor/salesperson; or  the pricing basis for that premium allows for the full cost of marketing and distribution. Guidance paragraph 8.3 provides further discussion of renewal premiums and it states that renewals should include the expected levels of:  contractual renewal premiums, including contractual variations in premiums;  non-contractual variations in premiums where these are reasonably predictable (for example premium increases due to price inflation); and  recurrent single premiums where the level of premium is pre-defined and reasonably predictable. Principle 9 notes that other methods of distinguishing between new and existing business are allowable, but these should be explicitly defined in the disclosures.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 25 The definition of new business contemplated by the EEV Principles seems broadly consistent with the definition of new business suggested in paragraph 4.1.2 of GN 252 (and the views of Australian equity analysts), with the possible exception of recurrent single premiums. 5.3.2 Disclosure While the IAAust’s economic valuation guidance notes require considerable documentation to be maintained, this is does not have any bearing on external reporting disclosures by companies. Current AWM disclosures vary significantly across companies, and it is clear from the survey responses that greater consistency and detail would be welcome. (a) Format of results EEV Principle 3 defines the embedded value using a format of components which differs from that typically used by AWMs. The difference is in the presentation of the value of locked-in (required) capital. The following example illustrates the difference between the two formats. The EEV Principles do permit alternative presentations (such as that typically adopted by AWMs). TABLE 5.1 Components of Embedded Value EEV Principles Presentation Typical AWM Presentation Free Surplus 20 Adjusted Net Worth 20 Required Capital 30 Total Net Assets (as per Balance Sheet) 50 Less Cost of Capital (10) Value of Existing Business (includes value 40 of release of required capital margins) Present Value of Shareholder Cash Flows 20 TOTAL EMBEDDED VALUE 60 TOTAL EMBEDDED VALUE 60 (b) Additional disclosure requirements EEV Principle 12 contains the disclosure requirements regarding published embedded values. These require more extensive disclosure than that provided by the typical AWM
  • Evaluating Wealth Management Businesses - An Investors' Perspective 26 in a number of areas. Particular items that companies are required to disclose under the EEV Principles include:  the definition of new business that has been adopted;  a reconciliation of the sales volumes used for the valuation of sales in the period to published sales volumes (the EEV Principles apply for embedded value calculations, however, the value of sales in the reporting period is needed for the analysis of change and the EEV Principles also apply when calculating this value of sales);  the extent to which productivity gains have been included in the projection of future expenses;  the techniques used to value their financial options and guarantees;  the analysis of change in value (the format of the analysis of change suggested in the EEV Principles, which is more detailed than that used by AWMs, can be found in Appendix C); and  an analysis of the change in free surplus, in addition to the analysis of change described above.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 27 6 REFERENCES The published information used to compile the summaries of the current disclosure practices of AWMs (contained in Section 3 and Appendix D of this paper) is listed in Table 6.1 below. These documents can be obtained from the companies’ websites. TABLE 6.1 References for the 2004 Financial Year Company Document AMP - Full Annual Report 2004 - Investor Report Full Year 2004 - Annual Results 2004 Presentation ANZ - 2004 Annual Report - 2004 Financial Report - 2004 Financial Results Dividend Announcement and Appendix 4E - 2004 Annual Roadshow AXA - Financial Report for the Year Ended 31 December 2004 - Investor Compendium for the 12 Months Ended 31 December 2004 Challenger - Annual Report 2004 - Full-year Results to 30 June 2004 Presentation CBA - Annual Report 2004 - Profit Announcement for the Full Year Ended 30 June 2004 IOOF - Annual Report 2004 - Appendix 4E Preliminary Financial Report Given to the ASX Under Listing Rule 4.3A (Financial Year Ended 30 June 2004) Macquarie - 2004 Annual Review - 2004 Financial Report - Result Announcement Year Ended 31 March 2004 NAB - Annual Financial Report 2004 - Full Year Results 2004 Perpetual - Annual Report 2004 - 2004 Annual Results Analyst Briefing Promina - Full Year Financial Results for the Period Ended 31 December 2004 St George - Full Financial Report 2004 - Appendix 4E Profit Announcement for the year ended 30 September 2004 Suncorp - Announcement of Consolidated Financial Results for the Year Ended 30 June 2004 - 2004 Full Year Results Presentation Tower - Annual Report 2004 - Financial Statements 2004 for the Year Ended 30 September 2004 - Investor Report Year Ended 30 September 2004 Financial Results Westpac - Concise Annual Report 2004 - Profit Announcement for the Year Ended 30 September 2004 Other references:
  • Evaluating Wealth Management Businesses - An Investors' Perspective 28  CFO Forum (2004) “European Embedded Value Principles”  CFO Forum (2004) “Basis for Conclusions European Embedded Value Principles” These two documents can be found at http://www.cfoforum.nl/.  Tillinghast (2004) “European Embedded Values – A Significant Step Forward” This document can be found at http://www.towersperrin.com/tillinghast/default.htm.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 29 APPENDIX A -CFO FORUM MEMBERS The CFO Forum is a group of Chief Financial Officers from the following 19 major European insurance companies.  AEGON N.V.  Allianz AG  Assicurazioni Generali S.P.A.  AXA SA  Aviva plc  Fortis B.V.  Försäkrings AB Skandia  Hannover Rueckversicherung AG  ING Groep N.V.  Legal & General Group plc  Münchener Rückversicherungs-Gesellschaft  Old Mutual plc  Prudential Assurance Company plc  Scottish Widows Group  The Standard Life Assurance Company  Swiss Reinsurance Company  Swiss Life Group  Winterthur Group  Zurich Financial Services Group
  • Evaluating Wealth Management Businesses - An Investors' Perspective 30 APPENDIX B -SUMMARY OF EEV PRINCIPLES Introduction Principle 1: Embedded Value (“EV”) is a measure of the consolidated value of shareholders’ interests in the covered business. Coverage Principle 2: The business covered by the EV Methodology should be clearly identified and disclosed. EV Definitions Principle 3: EV is the present value of shareholders’ interests in the earnings distributable from assets allocated to the covered business after sufficient allowance for the aggregate risks in the covered business. The EV consists of the following components:  free surplus allocated to the covered business;  required capital, less the cost of holding required capital; and  present value of future shareholder cash flows from in-force covered business (PVIF). The value of future new business is excluded from the EV. Principle 4: The free surplus is the market value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date. Principle 5: Required capital should include any amount of assets attributed to the covered business over and above that required to back liabilities for covered business whose distribution to shareholders is restricted. The EV should allow for the cost of holding the required capital. Principle 6: The value of future cash flows from in-force covered business is the present value of future shareholder cash flows projected to emerge from the assets backing liabilities of the in-force covered business (“PVIF”). This value is reduced by the value of financial options and guarantees as defined in Principle 7. Principle 7: Allowance must be made in the EV for the potential impact on future shareholder cash flows of all financial options and guarantees within the in-force covered
  • Evaluating Wealth Management Businesses - An Investors' Perspective 31 business. This allowance must include the time value of financial options and guarantees based on stochastic techniques consistent with the methodology and assumptions used in the underlying EV. New Business and Renewals Principle 8: New business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts and expected future contractual alterations to those new contracts. The EV should only reflect in-force business, which excludes future new business. Assessment of Appropriate Projection Assumptions Principle 9: The assessment of appropriate assumptions for future experience should have regard to past, current and expected future experience and to any other relevant data. Changes in future experience should be allowed for in the value of in-force when sufficient evidence exists and the changes are reasonably certain. The assumptions should be actively reviewed. Economic Assumptions Principle 10: Economic assumptions must be internally consistent and should be consistent with observable, reliable market data. No smoothing of market or account balance values, unrealised gains or investment return is permitted. Principle 11: For participating business the method must make assumptions about future bonus rates and the determination of profit allocation between policyholders and shareholders. These assumptions should be made on a basis consistent with the projection assumptions, established company practice and local market practice. Disclosure Principle 12: EV results should be disclosed at consolidated group level using a business classification consistent with the primary statements.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 32 APPENDIX C -EEV ANALYSIS OF CHANGE FORMAT Guidance paragraph 12.4 of the EEV Principles includes a list of suggested items to be included in the analysis of change in embedded value. These items are as follows:  Capital raised  Capital distributed  New business contribution  Return on in-force business  Expected return (the expected transfer from value of in-force business to net worth)  Experience variances  Operating assumption changes  Development costs  Expected return on free surplus  Operating return before [after] tax and [before] exceptional items  Investment return variances  Effect of currency movements  Effect of economic assumption changes  Exceptional items  Return on EV before [after] tax *  Attributed tax *  Return on EV after [before] tax * * Note: The EEV Principles recognise that some companies may choose to present the analysis on an after-tax basis rather than deducting tax at the end.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 33 APPENDIX D -FURTHER DETAILS OF CURRENT DISCLOSURE PRACTICES The following listed Australian companies have business activities that meet our definition of AWM:  AMP Limited (“AMP”);  Australia and New Zealand Banking Group Limited, through a joint venture with ING (“ANZ”);  AXA Asia Pacific Holdings Limited (“AXA”);  Challenger Financial Services Group Limited (“Challenger”);  Commonwealth Bank of Australia Limited (“CBA”);  IOOF Holdings Limited (“IOOF”);  Macquarie Bank Limited (“Macquarie”)  National Australia Bank Limited (“NAB”);  Perpetual Trustees Australia Limited (“Perpetual”);  Promina Group Limited (“Promina”);  St George Bank Limited (“St George”);  Suncorp-Metway Ltd (“Suncorp”);  Tower Limited (“Tower”); and  Westpac Banking Corporation Limited (“Westpac”). Each of these companies offers funds management products, and all except Perpetual have life insurance subsidiaries. We have reviewed the supplementary information provided by AWMs for their 2004 full reporting year (for example we examined AMP’s and AXA’s disclosures for the year ending 31 December 2004 and Tower’s disclosures for the year ending 30 September 2004). The economic valuation information published by companies in respect of their AWM operations for the 2004 year is summarised in Table D.1 below.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 34 As far as we are aware, economic valuation information is not published for the AWM operations of ANZ, Challenger, IOOF, Macquarie, Perpetual, Promina and St George; and hence these companies do not feature in the table below. For three of the companies in Table D.1 (CBA, NAB and Tower) the economic valuations have been provided as the AWM operations are required to be “marked to market” in the financial statements at the reporting date. These three companies have a different form of disclosure, in particular they provide a full appraisal valuation rather than just the components of economic value, compared to the other four companies who supply economic valuation information purely as a supplementary disclosure. We note that different companies include different types of business in their economic valuations, hence the definition of AWM adopted for this paper may not precisely align with the businesses included in the economic valuations published by each of these companies. However, the majority of the companies include at least their life insurance and funds management business in the valuation.
  • Evaluating Wealth Management Businesses - An Investors' Perspective 35 TABLE D.1 Summary of Economic Valuation Disclosures 1 Company AMP AXA Suncorp Westpac CBA NAB Tower Reporting Date 31/12/2004 31/12/2004 30/6/2004 30/9/2004 30/6/2004 30/9/2004 30/9/2004 Mark-to-Market Requirement N N N N Y Y Y Components of Economic Valuation Adjusted Net Worth Y Y N Y Y Y Y Value of Existing Business Y Y N Y Y Y Y Embedded Value (“EV”) Y N2 Y Y Y Y Y Value of One Year’s Sales (“VOYS”) Y Y N Y N2 N2 Y Value of Future New Business N N N N Y Y Y (“VFNB”) New Business Multiplier(s) N N N N Y Y N2 Appraisal Value N N N N Y Y Y Analysis of Change in Embedded Value Expected Growth Y Y N Y N N3 Y Capital Movements, Dividends and Y Y N Y Y Y3 Y Transfers Value of Actual Sales Y Y N Y N N3 Y Effect of Assumptions Changes Y Y N Y N N3 Y Effect of Experience Variations Y Y N Y N N3 Y
  • Evaluating Wealth Management Businesses - An Investors' Perspective 36 TABLE D.1 Summary of Economic Valuation Disclosures 1 Company AMP AXA Suncorp Westpac CBA NAB Tower Analysis of Change in Value of One Year’s Sales Analysis disclosed Y N N N N N3 Y Economic Valuation Sensitivities4 Discount Rate Both Both EB Both N N AV Economic Assumptions Both EB N Both N N AV Operating Expenses Both EB N Both N N AV Discontinuance Rates Both EB N Both N N AV Mortality N EB N Both N N N Morbidity N EB N Both N N N Equity Index Values EB N N N N N N Sales Volumes NB N N N N N N Geographic Segmentation of Results EV & VOYS/VFNB Aus / NZ Aus & NZ / HK / N/A N Aus / NZ / Asia Aus / NZ / Asia / Aus / NZ SE Asia Europe Analyses of Change Aus / NZ Aus & NZ / HK / N/A N N N Aus / NZ SE Asia (EB only) Sensitivities Aus / NZ Aus & NZ / HK / N/A N N N Aus / NZ SE Asia
  • Evaluating Wealth Management Businesses - An Investors' Perspective 37 TABLE D.1 Summary of Economic Valuation Disclosures 1 Company AMP AXA Suncorp Westpac CBA NAB Tower Product Group Segmentation of Results5 EV & VOYS/VFNB Contemporary / Protection / Wealth N N Funds Investments / N Mature Management / Life Insurance / Other Insurance Analyses of Change Contemporary / N N N N N N Mature Sensitivities Contemporary / Protection / Wealth N N N N N Mature Economic Valuation Assumptions Nearly all companies disclose basic information regarding the assumptions used in the economic valuation. Some companies provide further detail including details of the main assumption changes since the previous valuation. There is noticeable variation in the level of detail provided. Notes: 1) The data sources for this information can be found in Section 6. 2) This data is not explicitly provided, however, these items can be determined implicitly from the other published results. 3) NAB publishes an analysis of change in appraisal value. Some of the items in the analysis are also provided for the embedded value and value of future new business. The analysis includes the expected appraisal value growth and the combined effect of assumption changes and experience variations. 4) EB = Value of existing business only, NB = Value of new business, Both = Both value of existing and new business, AV = appraisal value and N = not disclosed 5) We have used the same terminology to describe the product groupings as used by each particular AWM. Readers should refer to the AWM for details of the business included in each product group.