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Time for a new direction?
Market Consistent Embedded
Value Review
Contents
Foreword	 1
Executive Summary – Time for a new direction?	 2
Strategic decisions ahead	 3
EV an anchor for value?	 4
2014 in review	 5
UK new business under pressure	 7
European low interest rate challenges	 8
Methodology still not aligned to SII	 9
Appendix 1: Methodology & Assumptions	 10
Appendix 2: Disclosed sensitivities	 13
Contacts	 14
Foreword
On 1 January 2016, Solvency II will come into force within
the EU. In addition to changing the way that insurers
measure their solvency, the regime introduces significant
new disclosure requirements. Successfully managing this
transition will be challenging, but presents an opportunity
for insurers to redefine how their business is valued.
The reported values of a number of the big European
insurers were hit by falls in interest rates. Expansion of
the stimulus measures announced by the ECB in light of
prolonged anaemic growth and the threat of deflation
could cause further falls, creating downward pressure on
the value of insurers.
In the UK, we have seen a significant shift in new business
mix, as insurers adapt to the 2014 Budget announcement
removing compulsory annuitisation, and the biggest insurer
merger for over a decade in the Aviva and Friends Life deal.
I hope you find this report useful and insightful. If you
would like to contribute to the debate or ask any questions,
please do contact me, Alan Rankine, or one of the team
listed at the end of the report.
Roger Simler
Partner, Consulting
+44 (0) 20 7303 3292
rsimler@deloitte.co.uk
The European insurance industry is in a period of transition as it
wrestles with regulatory change and significant challenges as a result
of the political and economic environment.
Our latest report on the embedded value reporting of European
insurers reviews the 2014 results and highlights the strategic choices
open to insurers about how they choose to report to market in the
future.
Time for a new direction? Market Consistent Embedded Value Review 1
Executive Summary – Time for a new direction?
Embedded value reporting – time for a new
direction?
Solvency II’s introduction is both a challenge and an
opportunity for insurers to redefine what they report to the
external market. Some firms have indicated that they will be
scaling back their EV reporting, or dropping EV as a metric
altogether – a trend that we expect to see continue.
A modified version of Solvency II “own funds” could
meet the ongoing requirement for a realistic measure
of shareholder value.  This would have the advantage of
being easily reconcilable to the Solvency II position, while
reflecting insurers’ views on regulatory issues such as
contract boundaries, the risk margin and capital tiering.
Any transition will require careful management by firms, to
ensure that there are no surprises on results day. Disclosures
are likely to diverge in the short term and, absent top-down
guidance, this will reduce comparability and take a number
of years to resolve.
Historic Price/EV ratios highlight that some measure of
shareholder value remains helpful in supporting share
prices. The Aviva/Friends Life merger demonstrated that EV
remains a useful metric, with the transaction taking place at
around Embedded Value.
UK New Business under pressure
Following the 2014 UK Budget announcement removing
compulsory annuitisation, individual annuity sales have
fallen by around half. Annuities have historically offered
insurers high margins relative to unit-linked savings
contracts that make up the majority of new business
sales by volume. There has been a move towards the bulk
annuity market in a bid to maintain margin.
The challenge of a low interest rate environment
for European insurers
Chart 1 shows the overall EV for the insurers included in
our analysis. The interest rate reductions in 2014 caused
a significant fall in value for several European insurers.
Sensitivities show large exposures to further falls remain
– an exposure that may be mirrored in their Solvency II
balance sheets. We expect this to be an area of focus for
insurers, reflecting the possibility of further reductions in
Eurozone interest rates.
Limited methodology convergence with Solvency II
Despite increased certainty around Solvency II, there is
only limited evidence that insurers are aligning their EV
methodology with the concepts underlying Solvency II.
A lack of alignment increases the likelihood of large value
adjustments on the move to Solvency II.
Chart 1. Reported EV (£bn)
Source: Company disclosures, converted to £
Rest of world
Continental Europe
UK
0
5
10
15
20
25
30
35
40
45
PhoenixOld
Mutual
AgeasFriends
Life
Standard
Life
Swiss LifeLegal &
General
Munich
Re
ZIGCNPAvivaGeneraliAllianzPrudentialAxa
Year
Company
2014
2013
2012
Any transition
will require
careful
management
by firms, to
ensure that
there are no
surprises on
results day.
2
Strategic decisions ahead
Insurers face a strategic choice as to what
supplementary reporting they produce in future
Solvency II introduces enhanced disclosures and a “market
consistent” regulatory basis. Does this eliminate the need
for an additional measure of shareholder value? We
carried out a short survey to test insurers’ expectations for
reporting in FY15.
As can be seen from Chart 2, the majority of companies
intend to continue to report EV at the end of 2015.
However, Chart 3 shows that there is a significant split on
the basis that will be used and the extent of alignment to
Solvency II.
In particular, whilst 50% of firms surveyed intend to
continue with the current approach, 38% are assessing a
combination approach. This is likely to involve the economic
profit derived from the SII balance sheet being adjusted for
certain items or the existing embedded value method being
used but with the required capital aligned to SII.
Some aspects of EV reporting, such as new business value,
sensitivities and projected runoff profiles will continue to be
useful and we would expect firms to continue to disclose
this information in one form or another.
The EEV and MCEV Principles have only ever brought a
limited level of consistency to supplementary reporting. We
believe that there is likely to be further divergence between
the disclosure approach taken by companies, at least in the
short term, which, absent top-down guidance, will reduce
comparability and take a number of years to resolve.
Whatever approach is adopted by firms, and Chart 4 sets
out some of the key considerations we see for companies in
making this choice, it will be critical for them to ensure that
the accompanying messaging is clear and understandable.
Failure to effectively communicate why the stated economic
value of the company is “right” in an effective manner could
undermine value.
Retain Embedded Value
Positives Negatives
Continuity Increased workload
Comparability Unclear meaning under SII
Anchor for bridge Requirement to explain differences
Useful supplementary information Non-core metric
Chart 4. Issues to consider in retaining EV
Source: Deloitte analysis
Chart 2. Will you report EV results in 2015?
64%
18%
18%
Yes
Source: Deloitte survey
No
Not public/not yet confirmed
Chart 3. If yes, what basis will be used?
50%
12%
38%
Current adopted approach
Source: Deloitte survey
Full SII consistent approach
Combination
Time for a new direction? Market Consistent Embedded Value Review 3
EV an anchor for value?
After a number of years where transactions
were concluded at 70-80% of EV, more recent
transactions have taken place closer to, or above,
EV. This was the case with the Friends Life/Aviva
transaction.
The value placed on a company by investors or purchasers
reflects a wide range of factors. It is important to
understand why this differs from the published values.
In 2015 we anticipate that EV will continue to provide
a good starting point for assessing value. With the
implementation of Solvency II in 2016 we would expect
estimated embedded values to be derived from the SII
own funds plus part of the risk margin, adjusted to allow
for extra items of value, where companies choose not to
publish EV. Adjustments are likely to be made in respect of
contract boundaries, capital tiering rules and the impact
of transitionals. After a few “benchmark deals”, those
adjustments are likely to settle into some sort of consensus.
As can be seen from Chart 5, deals in the last 18 months
were typically higher than historical rates on a P/EV basis.
Chart 6 sets out the historic ratio of share price to last
reported EV for a range of insurers. This ratio has been
volatile historically but is currently over 100% in aggregate.
Target Company/Acquirer
Date
of sale
Price as a % of
MCEV/EEV
Friends Life/Aviva Apr-15 100%
Ageas Protect/AIG Dec-14 149%
Just Retirement – IPO Nov-13 51%
Partnership – IPO Jun-13 105%
Irish Life/Canada Life Feb-13 72%
Guardian Life Assurance/
Cinven
Aug-11 85%
Save & Prosper Insurance/
Chesnara PLC
Dec-10 69%
Bupa health insurance/
Resolution
Oct-10 79%
Axa/Resolution Jun-10 79%
Friends Provident/
Resolution
Aug-09 61%
Pearl Group/Liberty
International
Jun-09 52%
Abbey Life/Deutsche Bank Jun-09 104%
Chart 5. Historic transaction P/EV
Source: Deloitte analysis
80%
Chart 6. Historic P/EV
Source: Bloomberg, reported results, Deloitte analysis
Companies included: UK – Prudential, L&G, Aviva, Standard Life; Europe – Allianz, Axa, Generali
UK only
31/12/2010 31/12/2011 31/12/2012 31/12/201328/06/2013 31/12/201430/06/2014
EU only
75%
71%
70%
72%
110%
104%
97%
106%
122%
111%
109%
118%
126%
108%
108%
118%
97%
97%
119%
97%
102%
92%
88%
99%
75%
UK P/EV on previous reported EV UK P/EV on new reported EV
EU P/EV on previous reported EV EU P/EV on new reported EV
4
2014 in review
The aggregate embedded value in GBP of all the
companies in our analysis is broadly unchanged
over 2014 at £202bn, with expected profits and
new business offset by non-operating losses
(Chart 7).
Chart 8 shows that Axa, Prudential and Allianz remain
the largest companies by embedded value (in GBP terms),
with a significant proportion of the value in these insurers
attributable to markets outside of Continental Europe and
the UK.
This is reflected in the split of the value of new business
shown in Chart 9 (overleaf), where the majority of value
attributable to new business written in the year for Axa,
Prudential and Allianz is related to these markets.
The relatively small aggregate impact of operating
experience variance and assumption changes seen in
Chart 7 mask some material profits and losses at an
individual company level.
The strengthening of Sterling against the Euro is reflected
in the closing adjustments in Chart 7, as are any
dividends paid.
Chart 7. Aggregate Analysis of Change (£bn)
Source: Company disclosures, Deloitte analysis
180
185
190
195
200
205
210
215
220
225
230
Closing
Closingadjustments
Non-operatingprofit
Operatingvariance
(includingassumption)
ExpectedIFprofit
Newbusiness
Restatements/
Adjustments
Opening
205 1
10
11
2 11
16
202
Chart 8. EV by territory (£bn)
Source: Company disclosures, converted to £
Rest of world
Continental Europe
UK
0
10
20
30
40
50
PhoenixOld
Mutual
AgeasFriends
Life
Standard
Life
Swiss LifeLegal &
General
Munich
Re
ZIGCNPAvivaGeneraliAllianzPrudentialAxa
Year
Company
2014
2013
2012
Time for a new direction? Market Consistent Embedded Value Review 5
Chart 9. New Business Value by territory (£m)
Source: Company disclosures, converted to £
Rest of world
Continental Europe
UK
-500
0
500
1,000
1,500
2,000
2,500
BaloiseAgeasFriends
Life
Old
Mutual
Swiss LifeStandard
Life
CNPMunich
Re
ZIGLegal &
General
AvivaGeneraliAllianzAxaPrudential
Year
Company
2014
2013
2012
2014 in review
6
UK new business under pressure
UK insurers face pressure to maintain margins
following fundamental changes to the annuity
market announced in 2014 UK Budget
Greater freedom for retirees has led to significant falls in
individual annuity sales and this is reflected in the reduction
in new business value and margin for Friends Life and
Standard Life in particular, as shown in Chart 10.
Some insurers, in particular Legal & General and Prudential,
have increased their presence in the bulk annuity market
to offset this fall (see Charts 11 and 12) and, in the case of
Legal & General, this more than offsets the loss in margins
from the reduction in individual annuities.
As annuities were historically relatively high margin,
we have seen a reduction in overall margins, as a
greater proportion of sales are now in low margin
accumulation products.
The sustainability of bulk annuities as a source of continued
profits depends on the continued appetite for the risks,
as well as the desire of defined benefit pension schemes
to de-risk.
We expect annuity volumes to be more volatile going
forward, as there is heavy dependence on a small number
of large deals.
The rise in Axa’s UK new business margin is mainly the
result of expense savings.
Company
% change in
Value of NB
% change in
NB volumes
% change in
NB margin
Friends Life -25% -4% -23%
Standard Life -11% -9% -2%
Prudential 14% 25% -9%
ZIG 30% 71% -24%
Aviva 15% 33% -13%
Legal & General 39% 17% 18%
Axa 43% -10% 58%
Chart 10. Change in new business metrics for companies selling new business in the UK
Source: Company disclosures, Deloitte analysis
Chart 11. Percentage change in annuity sales
Source: Company disclosures*, Deloitte analysis
-57%
-15%
-49%
-54%
114%
511%
Legal & General
Prudential
Friends Life
Standard Life
IndividualBulk
Chart 12. Individual and Bulk annuity sales 2013 and 2014
Source: Company disclosures*
*Standard Life “spread and risk” category taken to be individual annuities
Individual annuities 2014 Individual annuities 2013 Bulk annuities 2014 Bulk annuities 2013
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Standard LifeFriends LifePrudentialLegal & General
Time for a new direction? Market Consistent Embedded Value Review 7
European low interest rate challenges
Continental European insurers have suffered
significant losses as a result of falls in interest rates
European swap curves have reduced dramatically over the
year as can be seen in Chart 13.
This has led to large negative economic variances for a
number of the bigger continental European insurers –
particularly Allianz, Axa, Generali and Munich Re, which all
show negative variances this year compared to positives in
2013 (Chart 14).
Sensitivity analysis released by the companies (see Chart 15)
demonstrates that there remains a significant exposure to
further falls in the risk-free rate, with double digit falls in EV
still possible should risk free rates fall further.
Solvency II is based on similar underlying yield curves, so
these behaviours and exposures are expected to remain
in 2016 and onwards. We expect insurers with such an
exposure to take steps to ensure that the risks are well
understood and, where appropriate, mitigated.
Continued loose monetary policy from the ECB in the face
of anaemic growth and the potential of deflation could
provide further downward pressure to rates and raises the
prospect of a continuation of low interest rates. Similarly,
Switzerland has already seen negative interest rates.
UK companies generally saw more limited economic
variances, despite similar falls in yield curves.
2014 2013
Ageas 6% 23%
Swiss Life 5% 0%
ZIG 2% 3%
CNP -3% 5%
Munich Re -7% 6%
Generali -7% 9%
Axa -8% 10%
Allianz -19% 8%
Chart 14. Economic variances as a percentage of
opening EV
Source: Company disclosures, Deloitte analysis
2014 2013
Risk free rate Risk free rate
Company +100bps -100bps +100bps -100bps
Axa 4% -10% 3% -8%
Allianz 8%* -12%* 3% -8%
CNP 3% -7% -3% 0%
Ageas 0% -1% 2% -5%
Generali 7% -16% 3% -6%
Munich Re 6% -16% 5% -8%
Swiss Life 5% -10% 4% -7%
ZIG 0% -1% -2% 2%
Chart 15. Reported EV sensitivities to change in risk free rate
*2014 risk free rate sensitivities for Allianz were for a fall/rise of 50bps, reflective of low interest rate environment
Source: Company disclosures
Chart 13. Eurozone swap curves
Source: Bloomberg, Deloitte analysis
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
31 December 2013 31 December 2014
8
Methodology still not aligned to SII
There has been a limited move towards consistency
with Solvency II in the underlying methodologies
Last year, we noted an expectation that companies would
continue to move their methodologies towards “Solvency
II consistent” bases. Despite greater certainty around the
Solvency II regulations, this move has not occurred, other
than:
•	for Allianz and Ageas, the illiquidity premium is now
based on the SII volatility adjustment where possible;
and
•	for Allianz, the credit deduction to base swap curve
has been aligned to SII.
Charts 16 and 17 show that there continues to be a wide
variety of illiquidity premiums and approaches reported,
particularly for sterling denominated liabilities. It remains
to be seen whether such differences will persist in the
matching adjustment under Solvency II. The simple
mechanistic approach proposed by the CFO/CRO forum
and adopted by a number of insurers is unlikely to be
acceptable as a basis for the matching adjustment in the
UK, particularly when trying to describe the behaviour
under stress.
Further convergence remains a possibility, but will depend
on the extent to which firms continue to produce EV
supplementary information. Chart 18 compares some
of the key assumption differences between MCEV and
Solvency II. Non-convergence increases the likelihood
of material impacts once the move to SII is complete,
particularly where EEV principles are still adopted.
EUR USD GBP CHF
Min 13bps 47bps 36bps 0bps
Median 19bps 56bps 66bps 0bps
Max 24bps 63bps 109bps 28bps
Chart 17. Range of illiquidity premiums
Source: Company disclosures, Deloitte analysis
Basis item MCEV Methodology SII Methodology Expected impact
Non-economic assumptions Best-estimate Best-estimate Neutral
Base curve Swaps Swaps Neutral
Credit deduction Varies – often 0bps or 10bps 10bps – 35bps Negative
Liquidity premium CFO/CRO Forum Volatiliy adjustment
Matching adjustment
VA: Negative
MA: Unknown
Volatilities Market consistent Market consistent Neutral
Cost of capital CNHR – typically 3-5% of projected risks, but varies 6% diversified non‑hedgeable risk Likely negative
Contract boundaries No restrictions within single contract Restrictions vary by product type Negative
Chart 18. Comparison of key methodologies
Source: Deloitte analysis
There continues
to be a
wide variety
of liquidity
premiums and
approaches
reported,
particularly
for sterling
denominated
liabilities.
Chart 16. Liquidity premium approach
54%
15%
31%
CRO/CFO Forum
Source: Company disclosures
SII Volatility adjustment
Other/not disclosed
Time for a new direction? Market Consistent Embedded Value Review 9
Appendix 1: Methodology & Assumptions
Company Methodology
Implied
Discount
Rate (IDR)
Reference
Rates
Illiquidity Premiums
(Methodology)
Illiquidity
Premiums
(Value) Volatilities CNHR
Ageas EEV (Market
Consistent)
Not disclosed Swap rates less
10bps
EIOPA released volatility
adjustment, for EUR
denominated business
CFO/CRO Forum and
QIS 5 illiquidity formula
for other business*
•	 EUR: 19bps
•	 HKD: 35bps
•	 USD: 47bps
Implied
volatility, except
for property
volatilities where
historic market
data is used
0.5% post-tax
capital charge
applied to
projected total
required equity
Allianz MCEV Not disclosed Swap rates
less credit risk
adjustment
(10bps for EUR,
12bps for USD,
11bps for CHF,
19bps for GBP)
Solvency II volatility
adjustment – applied
to all products
other than UL and
variable annuities
(no adjustment) and
“matching adjustment”
eligible products
Term dependent
•	 EUR: 13bps
•	 CHF: 28bps
•	 USD: 50bps
•	 CZK, HUF, PLN,
THB: 4-28bps
Implied
volatility, except
for property
volatilities where
best estimate
levels are used
(8% for CHF, 15%
for EUR, USD)
3.25% capital
charge applied
to risk capital
Aviva MCEV 5.5% Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
100% applied to
immediate annuities,
bulk purchase annuities
and certain Spanish
products
75% applied to
participating contracts
and deferred annuities
•	 GBP imm
annuities: 109bps
•	 GBP def
annuities: 82bps
•	 France, Ireland,
Spain annuities:
19bps
•	 France,
Ireland, Spain
participating:
15bps
Implied
volatility, except
for property
volatilities where
best estimate
levels are used
(15% for UK, 13%
for other markets)
3.2% capital
charge applied to
group-diversified
capital
Axa EEV
(Market
Consistent)
6.6% Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
•	 EUR: 20bps
•	 GBP: 53bps
•	 USD: 61bps
•	 JPY: 0bps
•	 CHF: 0bp
•	 HKD: 61bps
Implied volatility Allowance for
non-financial
risk assuming a
higher locked‑in
capital base
(corresponding
to a solvency
coverage ratio
of 1.5 times the
minimum solvency
coverage ratio)
Baloise
Group
MCEV Not disclosed Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
•	 EUR: 18bps
•	 CHF: 0bps
Implied
volatility, except
for property
volatilities where
historic market
data is used
4.0% capital
charge applied
to risk capital
CNP MCEV (except
Caixa Seguros
– TEV)
6.0% Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
•	 EUR: 18bps
(2/3 applied
to UL and
protection)
Implied
volatilities, except
for property
where it is
fixed 15%
5% capital charge
applied to risk
capital (equivalent
to 2.5% charge
on capital)
10
Company Methodology
Implied
Discount
Rate (IDR)
Reference
Rates
Illiquidity Premiums
(Methodology)
Illiquidity
Premiums
(Value) Volatilities CNHR
Friends Life MCEV Not disclosed Swap rates, long
term assumption
of 1.9%
Two approaches used:
•	 a component of the
difference between
the spread on a
corporate bonds and
a credit default swap;
and
•	 use of option
pricing techniques
to decompose the
spread into its
components including
illiquidity premium
UK annuity: 70bps Implied
volatility, except
for property
volatilities where
initial volatility
of 13.1% and a
running yield of
4.3% is used
Capital charge
of 1.0% on
projected Group
required capital
Generali MCEV 3.6% Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
•	 EUR: 19bps
•	 CHF: 0bps
•	 GBP: 61bps
•	 CZK: 7bps
Implied
volatility, except
for property
volatilities where
historic market
data is used
4% capital
charge applied
to relevant risk
capital
Legal &
General
EEV Not applicable UK RDR
= 5.5%
USA RDR
= 5.5%
Europe RDR =
3.9%
Not applicable Not applicable Not specifically
disclosed
Not applicable
Munich Re MCEV Not disclosed Swap rates Not applied Not applicable Implied volatilities 7% capital
charge applied
to economic risk
capital for non-
hedgeable risks
Old Mutual MCEV Not disclosed Swap rates •	 South African
Immediate Annuity
business and Fixed
Bond business:
Illiquidity premium
adjustments reflect
the illiquidity
premium component
in non-government
bond spreads over
swap rates
•	 All other business:
No adjustments are
made to swap yields
to allow for illiquidity
premiums or credit
risk premiums
55bps of illiquidity
premium for South
African Immediate
Annuity business
and 50bps for
South African Fixed
Bond business
Implied volatility
for deep and
liquid market
Historic data and
expert judgment
elsewhere
2.0% capital
charge applied to
Group diversified
capital
Phoenix MCEV Not disclosed Gilt yield plus
10bps
Reference to the bond
yield allowing for credit
risk deductions
36bps Implied
volatility, except
for property
volatilities where
best estimate
levels are used
No charge
Time for a new direction? Market Consistent Embedded Value Review 11
Company Methodology
Implied
Discount
Rate (IDR)
Reference
Rates
Illiquidity Premiums
(Methodology)
Illiquidity
Premiums
(Value) Volatilities CNHR
Prudential EEV Not
applicable
Weighted RDR:
•	 6.6% (Asia)
•	 6.2% (US)
•	 5.9% (UK,
non-annuities)
•	 6.9%
(UK, annuities)
Top down UK annuity: 85bps Best estimates Allowed as a
margin in the
discount rate.
Defined as:
•	 100 bps for
UK annuity
business
•	 50 bps for
Group’s other
business
•	 additional 100
to 250 bps for
Group’s Asian
operations
Standard
Life
EEV Not
applicable
RDR = risk free
government
bond yield
+ a risk margin:
•	 5.66% (UK
Heritage WPF)
•	 4.46%
(UK other)
•	 6.53%
(Canada)
•	 2.44% (Europe
Heritage WPF)
•	 2.04%
(Europe other)
•	 4.89%
(Hong Kong)
•	 4.66%
(Standard Life
International
Limited)
Not applicable Not applicable Implied
volatility, except
for property
volatilities where
historic market
data is used
Allowed as a
margin in the
discount rate
Breakdown
per business
not available
since margin
not divided into
market and
non‑market risk
as in previous
years
Swiss Life MCEV Not disclosed Swap rates CFO/CRO Forum
and QIS 5 illiquidity
formula*, with different
bucketing:
•	 0% for PPLI, unit-
linked and variable
annuities business.
•	 50% for health
insurance and
assumed external
reinsurance
•	 75% for all
participating and
other business,
including traditional
annuities
•	 EUR: 24bps
•	 USD: 63bps
•	 CHF: 20bps
Implied
volatility, except
for property
volatilities where
historic market
data is used
4% capital charge
applied to capital
at risk
ZIG MCEV Not disclosed Swap rates CFO/CRO Forum and
QIS 5 illiquidity formula*
100% annuities, 75%
participating features,
universal life contracts
and US fixed interest
annuities
Not disclosed Implied
volatility, except
for property
volatilities where
historic market
data is used
4% capital
charge applied to
diversified non-
hedgeable risk
based capital
*CFO/CRO Forum and QIS 5 illiquidity formula: LP currency = MAX (0, x% × (Spread – y bps))
where x = 50% and y = 40bps		
Liabilities are classified in four buckets, dependent on their nature. Different proportions of the LP are applied (100%, 75%, 50% and 0%)
12
Appendix 2: Disclosed sensitivities
2014 2013 2014 2013
Illiquidity Premium Illiquidity Premium Risk free rate Risk free rate
Company
10bp
increase to
reference
rates
Remove
premium
10bp
increase to
reference
rates
Remove
premium +100bps -100bps +100bps -100bps
Axa 2% -6% 1% -5% 4% -10% 3% -8%
Allianz – – – – 8%* -12%* 3% -8%
Aviva 3% – 2% – -2% -2% -2% 0%
CNP 1% – 0% – 3% -7% -3% 0%
Ageas 2% -5% 2% -5% 0% -1% 2% -5%
Generali 5% -5% 2% -5% 7% -16% 3% -6%
Legal  General – – – – -7% 9% -7% 8%
Munich Re 3% – 2% – 6% -16% 5% -8%
Old Mutual 0% – 0% – -1% 1% -2% 2%
Phoenix – – – – -2% 2% 0% 0%
Prudential 1% – 1% – -4% 2% -3% 3%
Friends Life – -16% – -10% -1% 1% 0% 0%
Standard Life – – – – -7% 9% -7% 9%
Swiss Life – – – – 5% -10% 4% -7%
ZIG – – – – 0% -1% -2% 2%
*2014 risk free rate sensitivities for Allianz were for a fall/rise of 50bps, reflective of low interest rate environment
2014 2013 2014 2013
Equity/Property values Equity/Property values Volatilities Volatilities
Company – 10 % – 10 %
Equity
option +25%
Swaption
+25%
Equity
option +25%
Swaption
+25%
Axa -5% -5% -2% -4% -1% -2%
Allianz -3% -3% -4% -4% -2% -2%
Aviva -4% -4% -2% -2% -2% -1%
CNP -6% -4% -3% -2% -1% -2%
Ageas -5% -5% -1% -2% 0% -2%
Generali -7% -6% -2% -3% -1% -2%
Legal  General -3% -3% – – – –
Munich Re -1% -1% -1% -2% -1% 1%
Old Mutual -3% -4% -2% 0% -1% 0%
Phoenix -3% -3% 0% 0% 0% 0%
Prudential -3% -2% – – – –
Friends Life -5% -5% -1% 0% -1% 0%
Standard Life -6% -6% – – – –
Swiss Life -7% -7% -3% -1%* -3% 2%
ZIG -3% -2% -1% -1% -1% -1%
*Swiss Life report a sensitivity to a 10% increase in swaption volatilities
Time for a new direction? Market Consistent Embedded Value Review 13
For more information please contact
Contacts
For further information, visit our website at www.deloitte.com
UK
Richard Baddon
+44 (0) 20 7303 5570
rbaddon@deloitte.co.uk
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dhare@deloitte.co.uk
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+44 (0) 20 7303 3292
rsimler@deloitte.co.uk
Andrew Smith
+44 (0) 20 7303 5844
andrewdsmith8@deloitte.co.uk
Alan Rankine – Author
+44 (0) 131 535 7078
arankine@deloitte.co.uk
Australia
Caroline Bennet
+61 (03) 9671 6572
cbennet@deloitte.com.au
Austria
Daniel Thompson
+43 15 3700 5474
danthompson@bw-deloitte.de
Belgium
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adegroote@deloitte.com
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Italy
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US
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jamorton@deloitte.com
South Africa
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cvanderriet@deloitte.co.za
Hong Kong
Simon Walpole
+852 2238 7229
siwalpole@deloitte.com.hk
14
Notes
Time for a new direction? Market Consistent Embedded Value Review 15
Notes
16
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its
network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a
detailed description of the legal structure of DTTL and its member firms.
Deloitte MCS Limited is a subsidiary of Deloitte LLP, the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the
principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice
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readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte MCS Limited accepts no duty
of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
© 2015 Deloitte MCS Limited. All rights reserved.
Registered office: Hill House, 1 Little New Street, London EC4A 3TR, United Kingdom. Registered in England No 3311052.
Designed and produced by The Creative Studio at Deloitte, London. 43991A

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Informe Deloitte. Time for a new direction? Market Consistent Embedded Value Review

  • 1. Time for a new direction? Market Consistent Embedded Value Review
  • 2. Contents Foreword 1 Executive Summary – Time for a new direction? 2 Strategic decisions ahead 3 EV an anchor for value? 4 2014 in review 5 UK new business under pressure 7 European low interest rate challenges 8 Methodology still not aligned to SII 9 Appendix 1: Methodology & Assumptions 10 Appendix 2: Disclosed sensitivities 13 Contacts 14
  • 3. Foreword On 1 January 2016, Solvency II will come into force within the EU. In addition to changing the way that insurers measure their solvency, the regime introduces significant new disclosure requirements. Successfully managing this transition will be challenging, but presents an opportunity for insurers to redefine how their business is valued. The reported values of a number of the big European insurers were hit by falls in interest rates. Expansion of the stimulus measures announced by the ECB in light of prolonged anaemic growth and the threat of deflation could cause further falls, creating downward pressure on the value of insurers. In the UK, we have seen a significant shift in new business mix, as insurers adapt to the 2014 Budget announcement removing compulsory annuitisation, and the biggest insurer merger for over a decade in the Aviva and Friends Life deal. I hope you find this report useful and insightful. If you would like to contribute to the debate or ask any questions, please do contact me, Alan Rankine, or one of the team listed at the end of the report. Roger Simler Partner, Consulting +44 (0) 20 7303 3292 rsimler@deloitte.co.uk The European insurance industry is in a period of transition as it wrestles with regulatory change and significant challenges as a result of the political and economic environment. Our latest report on the embedded value reporting of European insurers reviews the 2014 results and highlights the strategic choices open to insurers about how they choose to report to market in the future. Time for a new direction? Market Consistent Embedded Value Review 1
  • 4. Executive Summary – Time for a new direction? Embedded value reporting – time for a new direction? Solvency II’s introduction is both a challenge and an opportunity for insurers to redefine what they report to the external market. Some firms have indicated that they will be scaling back their EV reporting, or dropping EV as a metric altogether – a trend that we expect to see continue. A modified version of Solvency II “own funds” could meet the ongoing requirement for a realistic measure of shareholder value.  This would have the advantage of being easily reconcilable to the Solvency II position, while reflecting insurers’ views on regulatory issues such as contract boundaries, the risk margin and capital tiering. Any transition will require careful management by firms, to ensure that there are no surprises on results day. Disclosures are likely to diverge in the short term and, absent top-down guidance, this will reduce comparability and take a number of years to resolve. Historic Price/EV ratios highlight that some measure of shareholder value remains helpful in supporting share prices. The Aviva/Friends Life merger demonstrated that EV remains a useful metric, with the transaction taking place at around Embedded Value. UK New Business under pressure Following the 2014 UK Budget announcement removing compulsory annuitisation, individual annuity sales have fallen by around half. Annuities have historically offered insurers high margins relative to unit-linked savings contracts that make up the majority of new business sales by volume. There has been a move towards the bulk annuity market in a bid to maintain margin. The challenge of a low interest rate environment for European insurers Chart 1 shows the overall EV for the insurers included in our analysis. The interest rate reductions in 2014 caused a significant fall in value for several European insurers. Sensitivities show large exposures to further falls remain – an exposure that may be mirrored in their Solvency II balance sheets. We expect this to be an area of focus for insurers, reflecting the possibility of further reductions in Eurozone interest rates. Limited methodology convergence with Solvency II Despite increased certainty around Solvency II, there is only limited evidence that insurers are aligning their EV methodology with the concepts underlying Solvency II. A lack of alignment increases the likelihood of large value adjustments on the move to Solvency II. Chart 1. Reported EV (£bn) Source: Company disclosures, converted to £ Rest of world Continental Europe UK 0 5 10 15 20 25 30 35 40 45 PhoenixOld Mutual AgeasFriends Life Standard Life Swiss LifeLegal & General Munich Re ZIGCNPAvivaGeneraliAllianzPrudentialAxa Year Company 2014 2013 2012 Any transition will require careful management by firms, to ensure that there are no surprises on results day. 2
  • 5. Strategic decisions ahead Insurers face a strategic choice as to what supplementary reporting they produce in future Solvency II introduces enhanced disclosures and a “market consistent” regulatory basis. Does this eliminate the need for an additional measure of shareholder value? We carried out a short survey to test insurers’ expectations for reporting in FY15. As can be seen from Chart 2, the majority of companies intend to continue to report EV at the end of 2015. However, Chart 3 shows that there is a significant split on the basis that will be used and the extent of alignment to Solvency II. In particular, whilst 50% of firms surveyed intend to continue with the current approach, 38% are assessing a combination approach. This is likely to involve the economic profit derived from the SII balance sheet being adjusted for certain items or the existing embedded value method being used but with the required capital aligned to SII. Some aspects of EV reporting, such as new business value, sensitivities and projected runoff profiles will continue to be useful and we would expect firms to continue to disclose this information in one form or another. The EEV and MCEV Principles have only ever brought a limited level of consistency to supplementary reporting. We believe that there is likely to be further divergence between the disclosure approach taken by companies, at least in the short term, which, absent top-down guidance, will reduce comparability and take a number of years to resolve. Whatever approach is adopted by firms, and Chart 4 sets out some of the key considerations we see for companies in making this choice, it will be critical for them to ensure that the accompanying messaging is clear and understandable. Failure to effectively communicate why the stated economic value of the company is “right” in an effective manner could undermine value. Retain Embedded Value Positives Negatives Continuity Increased workload Comparability Unclear meaning under SII Anchor for bridge Requirement to explain differences Useful supplementary information Non-core metric Chart 4. Issues to consider in retaining EV Source: Deloitte analysis Chart 2. Will you report EV results in 2015? 64% 18% 18% Yes Source: Deloitte survey No Not public/not yet confirmed Chart 3. If yes, what basis will be used? 50% 12% 38% Current adopted approach Source: Deloitte survey Full SII consistent approach Combination Time for a new direction? Market Consistent Embedded Value Review 3
  • 6. EV an anchor for value? After a number of years where transactions were concluded at 70-80% of EV, more recent transactions have taken place closer to, or above, EV. This was the case with the Friends Life/Aviva transaction. The value placed on a company by investors or purchasers reflects a wide range of factors. It is important to understand why this differs from the published values. In 2015 we anticipate that EV will continue to provide a good starting point for assessing value. With the implementation of Solvency II in 2016 we would expect estimated embedded values to be derived from the SII own funds plus part of the risk margin, adjusted to allow for extra items of value, where companies choose not to publish EV. Adjustments are likely to be made in respect of contract boundaries, capital tiering rules and the impact of transitionals. After a few “benchmark deals”, those adjustments are likely to settle into some sort of consensus. As can be seen from Chart 5, deals in the last 18 months were typically higher than historical rates on a P/EV basis. Chart 6 sets out the historic ratio of share price to last reported EV for a range of insurers. This ratio has been volatile historically but is currently over 100% in aggregate. Target Company/Acquirer Date of sale Price as a % of MCEV/EEV Friends Life/Aviva Apr-15 100% Ageas Protect/AIG Dec-14 149% Just Retirement – IPO Nov-13 51% Partnership – IPO Jun-13 105% Irish Life/Canada Life Feb-13 72% Guardian Life Assurance/ Cinven Aug-11 85% Save & Prosper Insurance/ Chesnara PLC Dec-10 69% Bupa health insurance/ Resolution Oct-10 79% Axa/Resolution Jun-10 79% Friends Provident/ Resolution Aug-09 61% Pearl Group/Liberty International Jun-09 52% Abbey Life/Deutsche Bank Jun-09 104% Chart 5. Historic transaction P/EV Source: Deloitte analysis 80% Chart 6. Historic P/EV Source: Bloomberg, reported results, Deloitte analysis Companies included: UK – Prudential, L&G, Aviva, Standard Life; Europe – Allianz, Axa, Generali UK only 31/12/2010 31/12/2011 31/12/2012 31/12/201328/06/2013 31/12/201430/06/2014 EU only 75% 71% 70% 72% 110% 104% 97% 106% 122% 111% 109% 118% 126% 108% 108% 118% 97% 97% 119% 97% 102% 92% 88% 99% 75% UK P/EV on previous reported EV UK P/EV on new reported EV EU P/EV on previous reported EV EU P/EV on new reported EV 4
  • 7. 2014 in review The aggregate embedded value in GBP of all the companies in our analysis is broadly unchanged over 2014 at £202bn, with expected profits and new business offset by non-operating losses (Chart 7). Chart 8 shows that Axa, Prudential and Allianz remain the largest companies by embedded value (in GBP terms), with a significant proportion of the value in these insurers attributable to markets outside of Continental Europe and the UK. This is reflected in the split of the value of new business shown in Chart 9 (overleaf), where the majority of value attributable to new business written in the year for Axa, Prudential and Allianz is related to these markets. The relatively small aggregate impact of operating experience variance and assumption changes seen in Chart 7 mask some material profits and losses at an individual company level. The strengthening of Sterling against the Euro is reflected in the closing adjustments in Chart 7, as are any dividends paid. Chart 7. Aggregate Analysis of Change (£bn) Source: Company disclosures, Deloitte analysis 180 185 190 195 200 205 210 215 220 225 230 Closing Closingadjustments Non-operatingprofit Operatingvariance (includingassumption) ExpectedIFprofit Newbusiness Restatements/ Adjustments Opening 205 1 10 11 2 11 16 202 Chart 8. EV by territory (£bn) Source: Company disclosures, converted to £ Rest of world Continental Europe UK 0 10 20 30 40 50 PhoenixOld Mutual AgeasFriends Life Standard Life Swiss LifeLegal & General Munich Re ZIGCNPAvivaGeneraliAllianzPrudentialAxa Year Company 2014 2013 2012 Time for a new direction? Market Consistent Embedded Value Review 5
  • 8. Chart 9. New Business Value by territory (£m) Source: Company disclosures, converted to £ Rest of world Continental Europe UK -500 0 500 1,000 1,500 2,000 2,500 BaloiseAgeasFriends Life Old Mutual Swiss LifeStandard Life CNPMunich Re ZIGLegal & General AvivaGeneraliAllianzAxaPrudential Year Company 2014 2013 2012 2014 in review 6
  • 9. UK new business under pressure UK insurers face pressure to maintain margins following fundamental changes to the annuity market announced in 2014 UK Budget Greater freedom for retirees has led to significant falls in individual annuity sales and this is reflected in the reduction in new business value and margin for Friends Life and Standard Life in particular, as shown in Chart 10. Some insurers, in particular Legal & General and Prudential, have increased their presence in the bulk annuity market to offset this fall (see Charts 11 and 12) and, in the case of Legal & General, this more than offsets the loss in margins from the reduction in individual annuities. As annuities were historically relatively high margin, we have seen a reduction in overall margins, as a greater proportion of sales are now in low margin accumulation products. The sustainability of bulk annuities as a source of continued profits depends on the continued appetite for the risks, as well as the desire of defined benefit pension schemes to de-risk. We expect annuity volumes to be more volatile going forward, as there is heavy dependence on a small number of large deals. The rise in Axa’s UK new business margin is mainly the result of expense savings. Company % change in Value of NB % change in NB volumes % change in NB margin Friends Life -25% -4% -23% Standard Life -11% -9% -2% Prudential 14% 25% -9% ZIG 30% 71% -24% Aviva 15% 33% -13% Legal & General 39% 17% 18% Axa 43% -10% 58% Chart 10. Change in new business metrics for companies selling new business in the UK Source: Company disclosures, Deloitte analysis Chart 11. Percentage change in annuity sales Source: Company disclosures*, Deloitte analysis -57% -15% -49% -54% 114% 511% Legal & General Prudential Friends Life Standard Life IndividualBulk Chart 12. Individual and Bulk annuity sales 2013 and 2014 Source: Company disclosures* *Standard Life “spread and risk” category taken to be individual annuities Individual annuities 2014 Individual annuities 2013 Bulk annuities 2014 Bulk annuities 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Standard LifeFriends LifePrudentialLegal & General Time for a new direction? Market Consistent Embedded Value Review 7
  • 10. European low interest rate challenges Continental European insurers have suffered significant losses as a result of falls in interest rates European swap curves have reduced dramatically over the year as can be seen in Chart 13. This has led to large negative economic variances for a number of the bigger continental European insurers – particularly Allianz, Axa, Generali and Munich Re, which all show negative variances this year compared to positives in 2013 (Chart 14). Sensitivity analysis released by the companies (see Chart 15) demonstrates that there remains a significant exposure to further falls in the risk-free rate, with double digit falls in EV still possible should risk free rates fall further. Solvency II is based on similar underlying yield curves, so these behaviours and exposures are expected to remain in 2016 and onwards. We expect insurers with such an exposure to take steps to ensure that the risks are well understood and, where appropriate, mitigated. Continued loose monetary policy from the ECB in the face of anaemic growth and the potential of deflation could provide further downward pressure to rates and raises the prospect of a continuation of low interest rates. Similarly, Switzerland has already seen negative interest rates. UK companies generally saw more limited economic variances, despite similar falls in yield curves. 2014 2013 Ageas 6% 23% Swiss Life 5% 0% ZIG 2% 3% CNP -3% 5% Munich Re -7% 6% Generali -7% 9% Axa -8% 10% Allianz -19% 8% Chart 14. Economic variances as a percentage of opening EV Source: Company disclosures, Deloitte analysis 2014 2013 Risk free rate Risk free rate Company +100bps -100bps +100bps -100bps Axa 4% -10% 3% -8% Allianz 8%* -12%* 3% -8% CNP 3% -7% -3% 0% Ageas 0% -1% 2% -5% Generali 7% -16% 3% -6% Munich Re 6% -16% 5% -8% Swiss Life 5% -10% 4% -7% ZIG 0% -1% -2% 2% Chart 15. Reported EV sensitivities to change in risk free rate *2014 risk free rate sensitivities for Allianz were for a fall/rise of 50bps, reflective of low interest rate environment Source: Company disclosures Chart 13. Eurozone swap curves Source: Bloomberg, Deloitte analysis 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 December 2013 31 December 2014 8
  • 11. Methodology still not aligned to SII There has been a limited move towards consistency with Solvency II in the underlying methodologies Last year, we noted an expectation that companies would continue to move their methodologies towards “Solvency II consistent” bases. Despite greater certainty around the Solvency II regulations, this move has not occurred, other than: • for Allianz and Ageas, the illiquidity premium is now based on the SII volatility adjustment where possible; and • for Allianz, the credit deduction to base swap curve has been aligned to SII. Charts 16 and 17 show that there continues to be a wide variety of illiquidity premiums and approaches reported, particularly for sterling denominated liabilities. It remains to be seen whether such differences will persist in the matching adjustment under Solvency II. The simple mechanistic approach proposed by the CFO/CRO forum and adopted by a number of insurers is unlikely to be acceptable as a basis for the matching adjustment in the UK, particularly when trying to describe the behaviour under stress. Further convergence remains a possibility, but will depend on the extent to which firms continue to produce EV supplementary information. Chart 18 compares some of the key assumption differences between MCEV and Solvency II. Non-convergence increases the likelihood of material impacts once the move to SII is complete, particularly where EEV principles are still adopted. EUR USD GBP CHF Min 13bps 47bps 36bps 0bps Median 19bps 56bps 66bps 0bps Max 24bps 63bps 109bps 28bps Chart 17. Range of illiquidity premiums Source: Company disclosures, Deloitte analysis Basis item MCEV Methodology SII Methodology Expected impact Non-economic assumptions Best-estimate Best-estimate Neutral Base curve Swaps Swaps Neutral Credit deduction Varies – often 0bps or 10bps 10bps – 35bps Negative Liquidity premium CFO/CRO Forum Volatiliy adjustment Matching adjustment VA: Negative MA: Unknown Volatilities Market consistent Market consistent Neutral Cost of capital CNHR – typically 3-5% of projected risks, but varies 6% diversified non‑hedgeable risk Likely negative Contract boundaries No restrictions within single contract Restrictions vary by product type Negative Chart 18. Comparison of key methodologies Source: Deloitte analysis There continues to be a wide variety of liquidity premiums and approaches reported, particularly for sterling denominated liabilities. Chart 16. Liquidity premium approach 54% 15% 31% CRO/CFO Forum Source: Company disclosures SII Volatility adjustment Other/not disclosed Time for a new direction? Market Consistent Embedded Value Review 9
  • 12. Appendix 1: Methodology & Assumptions Company Methodology Implied Discount Rate (IDR) Reference Rates Illiquidity Premiums (Methodology) Illiquidity Premiums (Value) Volatilities CNHR Ageas EEV (Market Consistent) Not disclosed Swap rates less 10bps EIOPA released volatility adjustment, for EUR denominated business CFO/CRO Forum and QIS 5 illiquidity formula for other business* • EUR: 19bps • HKD: 35bps • USD: 47bps Implied volatility, except for property volatilities where historic market data is used 0.5% post-tax capital charge applied to projected total required equity Allianz MCEV Not disclosed Swap rates less credit risk adjustment (10bps for EUR, 12bps for USD, 11bps for CHF, 19bps for GBP) Solvency II volatility adjustment – applied to all products other than UL and variable annuities (no adjustment) and “matching adjustment” eligible products Term dependent • EUR: 13bps • CHF: 28bps • USD: 50bps • CZK, HUF, PLN, THB: 4-28bps Implied volatility, except for property volatilities where best estimate levels are used (8% for CHF, 15% for EUR, USD) 3.25% capital charge applied to risk capital Aviva MCEV 5.5% Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* 100% applied to immediate annuities, bulk purchase annuities and certain Spanish products 75% applied to participating contracts and deferred annuities • GBP imm annuities: 109bps • GBP def annuities: 82bps • France, Ireland, Spain annuities: 19bps • France, Ireland, Spain participating: 15bps Implied volatility, except for property volatilities where best estimate levels are used (15% for UK, 13% for other markets) 3.2% capital charge applied to group-diversified capital Axa EEV (Market Consistent) 6.6% Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* • EUR: 20bps • GBP: 53bps • USD: 61bps • JPY: 0bps • CHF: 0bp • HKD: 61bps Implied volatility Allowance for non-financial risk assuming a higher locked‑in capital base (corresponding to a solvency coverage ratio of 1.5 times the minimum solvency coverage ratio) Baloise Group MCEV Not disclosed Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* • EUR: 18bps • CHF: 0bps Implied volatility, except for property volatilities where historic market data is used 4.0% capital charge applied to risk capital CNP MCEV (except Caixa Seguros – TEV) 6.0% Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* • EUR: 18bps (2/3 applied to UL and protection) Implied volatilities, except for property where it is fixed 15% 5% capital charge applied to risk capital (equivalent to 2.5% charge on capital) 10
  • 13. Company Methodology Implied Discount Rate (IDR) Reference Rates Illiquidity Premiums (Methodology) Illiquidity Premiums (Value) Volatilities CNHR Friends Life MCEV Not disclosed Swap rates, long term assumption of 1.9% Two approaches used: • a component of the difference between the spread on a corporate bonds and a credit default swap; and • use of option pricing techniques to decompose the spread into its components including illiquidity premium UK annuity: 70bps Implied volatility, except for property volatilities where initial volatility of 13.1% and a running yield of 4.3% is used Capital charge of 1.0% on projected Group required capital Generali MCEV 3.6% Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* • EUR: 19bps • CHF: 0bps • GBP: 61bps • CZK: 7bps Implied volatility, except for property volatilities where historic market data is used 4% capital charge applied to relevant risk capital Legal & General EEV Not applicable UK RDR = 5.5% USA RDR = 5.5% Europe RDR = 3.9% Not applicable Not applicable Not specifically disclosed Not applicable Munich Re MCEV Not disclosed Swap rates Not applied Not applicable Implied volatilities 7% capital charge applied to economic risk capital for non- hedgeable risks Old Mutual MCEV Not disclosed Swap rates • South African Immediate Annuity business and Fixed Bond business: Illiquidity premium adjustments reflect the illiquidity premium component in non-government bond spreads over swap rates • All other business: No adjustments are made to swap yields to allow for illiquidity premiums or credit risk premiums 55bps of illiquidity premium for South African Immediate Annuity business and 50bps for South African Fixed Bond business Implied volatility for deep and liquid market Historic data and expert judgment elsewhere 2.0% capital charge applied to Group diversified capital Phoenix MCEV Not disclosed Gilt yield plus 10bps Reference to the bond yield allowing for credit risk deductions 36bps Implied volatility, except for property volatilities where best estimate levels are used No charge Time for a new direction? Market Consistent Embedded Value Review 11
  • 14. Company Methodology Implied Discount Rate (IDR) Reference Rates Illiquidity Premiums (Methodology) Illiquidity Premiums (Value) Volatilities CNHR Prudential EEV Not applicable Weighted RDR: • 6.6% (Asia) • 6.2% (US) • 5.9% (UK, non-annuities) • 6.9% (UK, annuities) Top down UK annuity: 85bps Best estimates Allowed as a margin in the discount rate. Defined as: • 100 bps for UK annuity business • 50 bps for Group’s other business • additional 100 to 250 bps for Group’s Asian operations Standard Life EEV Not applicable RDR = risk free government bond yield + a risk margin: • 5.66% (UK Heritage WPF) • 4.46% (UK other) • 6.53% (Canada) • 2.44% (Europe Heritage WPF) • 2.04% (Europe other) • 4.89% (Hong Kong) • 4.66% (Standard Life International Limited) Not applicable Not applicable Implied volatility, except for property volatilities where historic market data is used Allowed as a margin in the discount rate Breakdown per business not available since margin not divided into market and non‑market risk as in previous years Swiss Life MCEV Not disclosed Swap rates CFO/CRO Forum and QIS 5 illiquidity formula*, with different bucketing: • 0% for PPLI, unit- linked and variable annuities business. • 50% for health insurance and assumed external reinsurance • 75% for all participating and other business, including traditional annuities • EUR: 24bps • USD: 63bps • CHF: 20bps Implied volatility, except for property volatilities where historic market data is used 4% capital charge applied to capital at risk ZIG MCEV Not disclosed Swap rates CFO/CRO Forum and QIS 5 illiquidity formula* 100% annuities, 75% participating features, universal life contracts and US fixed interest annuities Not disclosed Implied volatility, except for property volatilities where historic market data is used 4% capital charge applied to diversified non- hedgeable risk based capital *CFO/CRO Forum and QIS 5 illiquidity formula: LP currency = MAX (0, x% × (Spread – y bps)) where x = 50% and y = 40bps Liabilities are classified in four buckets, dependent on their nature. Different proportions of the LP are applied (100%, 75%, 50% and 0%) 12
  • 15. Appendix 2: Disclosed sensitivities 2014 2013 2014 2013 Illiquidity Premium Illiquidity Premium Risk free rate Risk free rate Company 10bp increase to reference rates Remove premium 10bp increase to reference rates Remove premium +100bps -100bps +100bps -100bps Axa 2% -6% 1% -5% 4% -10% 3% -8% Allianz – – – – 8%* -12%* 3% -8% Aviva 3% – 2% – -2% -2% -2% 0% CNP 1% – 0% – 3% -7% -3% 0% Ageas 2% -5% 2% -5% 0% -1% 2% -5% Generali 5% -5% 2% -5% 7% -16% 3% -6% Legal General – – – – -7% 9% -7% 8% Munich Re 3% – 2% – 6% -16% 5% -8% Old Mutual 0% – 0% – -1% 1% -2% 2% Phoenix – – – – -2% 2% 0% 0% Prudential 1% – 1% – -4% 2% -3% 3% Friends Life – -16% – -10% -1% 1% 0% 0% Standard Life – – – – -7% 9% -7% 9% Swiss Life – – – – 5% -10% 4% -7% ZIG – – – – 0% -1% -2% 2% *2014 risk free rate sensitivities for Allianz were for a fall/rise of 50bps, reflective of low interest rate environment 2014 2013 2014 2013 Equity/Property values Equity/Property values Volatilities Volatilities Company – 10 % – 10 % Equity option +25% Swaption +25% Equity option +25% Swaption +25% Axa -5% -5% -2% -4% -1% -2% Allianz -3% -3% -4% -4% -2% -2% Aviva -4% -4% -2% -2% -2% -1% CNP -6% -4% -3% -2% -1% -2% Ageas -5% -5% -1% -2% 0% -2% Generali -7% -6% -2% -3% -1% -2% Legal General -3% -3% – – – – Munich Re -1% -1% -1% -2% -1% 1% Old Mutual -3% -4% -2% 0% -1% 0% Phoenix -3% -3% 0% 0% 0% 0% Prudential -3% -2% – – – – Friends Life -5% -5% -1% 0% -1% 0% Standard Life -6% -6% – – – – Swiss Life -7% -7% -3% -1%* -3% 2% ZIG -3% -2% -1% -1% -1% -1% *Swiss Life report a sensitivity to a 10% increase in swaption volatilities Time for a new direction? Market Consistent Embedded Value Review 13
  • 16. For more information please contact Contacts For further information, visit our website at www.deloitte.com UK Richard Baddon +44 (0) 20 7303 5570 rbaddon@deloitte.co.uk David Hare +44 (0) 131 535 7068 dhare@deloitte.co.uk Roger Simler +44 (0) 20 7303 3292 rsimler@deloitte.co.uk Andrew Smith +44 (0) 20 7303 5844 andrewdsmith8@deloitte.co.uk Alan Rankine – Author +44 (0) 131 535 7078 arankine@deloitte.co.uk Australia Caroline Bennet +61 (03) 9671 6572 cbennet@deloitte.com.au Austria Daniel Thompson +43 15 3700 5474 danthompson@bw-deloitte.de Belgium Arno De Groote +32 2 800 2473 adegroote@deloitte.com Central Europe Krzysztof Stroinski +48 22 5110549 kstroinski@deloitteCE.com Canada Paul Downes +1 416 775 8874 pdownes@deloitte.ca Denmark Thomas Ringsted +45 36103815 tringsted@deloitte.dk France Claude Chassain +33 1 40 88 24 56 cchassain@deloitte.fr Germany Bharat Bhayani +49 2219732411 bbhayani@bw-deloitte.de Ireland Ciara Regan +353 1407 4856 cregan@deloitte.ie Italy Alessandro Ghilarducci +39 028 332 3057 aghilarducci@deloitte.it Netherlands Fabian Kratz +31 882 883 765 fkratz@deloitte.nl Spain José Gabriel Puché +34 914 43 2000 jpuche@deloitte.es Switzerland Stefan Rechtsteiner +41 (0) 58 279 67 69 srechtsteiner@deloitte.ch Jerome Crugnola +41 (0) 58 279 68 02 jcrugnola@deloitte.ch US Jason Morton +1 612 397 4048 jamorton@deloitte.com South Africa Carl van der Riet +27112098115 cvanderriet@deloitte.co.za Hong Kong Simon Walpole +852 2238 7229 siwalpole@deloitte.com.hk 14
  • 17. Notes Time for a new direction? Market Consistent Embedded Value Review 15
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