Insights Life supplementary reporting. Entering a new era? EV reporting remained prevalent across Asia-Pacific, although reduced in Europe

Transcription

1 Insights July Life supplementary reporting Entering a new era? The 2015 life insurer reporting season showed a continuing emphasis on supplementary information including Embedded Value (EV) and related metrics, cashflow, economic capital and International Financial Reporting Standards (IFRS) profit drivers. However, following the introduction of Solvency II on 1 January 2016 and revised European Embedded Value (EEV) and Market Consistent Embedded Value (MCEV) Principles published in May 2016, significant changes to supplementary reporting may be on the horizon. Indeed, some impacts have already been observed. EV reporting remained prevalent across Asia-Pacific, although reduced in Europe Globally, around 90 companies published an EV at year-end The majority are headquartered in Asia-Pacific and Europe, with a total reported EV of approximately US$1.0 trillion. However, citing Solvency II, five European companies stopped disclosing under the EEV or MCEV Principles at year-end 2015 and three further European companies stated similar intentions for Solvency II is a catalyst for change The introduction of Solvency II on 1 January 2016 will affect future European supplementary reporting and, at a minimum, distributable profit based metrics such as EV should change to reflect the impact of the new regulatory regime. Wider changes will depend on the metric: Value: The recent changes made to the EEV/MCEV Principles and Guidance will permit companies to closely align their EV basis to their Solvency II basis and will allow more flexibility with regards to the content of the disclosures. The impact of these changes on the number of companies publishing EV information in line with the revised EEV or MCEV Principles remains to be seen, along with the EV bases that will be used and the content of the disclosures. In this issue 2 Financial and regulatory reporting developments 4 Disclosures by EEV/MCEV reporters 6 Market-consistent methodology 9 Supplementary reporting in Asia-Pacific 11 Appendix: 2015 EEV and MCEV Principles publications 12 How Willis Towers Watson can help New business: Demand will remain for information on the value added by new business and the impact of new business on other metrics. Capital: Solvency II has led to increased interest in Solvency II capital information, with virtually all companies headquartered in the European Union (EU) (which published EVs in accordance with the EEV or MCEV Principles at year-end 2015) also publishing a Solvency II capital ratio. Some of these companies published corresponding sensitivities and analyses of movement around these ratios. Consequently, importance placed on other economic capital disclosures has reduced. Cashflow: Users will be interested in the impact of Solvency II on projected distributable profits, including the impact of any Solvency II transitional measures which may be incorporated into the Solvency II balance sheet. Profitability: Generally Accepted Accounting Principles (GAAP) and IFRS profits will be affected in the coming years by IFRS 9 and IFRS 4 Phase 2. IFRS 9 becomes effective from January 2018, however insurance companies will have the option to defer most of the impact by three years until the start of The final Insurance Contracts accounting standard is now expected to be published in Q1 2017, with an effective date at least three years later. Companies may make voluntary changes to their accounting approach in advance of these dates, and the intervening period may be used to industrialise model processes in preparation for the new requirements.

2 Financial and regulatory reporting developments This section describes recent Solvency II, EV, IFRS and US Principles Based Reserving (PBR) developments related to insurance companies and how they may affect future supplementary reporting. Solvency II Solvency II went live on 1 January 2016 and companies have since focussed on producing the Day 1 reporting requirements due on 20 May 2016 (1 July 2016 for Insurance Groups) and the Q1 reporting requirements by 26 May 2016 (7 July 2016 for Insurance Groups). The CFO Forum released guidance in October 2015 regarding the implications for year-end 2015 EEV/MCEV reporting due to Solvency II, which replaced the previous interim guidance announced in September The additional guidance stated that The Solvency II requirements will not be finalised until late in 2015 for a number of insurers, consequently, the CFO Forum do not view an allowance for Solvency II and its associated consequences to be required when complying with the European Insurance CFO Forum Market Consistent Embedded Value Principles (MCEV Principles) or the European Embedded Value (EEV) Principles for reporting periods ending before 30 June 2016 and that the EEV and MCEV Principles (copyright Stichting CFO Forum Foundation 2008) would be revisited for reporting periods ending in 2016 and onwards (see Revised EEV and MCEV Principles section below). What does the future hold for supplementary reporting? The future prevalence and content of supplementary reporting will be dictated by the importance that shareholders and analysts place on the various metrics. With changes in supplementary reporting (resulting from the revised EV standards, Solvency II and IFRS developments) will come a period of adaptation by companies to market best practices as they emerge and adjustment for users of the information. Developments to supplementary reporting will likely be made for several years to come. At year-end 2015, some companies changed aspects of their EV methodology to align with Solvency II, which are further described in the Market-consistent methodology section of this Insights. We can expect further impacts to companies EV results, where bases are aligned with Solvency II, to reflect ongoing changes to the Solvency II bases such as the ultimate forward rate parameters. Revised EEV and MCEV Principles Later in this Insights, we review the year-end 2015 EEV and MCEV disclosures that were published under the 2004 EEV Principles and the 2009 MCEV Principles respectively. Due to the introduction of Solvency II, the CFO Forum published revised EEV and MCEV Principles in May These replace the 2004 EEV Principles and the 2009 MCEV Principles and will apply for future reporting periods. The revisions to the EEV and MCEV Principles and Guidance will permit companies reporting under Solvency II (or equivalent market-consistent solvency regimes) to align many aspects of their methodology and assumptions under EEV or MCEV Principles to their Solvency II basis. These could include both economic aspects (for example, reference rate) and non-economic aspects (for example, expenses). However, there is no requirement for companies to change from their existing approach to EEV or MCEV Principles, so in these cases the impact of Solvency II would only need to be reflected in current and projected regulatory reserves and required capital. 2 willistowerswatson.com

3 The revisions also give companies greater flexibility regarding the EV information to be disclosed and the requirements are less prescriptive, with most of the previous EEV and MCEV Guidance around disclosures changed to being just examples of possible disclosures. Minimum disclosure requirements are now described in broader terms as follows: Assumptions, methodology and key judgements Sensitivities of results to changes in key assumptions Explanation of results compared to prior period and Any areas of non-compliance with the Principles and Guidance A Group EV calculation for measuring the consolidated value of both covered and non-covered business is no longer mandatory, nor is the requirement for reconciliation to the IFRS Net Asset Value or GAAP equity. Other accounting developments Developments have been observed both within current accounting practice and the development of new accounting standards. Insurers also need to decide when and how IFRS 9, the Financial Instruments accounting standard, should be adopted. With 1 January 2018 being the effective date of IFRS 9, this date will be inconsistent with the insurance contract accounting standard and the IASB has given the industry two optional ways out of this dilemma after a considerably intensive political debate: Option 1: The overlay approach requires the implementation of IFRS 9 in addition to IAS 39, but permits an entity, for qualifying assets, to reclassify ( overlay ) the difference between the new amounts resulting from the IFRS 9 introduction compared to existing IAS 39 between Profit and Loss (P&L) and Other Comprehensive Income (OCI). Option 2: The deferral approach is a temporary exemption from most of IFRS 9 except for limited disclosure requirements. This temporary exemption will cease from the beginning of The deferral approach applies to a narrower group of entities for which insurance activities are the predominant activity of the reporting entity. In Europe, the low interest rate environment has continued to influence local accounting practices, where some countries have continued to embed additional interest strengthening reserves in their local reserving and accounting rules. So far there has been little impact of Solvency II on local GAAP and IFRS published accounting methodologies. In the US, PBR is likely to become effective as at 1 January 2017 which will allow companies to set statutory reserves based on PBR for new life insurance contracts. There is a three year transitional period whereby companies will be required to adopt PBR for new issues effective 1 January In February 2016, all 14 members of the International Accounting Standards Board (IASB) confirmed that they are satisfied that the Board has finalised its deliberations and completed all the necessary process steps on the Insurance Contracts project to date. The Board instructed their staff to commence the drafting process of the final insurance contract accounting standard, which is now expected to be published in Q with an effective date at least three years later, i.e. possibly being January 2020 or Life supplementary reporting

4 Disclosures by EEV/MCEV reporters In this section, we review the year-end 2015 EV and related supplementary metrics published by life insurers that reported under either the 2004 EEV Principles or 2009 MCEV Principles. Since then, and as already mentioned, the revised EEV and MCEV Principles have been published, which are less prescriptive on the disclosure requirements. Table 1 sets out the number of companies reporting under the EEV and MCEV Principles as at year-end 2015 and prior year-ends. Two new companies were included at year-end 2015, however nine companies have stopped disclosing under the EEV or MCEV Principles since year-end 2014 (eight of which are from Europe) and one company had not yet (by the end of May 2016) disclosed its year-end 2015 EV results. The nine companies include: five which no longer disclosed citing Solvency II as the reason; one due to lack of demand; one which stated that having a different accounting convention reduces the clarity of reporting (as it is not solely an insurance company); and two due to mergers and acquisitions. A proportionate breakdown of the approach to allow for risk is provided in the table for companies reporting under the EEV Principles. Further details of the 2015 EEV and MCEV publications by company are provided in the Appendix. (A breakdown of companies publishing an EV at year-end 2015 by basis of preparation and location of headquarters is provided in Table 6 on page 9.) Required EEV/MCEV disclosures at year-end 2015 Required EEV/MCEV disclosures included the balance sheet (accompanied by a reconciliation to IFRS or other consolidated GAAP equity), the analysis of earnings (or movement), the value of new business (VNB) and sensitivities. This set of information can help provide the basis for indicating the components of value, understanding a company s risk exposures, helping to explain movements in economic balance sheet disclosures, understanding capital generation, and assessing risk-adjusted targets and performance. The 2009 MCEV Principles prescribed the format for presenting the analysis of earnings in Appendices A and B of that document. Appendix A required that the MCEV movement is split between free surplus, required capital and the value of in-force business, highlighting the capital generation of in-force business and the capital strain of new business. Appendix B, the Group MCEV analysis of earnings, required a combined analysis of covered business MCEV and non-covered business IFRS results to be shown. At year-end 2015, 14 of the 18 MCEV Principles publications included the required analysis of MCEV earnings (a further three published something similar but with no breakdown between the free surplus and required capital components of net worth). One company showed something similar but based on the total movement in MCEV, with some information on changes in assets and liabilities used in the Solvency II market value balance sheet calculation. Seven of the 18 publications included the required analysis of Group MCEV earnings. There were seven EEV Principles publications at year-end 2015 which included information similar to the analysis of earnings for covered business required by the MCEV Principles. Some companies disclosed an analysis of the movement in own funds or own funds less Table 1. Summary of approach to allowing for risk companies reporting EEV/MCEV 1 MCEV Principles Reporting under the EEV Principles 2 Total Total Top-down Market-consistent Other Indirect Direct End 2015 reporting % 6% 82% 6% End 2014 reporting % 9% 73% 9% End 2013 reporting % 9% 73% 9% End 2012 reporting % 10% 75% 5% End 2011 reporting % 8% 68% 4% End 2010 reporting % 11% 64% 4% End 2009 reporting % 12% 64% 4% End 2008 reporting % 17% 60% 3% End 2007 reporting N/A 34 20% 18% 56% 6% End 2006 reporting N/A 35 26% 17% 46% 11% End 2005 reporting N/A 21 33% 24% 24% 19% End 2004 reporting N/A 5 80% 20% 0% 0% 1. Includes both CFO Forum and non-cfo Forum companies publishing by the end of May in each year. 2. For a description of these approaches, see our May 2008 update 2007 EEV: Stable accounting in volatile markets. 4 willistowerswatson.com

5 the Solvency Capital Requirement (SCR) under Solvency II in their analyst presentation at year-end Companies also published sensitivities of their EEV/MCEV results. Both the EEV Principles and the MCEV Principles required the publication of a minimum set of sensitivities to the EV and the VNB. Some companies published additional voluntary sensitivities related to credit spreads, illiquidity premium, volatility adjustment and level of required capital under Solvency II at year-end As already mentioned, the revised EEV/MCEV Principles will allow more flexibility in future, with the previous set of required disclosures now being described as examples of possible disclosures. Wider supplementary disclosures In recent years, life insurers have expanded their supplementary disclosures beyond just the required EEV/MCEV disclosures, and in this section we analyse practice by the 36 companies publishing year-end 2015 EEV/MCEV results. Cashflow A number of life insurers reporting EEV/MCEV results have included additional cashflow-related metrics over recent years, and this practice has continued in the year-end 2015 reporting season. Examples include (with numbers reporting in parentheses): The timing of the emergence of future statutory (regulatory) distributable profits (9) The new business internal rate of return (10) The new business payback period (6) Details of how the new business metrics are typically defined and calculated can be found in our May 2011 Insights Focus on value and cashflow. Practice varies across the industry, particularly as to whether the projected profits underpinning these metrics a) are calculated on a real-world economic basis (i.e. including expected investment risk premia) or a risk-neutral basis (excluding expected investment risk premia), and b) allow for the impact of EEV/MCEV required capital. Two companies showed the expected future emergence of excess own funds above SCR on a Solvency II basis. Some companies also published information on the actual cash generation during the financial year. However, the disclosures are not consistent across the industry and the definitions are not always clear. There are limited cases where the insurer disclosed how the cash generated reconciled to its primary accounting profit. Several companies showed an analysis of movement in free surplus over the period (including elements of the analysis of MCEV earnings from the MCEV Principles), typically splitting out the free surplus generated by in-force business from that consumed by writing new business, together with the movements in non-covered business and the impact of group items where applicable. Economic capital Most of the 36 companies have been disclosing a regulatory solvency ratio in their supplementary reporting for a number of years to communicate the strength of their capital position. A number of companies also disclosed economic capital and/or Solvency II capital information at year-end 2015, such as the economic capital ratio of available economic capital to required economic capital and/or Solvency II capital ratio of available own funds to the SCR. Nineteen out of the 22 companies headquartered in the EU which published MCEV or EEV results disclosed their Solvency II capital ratio as at year-end 2015, including seven companies which had not previously disclosed an economic capital ratio. The number of companies publishing an economic capital ratio had been increasing over recent years, although this dropped to nine companies as at year-end 2015 from 15 companies as at year-end 2014 (based on companies publishing under the MCEV or EEV Principles in both years). All companies which no longer disclosed an economic capital ratio at year-end 2015 instead disclosed a Solvency II capital ratio. Six of the nine companies disclosing an economic capital ratio also disclosed a Solvency II capital ratio, generally explaining reasons for the differences, with the remainder not based in the EU. Five of the nine companies disclosing an economic capital ratio and 13 of the 19 companies disclosing a Solvency II capital ratio also showed the sensitivity of the ratio to a range of market scenarios, with three companies showing sensitivities to both ratios. (Nine out of 17 companies disclosing an economic capital ratio showed sensitivities at year-end 2014.) Typical sensitivities included a shock to equity markets, interest rates and credit spreads. Three also provided an explanation of the movement in their economic capital ratio over the financial year (down from six at year-end 2014, based on companies publishing under the MCEV or EEV Principles in both years). Three and nine companies respectively disclosed the required economic capital and SCR split by risk type typical risk categories include: equity risk, interest rate risk, property risk, underwriting risk, foreign currency risk and operational risk Life supplementary reporting

6 Market-consistent methodology A summary of the methodology for the 18 companies reporting under the MCEV Principles and the 16 companies reporting under the EEV Principles using a market-consistent approach is provided in this section. At year-end 2015, a number of companies changed aspects of their EV methodology to align with Solvency II. Six companies used a volatility adjustment in line with the Solvency II European Insurance and Occupational Pensions Authority (EIOPA) specifications for the first time, and six companies changed the definition of required capital in their EV to align with the capital required under Solvency II. One of the 18 companies classified in Table 1 as reporting under the MCEV Principles has fundamentally changed its approach to calculating the MCEV this year to use a market value balance sheet approach aligned with Solvency II. The Risk Margin under Solvency II replaced the Frictional Costs of required capital and Cost of Residual Non-Hedgeable Risks required under the MCEV Principles. Reference rate Table 2 summarises the reference rate approach (including illiquidity premium) used by the 34 companies reporting on a market-consistent basis as at year-end Of the 34 companies publishing under a market-consistent approach, eight applied swaps less a credit risk adjustment plus a volatility adjustment (all European headquartered companies) in line with Solvency II, although some of these companies did not apply the volatility adjustment to all products. Another company applied a volatility adjustment but no credit risk adjustment. No company included a matching adjustment in their EV basis as at year-end A description of the volatility adjustment and matching adjustment can be found in our May 2015 edition of Insights 2014 Life supplementary reporting: Current stability, future uncertainty. The volatility adjustments (after application of the 65% ratio) used as at year-end 2015 are summarised in Table 3 for the main reporting currencies, along with a comparison to year-end Eight companies applied an illiquidity premium (all European headquartered companies, except for one Japanese company that used an illiquidity premium for some parts of the business). Three of these companies applied an illiquidity premium in some aspects similar to that prescribed in the Solvency II fifth Quantitative Impact Study (QIS5), published on 5 July Details of how the illiquidity premium is calculated under QIS5 can be found in our May 2014 edition of Insights 2013 Life supplementary reporting: A decade of change what next?. The illiquidity premiums used by companies in the Eurozone are generally slightly higher as at year-end 2015 than as at year-end 2014, reflecting the change in financial market conditions. Several companies have updated other aspects of the reference rate calibration in line with Solvency II, for example relating to the extrapolation method. Table 4 describes in more detail the reference rate approach taken by CFO Forum companies publishing under Table 2. Reference rate approach for market-consistent publications, year-end 2015 EV MCEV Principles EEV Principles Swaps 0 4 Swaps/swaps plus illiquidity premium Swaps plus illiquidity premium 0 1 Swaps less credit risk adjustment plus volatility adjustment Government bonds 4 5 Government bonds/government bonds plus illiquidity premium 1,3 1 0 Other An illiquidity premium is applied for some, but not all, lines of business. 2. As defined under Solvency II. For some of these companies the volatility adjustment is not applied to all lines of business. 3. One company defines its reference rate, pre-illiquidity premium, as government bonds + 10bps. 4. One of these companies applied swaps plus a volatility adjustment but with no credit risk adjustment, and another applied swaps less a credit risk adjustment but with no volatility adjustment. Table 3. Volatility adjustments at year-end 2014 and year-end 2015 Currency Year-end Year-end 2015 EUR 2 18 bps 22 bps GBP 23 bps 31 bps CHF 5 bps 9 bps USD 51 bps 78 bps CZK 1 bp 6 bps HUF 17 bps 19 bps PLN 5 bps 8 bps JPY 1 bp 3 bps 1. The volatility adjustments shown here are the revised figures published in August Some countries in the Eurozone have a country-specific adjustment applied which is not shown in this table. 6 willistowerswatson.com

7 a market-consistent approach. It shows six companies applying both a credit risk adjustment and volatility adjustment in line with EIOPA specifications under Solvency II, and that two companies applied illiquidity premiums based on the QIS5 formula. These two companies allocated illiquidity premiums to different product classes using a similar method to the bucketing approach used in QIS5. A number of the 34 market-consistent companies published an illiquidity premium sensitivity at year-end The published sensitivity varies from illustrating the impact of removing the illiquidity premium entirely to showing the effect of an increase or decrease (for example, of 10 bps) in the illiquidity premium. Three companies introduced volatility adjustment sensitivities this year. Table 4. Summary of reference rate calibration approaches CFO Forum market-consistent publications only, year-end 2015 EV 1 Company EEV or MCEV Principles Reference rates Ageas EEV Swaps less a credit risk adjustment (of between 10 bps to 35 bps depending on currency) and increased by a volatility adjustment (as outlined in Table 3 and 64 bps in Hong Kong), in line with EIOPA specifications under Solvency II. Allianz MCEV Swaps less a credit risk adjustment (of between 10 bps to 35 bps depending on currency) and increased by a volatility adjustment (as outlined in Table 3), in line with EIOPA specifications under Solvency II. A country-specific exception was applied for Greece, for which a volatility adjustment of 55 bps was used. No volatility adjustment was applied for the variable annuities business. Government bond yields were used for certain currencies as required by EIOPA. Aviva MCEV Swaps, increased by an illiquidity premium for certain immediate annuity and participating contracts. The illiquidity premium calibration for corporate bonds is based on the QIS5 formula. For assets valued on a marked to model basis, the illiquidity premium is set consistent with the underlying model valuation. The illiquidity premium is based on a notional portfolio of assets which can include actual assets backing the liabilities. 100% of the illiquidity premium is applied to immediate and bulk purchase annuities, 75% applied to participating contracts and deferred annuities and 0% to all other products. The illiquidity premium for immediate annuity type contracts is 114 bps in the UK and 38 bps in France, Spain and Ireland, 86 bps for deferred annuity contracts in the UK and 29 bps for participating business in France, Spain and Italy. AXA EEV Swaps less a credit risk adjustment (of between 10 bps to 12 bps depending on currency) and increased by a volatility adjustment (as outlined in Table 3 and 78 bps in Hong Kong), in line with EIOPA specifications under Solvency II. No volatility adjustment was applied for unit linked business. CNP MCEV Swaps less a credit risk adjustment (of 10 bps) and increased by a volatility adjustment (as outlined in Table 3), in line with EIOPA specifications under Solvency II. For Brazil, a traditional embedded value method is used. Generali MCEV Swaps less a credit risk adjustment (of between 10 bps to 12 bps depending on currency) and increased by a volatility adjustment (as outlined in Table 3), in line with EIOPA specifications under Solvency II. For Hungary and Poland, government bond rates were used instead of swaps. Prudential EEV MCEV approach used for UK annuities only: reference rate set to swaps plus an allowance for illiquidity premium. The illiquidity premium is based on Prudential s assessment of the expected return on the assets backing the annuity liabilities, after allowing for expected long term defaults; a credit risk premium; a 1-notch downgrade of the asset portfolio subject to credit risk; and short term downgrades and defaults. SCOR MCEV Swaps less a credit risk adjustment, as published by EIOPA for Solvency II. Talanx MCEV Swaps reduced by a credit risk adjustment, and increased by a volatility adjustment for certain contracts. The volatility adjustment is calculated using methodology specified by EIOPA for Solvency II and has been applied to primary business. A volatility adjustment of 22 bps is applied to the primary insurance business in the Eurozone. No volatility adjustment is applied to the reinsurance segment or to Polish business. Swap rates are used in all countries except Poland, where government bonds are used. Zurich MCEV Swaps, plus illiquidity premium for certain products. The illiquidity premium is based on the QIS5 formula and, depending on the point on the yield curve, is bps in the Eurozone, bps in the US, bps in the UK and around 0 bps in Switzerland. 100% of the illiquidity premium is applied for annuities, 75% for contracts with participating features, universal life contracts and fixed interest annuities in the US, and 0% for all other lines of business. 1. This table describes which yield curve is used in the reference rate calibration together with some of the adjustments made. Other reference rate calibration aspects including yield curve extrapolation have not been described here Life supplementary reporting

8 Non-Hedgeable Risks The EEV Principles require that sufficient allowance is made for the aggregate risks in the business but do not provide further explicit guidance on the allowance for Non-Hedgeable Risks (NHR). In contrast, the allowance for NHR is covered in a number of areas of the MCEV Principles, described further in our May 2010 Insights 2009 EEV/MCEV Greater consistency, challenges remain. The MCEV Principles require that sufficient disclosures are provided to enable a comparison to a cost of capital methodology. Table 5 provides summary statistics for the equivalent cost of capital charge disclosed in the 18 MCEV Principles publications at year-end 2015 and also for the publications at year-ends 2009 to The reason for the reduction in the maximum cost of capital charge from 7% as at year-end 2014 to 6% as at year-end 2015 was due to one company no longer publishing an MCEV. One company replaced the allowance for NHR this year with the Risk Margin calculated in line with Solvency II, using a 6% cost of capital charge. In other respects, there were few changes between the years. Table 5. Equivalent annual cost of capital charge for NHR for MCEV Principles publications Year Minimum Lower quartile Median Upper quartile Maximum % 2.1% 3.1% 4.0% 6.0% % 2.4% 3.2% 4.0% 7.0% % 2.4% 3.6% 4.0% 7.0% % 2.4% 2.9% 4.0% 7.0% % 2.5% 3.3% 4.0% 7.0% % 2.5% 3.1% 4.0% 7.0% % 2.5% 2.8% 4.4% 7.0% 8 willistowerswatson.com

9 Supplementary reporting in Asia-Pacific In this section we review developments in EV and supplementary reporting information published by life insurers in the Asia-Pacific region. Table 6 sets out the number of life insurers disclosing year-end 2015 EV, subdivided by location of the headquarters. It shows the number of companies reporting using a Traditional Embedded Value (TEV) methodology, the EEV Principles or the MCEV Principles. The total reported EV as at year-end 2015 for these companies was approximately US$1.0 trillion, of which about 50% is in respect of Asia-Pacific-headquartered companies. All Japanese companies report under the EEV or MCEV Principles and mainly use a market-consistent bottom-up approach, although three of these companies hold US-based subsidiaries which are valued at least in part using a top-down approach. Two of these US subsidiaries were acquired by the respective Japanese companies during the last financial year. Most Indian companies stated that their EV results had been determined on a market-consistent basis. Outside of Japan and India, all other companies headquartered in Asia-Pacific used a TEV methodology. For the remainder of this section, we focus on the 29 companies headquartered in Asia-Pacific only using the TEV approach for EV reporting. Methodology The TEV methodology used by companies reporting in Asia-Pacific is typically based on a single deterministic projection of after-tax profits, with an allowance for risk made via the risk discount rate and a deduction for the cost of holding required capital. There has been little change to the methodology used to determine EV results since year-end 2014, and still no move to define a set of standards for EV reporting in most markets. The Chinese insurers continue to apply the Life Insurance Embedded Value Reporting Guidelines issued by the China Insurance Regulatory Commission in September A new, risk-based, solvency system became effective on 1 January 2016 (C-ROSS), and as a result, new guidelines on EV reporting in China are under development. Table 6. Number of companies reporting year-end 2015 EV (by location of headquarters)1 Total Number of companies reporting EV 2 TEV EEV Principles 3 MCEV Principles 3 Other 4 Australia China Hong Kong India Japan Korea Singapore Taiwan Thailand Total Asia-Pacific Europe Total Asia-Pacific and Europe This table shows Asia-Pacific and European headquartered companies which publish an EV. A number of companies headquartered in other countries also publish EVs, including in Canada, Israel and South Africa. 2. Excludes companies publishing year-end 2015 results under the EEV/MCEV Principles after the end of May and excludes companies disclosing only VNB information or only VIF-related disclosure for individual product lines. 3. The companies reporting under the EEV Principles and the MCEV Principles are included in the analysis elsewhere in this Insights. 4. Eight companies stated that the EV has been determined on a market-consistent basis. One company stated that it has used its Solvency II process for the EV calculations. In India, for the purposes of determining an EV for initial public offerings, the Institute of Actuaries of India published a set of standards in December 2012 (modified in March 2015), which specify the use of a market-consistent approach which has similarities with the MCEV Principles. Economic assumptions and risk discount rates Four of the 29 companies disclosing TEV results state that the risk margin in the risk discount rate has been determined using the capital asset pricing model or using an estimate of the cost of equity capital for the business. The remaining companies do not disclose the approach used to determine the risk margin in the risk discount rate, consistent with the practice at year-end Eleven Asia-Pacific EV reporters use an approach to project investment returns where there is an initial yield based on yields at the valuation date and a higher long-term yield reflecting the company s view of expected future economic conditions. Twenty-seven out of 29 companies reporting EV in Asia use a level risk discount rate, while the other two do not disclose their risk discount rates Life supplementary reporting

10 Required capital The assumed capital requirement is a key part of the overall allowance for risk in the basis used to determine the EV results. The majority of companies set required capital to the minimum level required by the regulator, and the remaining companies assume a higher level of required capital based on a multiple of the regulatory requirements (set reflecting internal targets or the level where the regulator may be expected to intervene in the business). New business disclosures Twenty-eight of the 29 companies disclosing TEV results also disclosed the VNB. Fourteen companies disclosed new business margin information, with 12 companies showing the VNB as a percentage of Annual Premium Equivalent (APE) and five also disclosing the VNB as a percentage of the Present Value of New Business Premiums (PVNBP). Only one company headquartered in Asia-Pacific included any additional new business metrics such as internal rates of return or payback periods in their published supplementary disclosures. Analysis of movement and cash disclosures Of the 29 companies reporting TEV, 27 disclosed an analysis of movement in the EV. Fifteen of these companies showed the analysis of movement separately for the adjusted net worth and VIF. Only one company showed the analysis of movement separately for free surplus and required capital. Fourteen companies separately showed the economic and non-economic impacts on the value. AIA Group continues to be the only Asia-headquartered company to disclose information on the expected timing of the emergence of future regulatory distributable earnings from its in-force business. The information disclosed shows the projected free surplus generation in five year bands and reconciles to its overall EV. Prudential plc (headquartered in the UK) and Manulife (headquartered in Canada) disclose similar information for their Asian businesses. Comments on Asia-Pacific EV practice (excluding Japan) EVs and the value of one year s new business are key reporting metrics for listed life insurance companies in Asia-Pacific. In most markets, companies are using a traditional, deterministic EV approach which is consistent with how the business is managed internally. Below, we highlight a number of areas where EV reporting is being developed in these markets and/or investors are asking for further transparency. Changes in new business margins are subject to a great deal of scrutiny by industry observers, given the importance of profitable new business growth to market valuations. Investment analysts are asking for greater disclosure around why the VNB and new business margins have changed from one reporting period to the next, potentially split between business-driven developments and other causes of change, for example currency movements. Given the prolonged low interest rate environment, analysts are keen to understand the link between changes in net worth (following changes in interest rates) and the related changes in the value of the in-force business. This link is not always clear from EV disclosures. Disclosing more information on asset value movements and how these impact in-force values could help clarify (related) movements in in-force value and net worth. As a general rule, insurers in Asia-Pacific provide less detail on operating and economic assumption changes and variances than insurers in Europe. Our conversations with shareholders and analysts have indicated that more insight into the source of profits and the robustness of those profits would be useful. This insight could be provided, for example, by showing the impact of operating assumption changes split by assumption type. The projected distributable earning patterns are much valued by shareholders and analysts, as they provide an indication of expected future dividend payments and can be used to understand the link between future EV and IFRS earnings. Therefore, we expect that more companies will disclose the emergence of distributable earnings in the future. 10 willistowerswatson.com

11 Appendix: 2015 EEV and MCEV Principles publications Company Allowance for risk classification 1 Risk Discount Rate approach Year-end 2015 publications under the MCEV Principles Options and guarantees 1 Cost of capital 2 Allianz 3 Direct market-consistent Bottom-up Market-consistent Not calculated 3 Aviva Direct market-consistent Bottom-up Market-consistent Frictional costs Baloise Direct market-consistent Bottom-up Market-consistent Frictional costs CNP 4 Direct market-consistent Bottom-up Market-consistent Frictional costs Generali Direct market-consistent Bottom-up Market-consistent Frictional costs Old Mutual 5 Direct market-consistent Bottom-up Market-consistent Frictional costs Partnership Direct market-consistent Bottom-up Not material Frictional costs Phoenix Group Direct market-consistent Bottom-up Market-consistent Frictional costs SCOR Direct market-consistent Bottom-up Market-consistent Frictional costs Sompo Japan Nipponkoa Himawari Life 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Sony Life 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Swiss Life Direct market-consistent Bottom-up Market-consistent Frictional costs Talanx Direct market-consistent Bottom-up Market-consistent Frictional costs T&D Life Group 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Tokio Marine & Nichido Life 6 Direct market-consistent Bottom-up Market-consistent Frictional costs UNIQA Direct market-consistent Bottom-up Market-consistent Frictional costs Vienna Insurance Direct market-consistent Bottom-up Market-consistent Frictional costs Zurich Direct market-consistent Bottom-up Market-consistent Frictional costs Year-end 2015 publications under the EEV Principles Ageas Direct market-consistent Bottom-up Market-consistent Frictional costs AXA Direct market-consistent Bottom-up Market-consistent Frictional costs Chesnara Direct market-consistent Bottom-up Market-consistent Frictional costs Dai-ichi 6,7 Direct market-consistent Bottom-up Market-consistent Frictional costs Hansard Global 8 Direct market-consistent Bottom-up Not material Frictional costs Japan Post Insurance 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Just Retirement 8 Direct market-consistent Bottom-up Market-consistent Frictional costs Legal & General Top-down WACC Top-down Real-world Traditional Lifenet 6 Direct market-consistent Bottom-up Not material Frictional costs Meiji Yasuda Life 6,9 Direct market-consistent Bottom-up Market-consistent Frictional costs Mitsui Sumitomo Aioi Life 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Mitsui Sumitomo Primary Life 6 Direct market-consistent Bottom-up Market-consistent Frictional costs Poste Vita Direct market-consistent Bottom-up Market-consistent Frictional costs Prudential 10 Other Bottom-up Both are used Traditional Royal London Direct market-consistent Bottom-up Market-consistent Frictional costs St James s Place Indirect market-consistent Bottom-up Not material Not disclosed Swedbank Direct market-consistent Bottom-up Market-consistent Frictional costs Sumitomo Life 6,9 Direct market-consistent Bottom-up Market-consistent Frictional costs 1. At year-end 2015 a number of different market-consistent approaches were used in EEV and MCEV to set the reference rate, to adjust for illiquidity, and to set the allowance for non-hedgeable risk. For more information see pages Traditional cost per unit capital is the difference between the top-down RDR and the net earned rate. Frictional costs were almost always defined as tax and investment expenses. 3. Allianz used a market value balance sheet approach aligned with Solvency II for its MCEV disclosure as at year-end 2015, such that the MCEV is essentially equal to the shareholder s equity under Solvency II for the Life/Health segment. The Frictional Costs of required capital and Cost of Residual Non-Hedgeable Risks were replaced with the Risk Margin under Solvency II. 4. CNP has mainly used a market-consistent approach, but adopted a TEV approach for its Brazilian business due to a lack of market parameters. 5. Old Mutual published under the MCEV Principles for covered business in Emerging Markets only at year-end 2015 and did not disclose consolidated information for the Old Mutual Group. 6. Financial year-end is 31 March In the calculation of the EEV, the Group has mainly adopted a market-consistent approach. However, for the non-variable annuity business of the subsidiary Protective Life, a top-down WACC approach has been used with a traditional cost of capital methodology. 8. Financial year-end is 30 June In the calculation of the EEV, the Group has mainly adopted a market-consistent approach, except for the valuation of its US domiciled wholly owned subsidiary, for which a top-down approach is used. 10. Prudential used a bottom-up product specific beta approach, except for UK annuities where it used a market-consistent approach with a risk-free rate of swaps plus an illiquidity premium adjustment Life supplementary reporting

12 How Willis Towers Watson can help Insurance companies have developed supplementary reporting information to help with the financial management of the business. Willis Towers Watson s global reach and in-depth knowledge of supplementary reporting, particularly EV/EEV/MCEV and wider metrics, can assist companies in developing their reporting framework, methodology and processes. Our consultants operating in jurisdictions worldwide have experience supporting firms with the following activities: Embedded value reporting Assisting companies that adopt TEV, EEV or MCEV Providing review of TEV, EEV or MCEV methodology, assumptions and results (including processes) Assistance or review of key technical areas, such as the valuation of insurance liabilities during periods of financial crisis or market illiquidity Using embedded value techniques for external reporting and internal financial management frameworks Using EV reporting processes to generate wider metrics, such as free surplus (or cash) generation information, and internal rates of return and payback periods for new business Supplementary reporting Advising on the impact of Solvency II on EV/wider supplementary reporting Design of a supplementary reporting metrics pack that meets the needs of financial reporting users Developing pro-forma financial and risk metric dashboards for external reporting, continuous solvency monitoring and management information Education of management on how to interpret KPI results and relate them to business decisions Developing or reviewing economic capital calculations and disclosures Developing and industrialising processes for the financial reporting function Improving actuarial models and reporting processes Further information For more information, please contact your usual Willis Towers Watson consultant or: Kamran Foroughi kamran.foroughi@willistowerswatson.com Masahiko Fujiki masahiko.fujiki@willistowerswatson.com Dion Heijnen dion.heijnen@willistowerswatson.com Dominique Lebel dominique.lebel@willistowerswatson.com Mariangela Mantovani mariangela.mantovani@willistowerswatson.com John Nicholls john.nicholls@willistowerswatson.com About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. Towers Watson is represented in the UK by Towers Watson Limited. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, eu.unsubscribe@willistowerswatson.com with the publication name as the subject and include your name, title and company address. Copyright 2016 Willis Towers Watson. All rights reserved. WTW-EU-16-ICP-3022 willistowerswatson.com