Using Embedded Values to Value a Life Assurance Company

Transcription

1 Second African Congress of Actuaries Nairobi, Kenya Using Embedded Values to Value a Life Assurance Company Craig Falconer Chair of Africa Committee

2 Contents Introduction Uses of Embedded Values Embedded Values Appraisal Value Value of Future New Business Major Challenges Concluding Comments Questions

3 Uses of Embedded Values Companies need valuations for various reasons: Determining share price when undertaking a listing Mergers and Acquisitions Ongoing monitoring of company performance by management, shareholders and industry analysts Used for setting management s bonus incentives i.e. by placing notional internal value on a company

4 Embedded Values Components Adjusted Net Worth Free Surplus; Plus, Required Capital; plus, Value of In-force business less Cost of Required Capital (CoC) Cost of Surplus Restriction

5 Embedded Values EV = discounted value of future s/h profits on existing business plus NAV less capital costs Ignores future new business Many companies include EV in AFS EV earnings better measure for company performance than I/S New business strain Prudent Reserving Solvency Capital Embedded Value reporting standards Traditional EV European Embedded Value Market Consistent EV SA PGN107

6 Appraisal Value Goodwill needs to be added to Embedded Value to arrive at Appraisal Value Depends on company s infrastructure, quality of staff and effectiveness of policies/procedures as well as managements ability to attract future new business Quantified by calculating the Value of Future New Business AV = EV + Value of Future New Business

7 Value of Future New Business Subjective Two approaches: Use of value of new business multipliers Project expected new business cash flows Take into account Management view and budgets

8 Value of Future New Business (cont..) Challenges in determining suitable value: Management budgets usually aggressive.also suitable for setting business targets may not be suitable for AV For newly established companies, value of new business often negative because of high relative expenses Sensitive to regulatory changes, competition and economic environment Need to find balance to determine realistic long-term new business growth

9 Advantages of EV s and AV s EV accepted starting point in setting a price EV a proxy for share price Share price EV / (number of shares) Published EV s provide more relevant information to potential investors and analysts More accurate reflection of performance than published I/S Adds more stability to share price Provides useful ratios i.e. Return on EV RoEV = EV earnings / EV start of year EV more accurate / objective than other methods of determining share price: i.e. Compare share price to multiple of earnings Published EV discloses Value of New Business Shows new business profitability More information

10 Challenges Balancing stakeholders Determining suitable Risk Discount Rate SA market currently trading at discount to EV Regulations and tax legislation e.g. Restriction on shareholder transfers e.g. currently in Kenya 30% restriction on shareholder transfers from Life Fund Deferred Tax Solvency Capital Requirements Solvency II Best estimate assumptions.

11 SA Companies Key indicators

12 Concluding Comments EV s are widely used Many uses Here to stay for a while in Africa Countries adopting Solvency II?

13 Questions