GROUPAMA Presentation of 2007 Embedded Value

Transcription

1 GROUPAMA Presentatin f 2007 Embedded Value 1

2 CONTENTS Intrductin 3 Scpe included in the calculatin f the prtfli value 4 Principal changes cmpared t the 2006 EV 4 Cnslidated Results (France and Internatinal) 5 Results fr France 6 Value creatin analysis fr the French business 6 Embedded Value France 7 Sensitivities 8 Internatinal Results 10 Embedded Value Internatinal 10 New Business value Internatinal 11 Sensitivities Internatinal 11 EV Adjustment / cnslidated net equity 12 Methdlgy and Assumptins 13 ANAV 13 Certainty equivalent 13 Cst f ptins and financial guarantees 14 Neutral risk apprach 15 Cst f Capital (CC) / Taking int accunt nn-financial risks 16 New Business value (NBV) 16 Value creatin analysis 17 Assumptins 17 B&W Delitte Opinin 20 2

3 Intrductin Grupama calculates Embedded Value (EV) n the basis f Grupama SA s Life and Health Insurance in France and internatinally, in keeping with CFO Frum guidelines ver mst f its territry. EV includes the fllwing tw cmpnents: ANAV Adjusted net asset value crrespnds, under CFO guidelines, t the market value f assets representing net assets and ther reserves belnging t Grupama sharehlders. As at 31 December 2007, ANAV includes net assets, certain reserve prvisins, unrealised capital gains frm net assets, the share f unrealised capital gains representing uncalculated nn-participating plicies net f hlding csts. These crrespnd t the present value f that part f Grupama SA s hlding expenses attributable t the grup s Life business. Prtfli value This crrespnds t the present value f prjected future prfits fr the life f the plicies in the prtfli, net f the cst f ptins and financial guarantees, f capital csts and nn-financial risks. The value f the prtfli includes the fllwing: The value f the prtfli withut risk premium, the certainty equivalent (CE) crrespnding t the present value f future prfits generated by current plicies n the valuatin date and calculated using the fllwing methd: Use f nn-ecnmic best estimate assumptins fr mst f the statistical studies dne n Grupama plicy prtflis; Determinatin f the prjected rates f return withut cnsideratin f any risk premium n assets; Discunting all future cash flws n the basis f the swap rate curve as at 31 December The time value f ptins and financial guarantees crrespnding t the risk cst f financial deviatin cmpared t the scenari used t calculate the intrinsic value, calculated by the difference between: Cst f capital the stchastic value f future plicy prfits ( Prtfli Market Value ), and the Certainty Equivalent r prtfli value withut risk premiums (CE) Grupama has kept its cst f capital at 100% f the minimum slvency margin required by Eurpean regulatins currently in frce (slvency I). This capital requirement entails a frictin cst fr the sharehlders t the degree that this cst f capital may require the enterprise t pay financial management csts and crprate taxes. Cst f nn-financial risks Under peratinal risks, a supplemental risk premium has been included in the cst f capital f the slvency margin. 3

4 In additin, plicy prtflis carrying technical risks are als expsed t risk factrs nt taken int accunt elsewhere. These risk factrs cnsist f, amng ther things, assumptins f adverse changes in claims (mrtality, mrbidity, lngevity, ). An additinal risk premium has thus been added t the ttal f these plicies. The ttal f these tw risk premiums (fr peratinal technical risks and technical risks) make up the cmplementary risk premium included in the cst f capital and used t evaluate the cst f nn-financial risks. 1. Scpe included in the calculatin f the prtfli value Grupama calculates EV n its Life and Health Insurance activities in France and abrad, including its Life business. France The scpe calculated represents 91% f the technical reserves f the French Life business. The Health prtfli has als been included, as it was last year, in the scpe f the EV calculatin. Internatinal In 2007 the values fr all the internatinal subsidiaries Life business have been calculated using the CFO Frum guidelines, with the exceptin f Turkey (calculated the traditinal way) and the newly acquired subsidiaries Grupama Phenix and Nuva Tirrena (nt calculated). With regards t the Turkish subsidiary, values fr the Life prtfli have been calculated with the traditinal apprach f using financial return assumptins based n the risk-free rate as at 31 December 2007 and including a risk premium fr bth financial and nnfinancial risks in the discunt rate. The scpe f the EV calculatin cvers 91% f the technical reserves f the Life business abrad, and excludes the subsidiaries Grupama Phenix and Nuva Tirrena. In 2007, the whle Health prtfli (cllective and individual) abrad was als calculated (except fr Grupama Phenix and Nuva Tirrena). 2. Principal changes cmpared t the 2006 EV Assumptins In accunting dctrine regarding the risk-free rate, the swap rate curve has replaced the French gvernment bnd rate curve. Scpe Increase in the scpe f EV calculatin (see previus paragraph). Additinal calculatins In terms f sensitivity, tw additinal calculatins have been made: +25% in interest rate vlatility and +25% in equity and prperty values vlatility. 4

5 3. Cnslidated Results (France and Internatinal) Millin eurs France Internatinal Ttal Adjusted Net Asset Value 2, ,603.7 Value f the prtfli withut risk premium (CE) 3, Time value f financial ptins Cst f Capital (100% f slvency margin) Cst f nn-financial risks Prtfli value 2, ,405.2 Embedded Value 4, ,009.0 Millin eurs France Internatinal Ttal New business value withut risk premium (CE) Time value f financial ptins Cst f Capital (100% f slvency margin) Cst f nn-financial risks New Business value (NBV) APE NBV / APE 12.8% 8.6% 11.8% PVNBP 3, ,080.0 NBV/PVNBP 1.5% 2.0% 1.5% APE premiums: 10% f single premiums and 100% f the regular premiums APE Rati: New business value divided by APE premiums. This is the currently used prfitability indicatr fr new businesses. PVNBP: NBV premiums crrespnd t the present value f future premiums generated by new business. 5

6 4. Results fr France Value creatin analysis fr the French business Millin eurs ANAV Prtfli value Value as at 31 Dec , , ,461.5 Changes f scpe and methd Adjusted value as at 31 Dec , , ,693.6 Timing difference (73.0) Nn-ecnmic adjustments (131.0) Changes in nn-ecnmic assumptins New business cntributins Cntributin frm perating businesses 0.0 (45.2) 42.1 (136.4) EV (136.4) Cntributin arising frm the ecnmic envirnment Dividend pay-ut fr Financial Year 2006 (272.4) 0.0 (272.4) Value as at 31 Dec , , ,653.4 The ttal return n EV was 5% befre dividend payments in Changes f scpe and methd relate essentially t the use f the Swap Rate (n 31 Dec. 2006): the 10-year French gvernment bnd (OAT) f 4.02%, the 10-year Swap Rate f 4.25%). Nn-ecnmic adjustments are largely due t the fllwing tw factrs: New mrtality statistics per generatin and gender fr sme grup plicies have been fully applied t the 2007 accunts. The negative effect n the net asset value f intrducing these statistics is largely cmpensated fr by the psitive effect n the prtfli value. Exceptinal csts are nt included in the EV calculatin mdel. A prject t verhaul the varius management tls used in Life grup is currently in prgress. This prject will incur csts f implementatin and transfer f prtflis ver the curse f the next few years that will be cmpensated fr by prductivity gains fr each f the entities. Since CFO Frum guidelines d nt allw ne t take int accunt prductivity gains, we are taking the apprach f nt taking int accunt either the csts related t this prject nr the prductivity gains resulting frm its implementatin. Changes in nn-ecnmic assumptins relate t a reappraisal f certain technical assumptins in the calculatin f 2007 EV. 6

7 The impact f the ecnmic envirnment n ANAV is 74.7 millin eurs. Apprximately 50 millin eurs arises frm using a risk-free rate in the certainty equivalent that is lwer than the actual return f the prtfli, and the balance is due t incme tax adjustments. The impact f the ecnmic envirnment n the value f the plicy prtfli is 89.6 millin eurs. Changes in ecnmic assumptins have an impact f apprximately 231 millin eurs n the Certainty Equivalent. Hwever, an increase in equity vlatility led t an increase in the cst f ptins. Embedded Value France Millin eurs 31 December December 2006 Change (eurs) % Change Adjusted Net Asset Value 2, , % Value f the prtfli withut risk premium (CE) 3, , % Time value f financial ptins % Cst f Capital (100% f slvency margin) % Cst f nn-financial risks % Prtfli value 2, , % Embedded Value 4, , % The EV grew frm 4,461.6 millin eur t 4,653.4 millin eur between 31 December 2006, and 31 December ANAV decreased by 6%. This change is explained by the payment f the 2006 dividend and the decrease in bligatry unrealised capital gains (fllwing an increase in interest rates). The prtfli value increased by millin eur (+17.7%) between 2006 and 2007: - The certainty equivalent increased by 16.8% resulting essentially frm the change in accunting dctrine use f risk-free rate and the increase in the interest rates; - the cst f capital slvency margin, crrespnding t tax changes, increased by 15.6% fllwing the interest rate increase; - the cst f ptins increased by 19%, essentially fllwing the increase in equity vlatility bserved in the markets. 7

8 New Business value France Millin eurs 31 Dec Dec Change (M ) % Change New business value withut risk premium (CE) % Time value f financial ptins % Cst f Capital (100% f slvency margin) % Cst f nn-financial risks % New Business value (NBV) % APE % NBV / APE 12.8% 10.3% 2.5 pints PVNBP % NBV/PVNBP 1.5% 1.2% 0.3 pints New business value increased by 20.5% between 2006 and 2007 essentially fllwing a change t higher margin prducts. Sensitivities Definitin f sensitivities Fr new business, sensitivity t financial markets shuld be applied just befre the plicy sales. Sensitivity gives 2007 New Business Value if market cnditins at the mment f sale had been thse crrespnding t the sensitivity scenari studied. The sensitivities carried ut thrughut the entire area are as fllws: Financial Sensitivities Yield curve f +/- 100 bp: This sensitivity crrespnds t a parallel increase/decrease f the yield curve f 100 basis pints at the beginning f the prjectin. This sensitivity implies a recalculatin f the market value f bnds, re-investment rates f all asset classes f 100 basis pints and, in accrdance with CFO Frum guidelines, adjustment f the discunt rate. Decline in equity and prperty values f 10%: This sensitivity crrespnds t a sudden decrease in the prjected level f equity and prperty value indices f 10%. Increase in the vlatility f equity and prperty yields f 25% This sensitivity crrespnds t a sudden increase at the start f the prjected level f equity and prperty values vlatility f 25%. Increase in the interest rate vlatility f 25% This sensitivity crrespnds t a sudden increase at the start f the prjected level f swaptin vlatility. Nn-financial sensitivities Mrtality rate - 5% 8

9 Mrtality sensitivity is presented by separating mrtality sensitivity annuities and ther plicies (funeral, temprary). Other claim ratis - 5% This sensitivity shws the changes in value under a scenari in which the rati f claims t premiums n prvidence (ther than temprary, funeral) and health decline by 5%. Rate f decline - 10% This sensitivity crrespnds t a decline in the plicy surrender rate f 10%. Csts + 10% This sensitivity crrespnds t a decrease in administrative and management csts (ther than cmmissins and acquisitin csts). EV financial sensitivities- France Millin eurs ANAV Prtfli value Median value 2, , , ,653.4 Impact f a 100bp increase in the interest rate curve Impact f a 100bp decrease in the interest rate curve Impact f a 10% decline in equity and prperty values Impact f a 25% increase in interest rate vlatility Impact f a 25% increase in equity and prperty values vlatility EV nn-financial sensitivities - France (A) ANR (B) Prtfli value EV EV (A+B) EV EV (%) % % % % % Millin eurs Prtfli value Prtfli value Median value 2, ,275.9 Prtfli value Prtfli value Administrative expenses + 10% % Lapse rates -10% % Mrtality (annuities) - 5% % Mrtality (ther prducts) - 5% % Other claim ratis - 5% % 9

10 New Business Value (NBV) Sensitivity France Millin eurs NBV: Median value 51.7 NBV Risk-free rate +100 bp -0.8 Risk-free rate -100 bp -5.2 Decline in equity and prperty values f 10% -1.5 Interest rate vlatility + 25% -4.8 Equity and prperty value yield vlatility+25% 0 Administrative expenses +10% Lapse rates -10% 5.2 Mrtality (annuities) -5% -0.5 Mrtality (ther prducts) -5% 1.8 Other claim ratis -5% 13.2 A decline f interest rates creates a decline in the EV f the hldings. An increase in unrealised bnd gains n assets in net assets is nt cmpensated by a decline in margins with the reductin f equity yield. An increase in interest rates has little impact n the value, the decrease in unrealised bnd gains in the ANAV cmpensates fr the increase in margins. The sensitivity t the equity market level (yield and vlatility) shws Grupama s expsure t the equity markets. Desensitizing plicies fr the equity prtfli were carried ut in 2007 t reduce this expsure. ANAV sensitivity t different market shcks studied arises frm the sensitivity f the equity unrealised capital gains regarding net assets. New Business Value declines nticeably with the lwering f interest rates (decrease in margins n plicies in eurs) and slightly with the increasing f interest rates (increase in margins n eur plicies but decrease in margins n unit linked plicies with a bnd cmpnent). 5. Internatinal Results Embedded Value Internatinal (1) Millin eurs Ttal Adjusted Net Asset Value Value f the prtfli withut risk premium (CE) Time value f financial ptins Cst f Capital (100% f slvency margin) Cst f nn-financial risks -3.7 Prtfli value Embedded Value (1) Italy, Spain, Prtugal, Turkey, UK 10

11 New Business value Internatinal (1) Millin eurs Ttal New business value withut risk premium (CE) 14.6 Time value f financial ptins -0.9 Cst f Capital (100% f slvency margin) -2.1 Cst f nn-financial risks -0.5 New Business value (NBV) 11.2 APE NBV / APE 8.6% PVNBP NBV/PVNBP 2.0% Sensitivities Internatinal (1) EV financial sensitivities Millin eurs ANAV Prtfli value Median value Impact f a 100bp increase in the interest rate curve Impact f a 100bp decrease in the interest rate curve Impact f a 10% decline in equity and prperty values Impact f a 25% increase in interest rate vlatility Impact f a 25% increase in equity and prperty values vlatility EV nn-financial sensitivities (A) ANR (B) Prtfli value EV (A+B) EV Millin eurs EV Median value EV Administrative expenses + 10% Lapse rates -10% 4.5 Mrtality (annuities) - 5% Mrtality (ther prducts) - 5% 5.9 Other claim ratis - 5% 19.9 (1) Italy, Spain, Prtugal, Turkey, UK 11

12 New Business Sensitivities Millin eurs NBV: NBV: Median value NBV NBV Risk-free rate +100 bp % Risk-free rate -100 bp % Decrease in equity and prperty values f 10% % Interest rate vlatility + 25% % Administrative expenses +10% % Lapse rates -10% % Mrtality (annuities) -5% 0 0.0% Mrtality (ther prducts) -5% % Other claim ratis - 5% % 6. EV Adjustment / cnslidated net equity The table belw restates the prtfli value t establish the additinal value nt entered n the bks in cnslidated capital and reserves. Millin eurs Internatinal France TOTAL TOTAL 2006/2007 spread Prtfli value 134 2,276 2,410 2, AFA Unrealised capital gains entered in cnslidated net assets -6-1,061-1,067-1, Unrealised capital gains entered in ANAV VOBA Other adjustments Hlding csts Additinal value nt taken int accunt in the IFRS net assets 121 1,736 1, Except fr unrealised prperty value gains (besides real estate partnerships classified as AFS), the share incme f unrealised capital gains returning t the sharehlder is entered in cnslidated net assets and in the prtfli value. Thus the unrealised gains entered n the bks in the net cnslidated PB/IS accunts are cancelled ut. The share incme f unrealised gains in equity is entered in the ANAV and nt in the prtfli value. The latter must therefre be included in the adjustments. Other adjustments arise frm differences between the net bk value f the cmpany (EV view) and the cnslidated net bk value, specifically in the class f prperty assets. The difference between the additinal value in 2006 and 2007 is explained by the differences between the cmpany un-recvered csts and the cnslidated un-recvered csts f prperty assets, that had nt been identified during 2006, by the increase in the prtfli value and the decrease f the bnd unrealised gains created by the increase in interest rates. 12

13 7. Methdlgy and Assumptins Grupama presents the fllwing Embedded Value: ANAV CE VT - OF CC / RNF MCEV Adjusted Net Asset Value + Risk-free prtfli value - Time value f ptins and financial guarantees - Cst f capital f slvency margin - Cst f nn-financial risks = Market Cnsistent Embedded Value ANAV Adjusted net asset value (ANAV), in keeping with CFO Frum, crrespnds t the market value f the assets represented by capital and reserves and ther reserves due t sharehlders. The Grup s ANAV was calculated by cnslidating restated cmpany net assets fr each entity. In summary, the ANAV as at 31 Dec is cmprised f the fllwing individual elements: retained net assets befre dividends distributed in 2008 fr fiscal year The capitalisatin reserve was calculated fr the sharehlder withut any tax adjustments verall prvisins whse risks and/r future csts have been taken int accunt in the prtfli value the amunt f the unrealised gains represented by net and absrbed assets and mathematical prvisins nt having undergne any prfit sharing distributin (frm a cntractual r regulatry pint f view) Hlding csts These csts crrespnd t the share f hlding csts attributed t the Grup Life insurance business (France and internatinal) Certainty equivalent The prtfli value withut risk premium (CE) crrespnds t the present value f future prfits generated by plicies in frce at the date when it was calculated and is calculated using the fllwing methds: The result is defined as being: Under credit: cllected premiums financial prducts Under debit: claims, 13

14 cmmissins, csts: acquisitin, administrative and ther csts, apprpriatins/writebacks f technical prvisins (including prfit sharing and general prvisins), and crprate taxes. Nn-ecnmic best estimate assumptins arising frm statistical studies carried ut n Grupama s plicy prtflis. Determinatin f the prjected yield rates n the basis f the fllwing principles: fr debt securities n hand at the date f calculatin: prjectin f real actuarial yields, after eliminating spreads rewarding default risk by assuming each security will be held until expiratin, fr all ther assets and new investments: use f the frward risk-free curve rate arising frm the swap rate at 31 Dec. 2007, All future cash flw discunted n the basis f the swap rate curve as at Dec. 31, The result f this apprach is that the unrealised gains f assets represented by the mathematical prvisins are taken int accunt in the prjected future yields. The Certainty Equivalent includes the intrinsic value f ptins and financial guarantees, that is the cst generated by these ptins and financial guarantees in the estimated ecnmic scenari. Cst f ptins and financial guarantees French plicies in eur include fr the mst part ptins and/r financial guarantees: The Minimum Guaranteed Rate (MGR) tgether with prfit sharing (PS ptin), guaranteed buyback amunt taking int accunt the dynamic behaviur f the insured (buyback ptin). These plicies are characterised by an asymmetry f sharing in prfits and lsses between the sharehlders and the insured fllwing changes in financial markets. The unit linked plicies n the ther hand d nt include any ptin r financial guarantee except fr certain minimum guarantees that are part f a mathematical prvisin under French regulatins f cmpany accunts. N special treatment was made fr these guarantees, cnsidering that the cmmitment is already cvered under this prvisin. Prvident plicies als d nt include any material financial ptin (n asymmetry between sharehlders and insured). Insurance liabilities are nt in principle traded in an rganised market; the Prtfli Market Value can therefre nly be theretical. Grupama s apprach assumes that the nly surce f risk that wuld influence the Prtfli Market Value is market risk, that is the risk linked t changes in the principal macr-ecnmic variables. Specifically, any impact f the fllwing surces f risk have nt been taken int accunt: credit risk, liquidity risk, r risk linked t adverse changes in Best Estimate assumptins used t calculate the results f the plicies. The risk linked t these Best Estimate assumptins has been taken int accunt elsewhere in the cst f nn-financial risks. 14

15 The principal ptins and financial guarantees calculated are the fllwing: the rules f prfit sharing (cntractual r regulatry), that cmbined with guaranteed rates, create an asymmetry between assured return and the insurer return, sudden buybacks that may ccur during unfavurable market cnditins fr the insurer. Grupama s ptin calculatins cver the prfit sharing ptin (arising frm the asymmetric distributin f financial returns between the insurer and the insured) and the buyback ptin f the fllwing plicies: individual savings plicies in eur, individual retirement pensin plicies in eur, industry wide plicies where the insured s capacity fr prfit sharing and buyback are cnsidered significant, plicies cvered by Article 83 f the General Tax Cde, plicies cvered by Article L.441 f the Insurance Cde. Neutral risk apprach Since market risk is the nly risk influencing the Prtfli Market Value, we naturally use calculatin techniques currently used in financial thery, and specifically the neutral-risk apprach. Accrding t this apprach, the Prtfli Market Value is equal t the current prbable value f flws attributable t the sharehlder during the entire prjectin perid. These cash flws are prjected in a neutral risk prbability universe, which means that the prjected returns d nt include any risk premium and that the flws are discunted using an instantaneus risk-free rate f each ecnmic scenari (integrated with the ne year rate). Prbable current values are calculated using the Mnte-Carl simulatins technique. Future cash flws are prjected fr 5,000 scenaris generated by the Barrie & Hibbert ecnmic mdel; the expected value f an element is estimated by the arithmetic average f the values f this element bserved in the 5,000 simulatins. The Prtfli Market Value calculated in this way crrespnds t a Market Cnsistent valuatin, that is estimated using a financial mdel that allws a valuatin f the assets f reference in keeping with the prices bserved n the actual financial markets. In the traditinal Embedded Value, the discunt rate is estimated as the sum f the risk-free rate and a risk premium representing the ttality f risk factrs ptentially influencing the prfitability f the enterprise. CFO Frum guidelines require adjusting this risk premium depending n the level f expsure t risk and especially t make the discunt rate fit with the ther ecnmic assumptins made. The time value f ptins and financial guarantees is calculated as the difference between the fllwing amunts: the stchastic value f the future yields f plicies ( Prtfli Market Value ), and the Certainty Equivalent r risk-free prtfli value (CE). The Prtfli Market Value is equal t the sum, thrugh the duratin f the prjectin, f present value f the fllwing items: dividends paid t the sharehlder net f crprate taxes the sharehlder s share f the capitalisatin reserve after estimatin f the grss taxes and in a cherent fashin with the adjustment t the ANAV, the sharehlder s share f the residual prvisin fr cntingent payment risk after prjectin net f crprate taxes, 15

16 the sharehlder s share in the unrealised capital gains r lsses after prjectin net f crprate taxes, Cst f Capital (CC) / Taking int accunt nn-financial risks Grupama kept its Cst f Capital at the level f 100% f the minimum slvency margin required by current Eurpean regulatins (slvency I). This capital requirement has generated a frictin cst fr the sharehlders in that its freezing causes the enterprise t pay financial management csts and especially taxes (crprate taxes n financial revenues generated). Under peratinal risks, a supplementary risk premium f 25 bp has been included in the Cst f Capital f the slvency margin. Furthermre, the plicy prtflis having technical risks are expsed t risk factrs that are nt taken int accunt elsewhere. These cnsist in, amng thers, adverse changes in claims assumptins (mrtality, mrbidity, lngevity ). A supplementary risk premium f 50bp has therefre been added t all these plicies. The cumulative value f these tw risk premiums (25bp fr peratinal risks and 50 bp fr technical risks) cnstitute the supplemental risk premium included in the cst f capital and used t calculate the cst f nn-financial risks. New Business value (NBV) The value f a year f New Business is cnsidered t be an indicatr f the prbable change in Embedded Value. Its purpse is t evaluate the cntributin f a year f business t the enrichment f the cmpany. Generally it is analyzed as the difference between the tw fllwing items: New Business Value cmmercialised the year preceding the calculatin date carrying csts f the regulatry slvency margin relative t the prtfli f new plicies underwritten during this year Cst f nn-financial risks With the exceptin f future returns, the methdlgy and assumptins used are the same as thse used t calculate the plicy inventry in the prtfli. It shuld be nted that New Business Value was calculated using the assets cnsisting f new investments (the s-called stand alne apprach), that is withut use: f the inventry f initial unrealised capital gains (whatever their nature), f the prfit-sharing at the time f the calculatin date. The prfit-sharing strategy was adapted t this financial envirnment (lack f initial underlying wealth). The underlying assumptin is that Grupama s cmpetitive envirnment wuld experience the same cnstraint f lack f initial underlying wealth. The prjectins used t estimate the value f a year f New Business crrespnd t the business prfile underwritten during 2007 with premium vlumes achieved fr 2007 business. Regarding the allcatin f payments between new business and plicy inventry, the fllwing guidelines were applied: Fr savings plicies in eur and unit linked plicies, nly the peridic premiums were included in the inventry (all later payments n existing plicies are cnsidered as new business). Fr prvident plicies (cvering individual prvidence, health and plicies such as the industry wide nes) the insurance plicies f lenders, peridic premiums were included in the value f the inventry. Thus nly the new plicies (r insured fr lenders insurance) are cnsidered in new business. 16

17 Fr cllective retirement plicies, Article 83, and plicies f the L.441 type, peridic premiums have been included in the value f the inventry (i.e. nly new cllective plicies are cnsidered as new business). Fr cllective retirement plicies, Article 39 standard, n future premium has been prjected fr the inventry (i.e. all later payments n existing plicies are cnsidered as new business). Value creatin analysis Fllwing guideline 12 f the CFO Frum, Grupama has created an accunt t analyze creatin f value t explain the change in Embedded Value between tw fiscal years. The main psts t this accunt are described belw. The first pst (changes in scpe and methd) include all the initial adjustments crrespnding t changes in methd. This year the mst nticeable effect is the use f the swap rate curve instead f the zer-cupn curve rate. Cntributin frm perating businesses The pst Cntributin frm perating businesses measures the impact: f the effect f a ne-year delay f the EV f the previus year, This pst measures the effect f passage f time n the EV. The discunt rate used fr calculating the effect f a year s time lag n the risk-free prtfli value in frce (r Certainty Equivalent) and n the cst f capital crrespnds t the assumptin f a risk-free rate used n 31 Dec Since it is an analysis f the creatin f value frm the time value f ptins and financial guarantees, the Prtfli Market Value given a year later was nt derived frm an implicit discunt rate but in cnsidering the prbable present value f cash flws t be distributed t the sharehlder a year later. f the difference between the assumptins used n 31 Dec fr changes in nnecnmic risk factrs (such as csts, mrality, mrbidity, falls, ) fr fiscal 2007 and the actual change in these factrs ver the same perid, f the change in assumptins related t all nn-ecnmic risk factrs, the cntributin f 2007 new business. Result linked t the change in the ecnmic envirnment The pst Result linked t the change in the ecnmic envirnment measures the impact n EV f: the change experienced between prjected financial returns fr the past year and the actual returns received, and the change in each variatin f the prjected assumptins f change in ecnmic risk factrs (prjected future returns, ecnmic stchastic scenaris). Assumptins Assumptin f discunt rate and rate f return Guideline 10 f the CFO Frum requires enterprises t retain cherent ecnmic assumptins fr the value f future returns and the time value f ptins and financial guarantees. Grupama applied this guideline in the fllwing manner: 17

18 fr calculating the Certainty Equivalent, n risk premium was applied t financial returns f the prjected futures market (equal t the ne year frward rates deduced frm the swap rate curve as at 31 Dec. 2007), Fr calculating the time value f ptins and financial guarantees, the swap rate curve as at 31 Dec was used t calibrate an ecnmic mdel. The fllwing table presents the rate curve used fr stchastic calculatins: Swap yield curve Maturity at % % % % % % % % % % The stchastic simulatins were based n the 5,000 scenaris prvided by the Barrie & Hibbert ecnmic generatr. The ecnmic generatr used t prduce these simulatins allws prductin ver 40 years: changes in a stck index and dividend rate: the return f this index is described using a lg-nrmal mdel with a determinant vlatility structure, the cnsumer price index, the risk-free swap rate curve fr whle life frm 1 t 30 years: this curve is described using the Black-Karasinski mdel with tw factrs the actual risk-free swap rate curves fr whle life between 1 and 30 years: this curve is described using the Vasicek mdel with tw factrs, the change in the real estate index and in the assciated rental rate: the return n this index is described using a cnstant vlatility lg-nrmal mdel. Calibratin f the rate mdel The initial curve used t calibrate the nminal rate mdel is the swap rate curve as at 31 Dec The initial curve used fr calibrating the mdel f actual rates was extraplated frm the prices, as at 31 Dec. 2007, f a basket f Treasury bnds indexed n inflatin. Vlatility parameters were estimated using the structure f implicit vlatility bservable in the financial markets n 31 Dec. 2007, beginning with frward at-the-mney swaptin prices (that is whse exercise price crrespnds t the frward rate fr the crrespnding maturity). The swaptins basket used fr calibratin is cmpsed f ptins expiring frm 1 t 30 years based n swaps f 5, 10, and 20 years. Calibratin f the securities mdel 18

19 The vlatility parameters fr the securities mdel were calibrated using the average bservable vlatility structure implicit in the financial markets in 2007 beginning with the price f puts n the Eurstxx index. The assumptins f vlatility f securities and rates cnsidered fr calibrating ecnmic scenaris are the fllwing: target vlatilities securities Swaptins 20 years 1yr 2yr 30yr 5yr 10yr 20yr 18.80% 19.20% 29.50% 11.30% 10.80% 9.75% Calibratin f the prperty mdel In the absence f liquid markets f derivative prducts having prperty as the underlying asset, the vlatility parameters used t calibrate the prperty mdel were based n the histrical vlatility f the IPD f a number f Eurpean cuntries. Prperty vlatility is cnsidered cnstant at 15%. Prfit sharing and financial margin plicies Prfit sharing plicies are in keeping with the bjectives and practices f each f the entities. Thus, the distributed financial returns crrespnd t the share f financial prfits histrically distributed t the ensured withut this amunt being less than the technical interest and amunts f cntractual r regulatry apprpriatin. In the mdel fr calculating the ptins, a prfit sharing sales target is defined fr each prduct. This prfit sharing target reflects the rate expected by the insured in the different market envirnments and when the target is nt reached cmpensating buybacks are allwed. This cmpensatry cmpnent takes int accunt the ability that the insured have t buy back their plicies if the payments received d nt seem satisfactry. Asset allcatin The initial allcatin crrespnds t the allcatin as at 31 Dec f each f the calculated asset prtflis. In the mdel f csts f ptins and financial guarantees, the allcatin f nn bligatry assets decreases with the duratin f the liabilities. The initial market value allcatin f the prtflis is 75%/20%/5% in France and 92%/6%/1% abrad respectively fr returns f rates/securities/prperty. Csts Fllwing CFO Frum guidelines, n prductivity gain has been taken int accunt in the prtfli values. Cnsequently, csts linked t exceptinal prjects that will achieve prductivity gains have nt been prjected. Changes created by nt taking these csts int accunt in the EV appear under nnecnmic adjustments in the analysis f the creatin f value. Hlding csts A prtin f these csts is attributed t Grup Life Insurance business (France and internatinal). Allcatin rules are based n the grss margin generated by the different businesses. 19

20 Tax Treatment Fr ttal prjectins f prfits frm inventry and new business, Grupama applied a tax rate f 34.43% fr France and cuntry rates fr Italy f 32.3%, Turkey f 20%, Prtugal f 26.5%, Spain f 30%, and England f 28%. Adjustments were made in rder t take int accunt the specific tax rates nt taken int accunt elsewhere in EV calculatins. These adjustments are f tw rders: - Accunting fr the tax system allwing fr strategic interests: A significant part f the R unrealised gains arises frm a specific tax treatment fr strategic participatins. This system allws a reductin f the tax rate t 1.72%. The tax savings created this way has been included in the EV. - Other tax adjustments: Since certain prvisins and ther unrealised capital gains (stability funds, verall management prvisins, revaluatin funds) have already been taxed, they were included in EV and taxed at the rate f 34.43%. In rder t avid cunting taxes twice, an adjustment was made. 8. B&W Delitte Opinin B&W Delitte have certified the Embedded Value figures f Grupama as at 31 December In the curse f ur wrk, we have reviewed the value in frce f Grupama plicies as at 31 December 2007, as calculated internally accrding t management directives and under its respnsibility. Our review has included the methdlgy adpted, the assumptins made and the calculatins carried ut. Our review was carried ut in accrdance with generally accepted practices and actuarial prcedures. We have relied especially n the infrmatin prvided by Grupama withut attempting t check it thrughly. In light f the preceding remarks, we cnsider that the methdlgy adpted is in keeping with market practices and CFO Frum guidelines (with the exceptin f the Turkish subsidiary fr which a traditinal calculatin f Embedded Value was carried ut), that the assumptins made by Grupama management are by and large reasnable and cherent, and that the results f the Embedded Value calculatins are in keeping with the methdlgy adpted by Grupama management and the assumptins made. The calculatins f Embedded Value are based n numerus assumptins relating t the state f the financial markets, peratins management, tax implicatins, and ther factrs mst f which are nt directly under Grupama s cntrl. Althugh the assumptins made are estimates that Grupama and B&W Delitte deem reasnable, ne usually ntes a deviatin between these prjected assumptins and their realisatin in the future. Such deviatins can significantly change the value. 20