eev/mcev – recent market trends · proprietary and confidential. for towers watson and towers...

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

EEV/MCEV – Recent Market Trends

Dominique Lebel June 2013

© 2013 Towers Watson. All rights reserved.


Agenda

Background on EEV/MCEV 2012 EEV/MCEV publication highlights EEV/MCEV trends

1

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The origins of EV in life financial reporting

2

Addressed inadequacies in statutory/GAAP reporting: High new business strain/ deferral of profit emergence No insight into new business profitability

EV used to show value creation and for management incentives

VIF included as asset on holding company balance sheet Banks reported change in EV as profits in their primary

accounts

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VIF

VNB

Net Assets

VIF

Net Assets

© 2013 Towers Watson. All rights reserved.


1988 1993 1998 2003 2008 2013

All Stocks Life Index

Developments in financial reporting

Source: Towers Watson analysis of Bloomberg data

Statutory/GAAP Traditional EV EEV/MCEV Cash and Capital

Economic capital/risk

EEV Principles published (2004)

MCEV Principles published (2008)

Prudential reports on an “Accruals basis” at YE 1992

Pearl appraisal value, 1989

First MCEVs published 2003

90s bull market

Dotcom bubble burst

Global Financial

Crisis

3



Within EEV, a number of approaches have been used to allow for risk

EEV allowance for risk

Top-down Bottom-up

Unadjusted WACC

Adjusted WACC

Product- specific

beta

Stochastic ‘real world’

Indirect MCEV

Direct MCEV

4



EEV vs. MCEV

Assets

C&S

Liabilities

PVFP @ RDR**

VIF

TVOG

Cost of NHR

Frictional Cost of

Required Capital

*Risk Adjusted Discount Rate **Market Consistent Discount Rate

PVFP @ RDR*

VIF

TVOG

Cost of Required Capital

Market Value of Free Surplus + Required Capital

Market Value of Free Surplus + Required Capital

Market Consistent Embedded Value European Embedded Value (Top Down Approach)

EEV MCEV

FVL

Assets

C&S

Liabilities

5



CFO Forum – Recent Statements

April 2011 The CFO Forum withdrew the intention that the Market Consistent Embedded Value (MCEV) Principles© are the only recognized format of embedded value reporting from 31 December 2011. The withdrawal reflects the ongoing development of insurance reporting under Solvency II and IFRS. The CFO Forum remains committed to the value in supplementary information, including embedded value.

September 2011 The CFO Forum released interim transitional guidance for embedded value reporting in advance of the effective date of Solvency II: For reporting dates on or before 30 June 2012, there is no requirement to make allowance for the developing European regulatory regime (Solvency II) and associated consequences when complying with the European Insurance Market Consistent Embedded Value (MCEV) Principles© or the European Embedded Value Principles (EEV). This interim transitional guidance reflects that the full implications of Solvency II will not be known with sufficient certainty before the second quarter of 2012 at the earliest.

December 2011 In response to current sovereign debt market conditions and complementary to the transition guidance published in September 2011, waiting for the finalization of Solvency II, the CFO Forum members are working collaboratively on the application of the Market Consistent Embedded Value (MCEV) Principles© to ensure that companies have access to the best possible guidance on the subject and that the application is appropriate to the current market conditions and to the needs of the users of financial statements. Including an allowance for the current sovereign debt market conditions as a component of the reference rate in embedded value reporting or disclosing a sensitivity as supplementary information of reported embedded value to such parameters where it is deemed appropriate would represent an initial step towards the expected convergence of MCEV with the developing European regulatory regime (Solvency II) on the matter. 6



CFO Forum – Recent Statements

September 2012 The CFO Forum released revised interim transitional guidance for embedded value reporting in advance of the effective date of Solvency II: • The revised interim transitional guidance is effective for all reporting dates until such time

that there is full clarity on Solvency II, including the effective date and the publication of all relevant standards and guidance.

• Until the conditions set out above are met, there is no requirement to make allowance for the developing European regulatory regime (Solvency II) and associated consequences when complying with the European Insurance Market Consistent Embedded Value (MCEV) Principles© or the European Embedded Value Principles (EEV).

This guidance reflects that the full implications of Solvency II are not known with sufficient certainty at this time.

7



EVs reported by more than 90 companies across the globe

0 5 10 15 20 25 30 35

Canada, Israel, South Africa

Japan

Asia-Pac excl. Japan

Europe

7

2

28

1

7

14

3

15

11

3

2

Number of companies reporting year-end 2012 embedded values

TEV EEV Principles MCEV Principles Other

Source: Towers Watson analysis 8



Total reported EV approximately $900bn at year-end 2012

395

161

145

122

70

Reported EV by location of headquarters (USD bn)

Europe

Japan

China / Hong Kong

Rest of Asia-Pacific

Canada, South Africa,Israel

Source: Towers Watson analysis of company EV reports 9



10

EEVP & MCEVP trends

Source: Towers Watson Insights, 2012 Life supplementary reporting: Focus on EV/EEV/MCEV and wider metrics, May 2013

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011 2012

EEV: top down & other EEV: market-consistent calibration MCEV Principles



MCEV technical issues

Equivalent annual cost of capital charge for NHR for MCEV Principles publications:

Extrapolation approach At YE12, changes to last liquidity point and convergence period by eight

companies Liquidity premium 2/3rds of companies applying illiquidity premium used method similar to

QIS5

Non-hedgeable risk (NHR):

Reference rate:

11



2012 EV/VNB Results for US Subsidiaries of European Multinationals

Multinational Change in EV Change in VNB Margin Allianz 16% -1.6% Aviva 73% -3.6% AXA -4% 0.8% Legal and General (Banner) -4% 1.1% Prudential UK (Jackson National) 13% -0.4% Zurich (Farmers New World) -7% 3.0%

12 Source: Towers Watson analysis of published year end 2012 EV reports


0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012Solvency I ratios EC solvency ratios

Increased focus on risk and capital

Issues IGD/Solvency I not very risk based (particularly Pillar 1) Practice varies around EC disclosure EC: lack of disclosure of methodology, assumptions and sign off

Number of current CFO Forum members reporting Solvency I and Economic Capital Coverage Ratios

Source: Towers Watson analysis of company reports

13



Increased focus on cash flow

1 1

5 4

5

7

10 11

13 13

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012

New business In-force business

Emergence of projected distributable profits (from the 39 EEVP/MCEVP companies)

Source: Towers Watson Insights, 2012 Life supplementary reporting: Focus on EV/EEV/MCEV and wider metrics, May 2013

Issues “Real world” or “risk neutral” Gross or net of required capital?

14



Projected cash flow disclosures: Prudential

15



Embedded value reporting in North America Is a new trend about to start?

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Improve construction/presentation of each metric

Metric Suggested improvement

Cash • Clearly define ‘cash’ • Net of required capital • Realistic (TEV style) cash flow projections

Capital • Regulatory and economic capital • Information on capital constraints at main entities

Profit • Based on IFRS • Split by main drivers (investment, insurance, expenses)

Value • Realistic (TEV style) cash flow projections • Discount at rate allowing for all risks (IDR) for central

value New business

• Value based on realistic cash flows with full (MCEV) allowance for risk

Sensitivities key to communicate risk

Bet

ter l

inks

bet

wee

n m

etric

s

17


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Contact

Dominique LeBel, FSA, FCIA, MAAA Towers Watson Director and Leader, Hartford Life Practice

860-843-7161 [email protected]

towerswatson.com Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

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eev/mcev – recent market trends · proprietary and confidential. for towers watson and towers...

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