International Financial Reporting for Insurers. August 19-21, Hong Kong. Session 2: Financial Reporting for Insurance Companies.

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1 International Financial Reporting for Insurers August 19-21, 213 Hong Kong Session 2: Financial Reporting for Insurance Companies Matt Lawrence

2 Financial Reporting for Insurance Companies (including management reporting) Matt Lawrence Prudential Corporation Asia Session 2 Insurance: why is reporting so difficult? Inverted production cycle - costs are not known before services provided Involves bearing risk - inherently uncertain - hence requires significant assumptions Very long time horizons Income statement largely driven by revisions of large balance sheet numbers Initial acquisition costs make contracts loss-making initially but profitable over the medium and longer term Regulatory requirements differ from country to country Should the measurement of insurance liabilities be linked to the measurement of matching assets? 2 1

3 Insurance reporting - overview For each insurance contract there are many possible ways of reporting its performance over its lifetime Some are more familiar than others Here are the main approaches 3 Statutory or regulatory based measures Statutory or regulatory measures Focus on solvency Are liabilities sufficient? Cautious assumptions, prudent margins Assets may be subject to haircuts Acquisition costs are typically expensed immediately Designed by regulators: safety first and policyholder ld protection 4 2

4 But these don t really provide useful information for investors GAAP measures typically focus on profits How much money have I made this year? Acquisition costs are typically deferred Assumptions may be locked in or active Little international agreement on how GAAP profits are measured Profits often emerge late in the product s life GAAP measures 5 Investors still didn t find this very useful and so Value measures e.g. Traditional, European, or Market Consistent Embedded Value Focus on value creation How much value have I created this year? Based on discounting statutory transfers But investors have become less trusting of assumptions And regulators and standard setters say that there is too much hope value involved Lots of varieties: TEV, EEV, MCEV 6 3

5 Often companies use a combination of metrics... This makes for a heavy reporting workload Especially as in some countries there may be other measures as well e.g. for tax Some companies may choose to use other measures e.g. margins, IRR, economic capital, free cash flow generation Regulatory reporting (stat) and more Looking at KPIs (in 211 results presentations) Total Operating Net FCD Allianz revenues profit Income solvency Underlying Solvency I Economic Op. free AXA earnings ratio solvency cash flows Generali Operating Solvency I Economic Net result result ratio solvency Insurance Insurance ING APE result operating RoE before tax result Munich Re Prudential Swiss Re Zurich Net Profit IFRS operating profit Nt Net Income Business operating profit equity Total profit before tax RoE Net Income Dividend EEV new business profit EPS Life new business Combined ratio (P&C) EEV operating profit Economic solvency Debt gearing Dividend per share Life general a/c assets Return on investments EEV s/holders funds Proposed dividend Payout ratio Admin exps. / op. income IGD surplus Book value Combined equity per share ratio (P&C) equity RoE Combined ratio (P&C) equity funds L&H benefit ratio Volume information Underlying earnings/profit GAAP profit EEV measures Solvency measures Capital markets measures Cash generation Combined ratio Net remittances Underlying free Dividend surplus generation Return on investments Source: Insurance Reporting Round-Up 211, KPMG LLP (UK) 8 4

6 But it s not always easy to see what s going on... m 2, Prudential plc EEV 1, U.S. GAAP AP UK GAAP IFRS U.S. GAAP Source: Prudential plc Annual Report and Accounts & SEC filings, What does the future have in store? 1 5

7 Current proposals for IFRS reporting Single model for all types of insurance contract Consistency of insurance accounting across an insurer that reports under IFRS Current assumptions updated at each reporting date BUT Do the proposals meet investor needs any better that other standards when these are applied consistently? Will it lead to non-gaap measures being dropped? 11 However Important not to lose sight of fundamentals Reporting: does not affect cash flows affects when profits and losses are reported 12 6

8 1 Premiums Statutory 1 Claims Expenses Acquisition costs Statutory Profit IFRS Premiums Claims Expenses Acquisition costs IFRS Profit 1 5 Profit EV Cumulative Profit but end up in the same 1 position Statutory IFRS EV profit 14 7

9 In summary Insurance reporting is complex No single globally accepted basis for reporting Insurers use many metrics for reporting: regulatory (stat) GAAP embedded value others However, reporting only affects economics (profitability) when it drives how much capital must be held 15 Thank you! 8

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