APPENDIX 1 : Q&A - CNP ASSURANCES ALTERNATIVE APPROACH

Transcription

1 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A APPENDIX 1 : Q&A - CNP ASSURANCES ALTERNATIVE APPROACH, IFRS 4 Phase II- ED 2013/06 1/18

2 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A Contents 1. How does this proposal simplify accounting for participating contracts? 5 2. Does this proposal require to eliminate the exception of 33 of ED/2013/7? 5 3. How does this proposal answer to main concerns of ED/2010/8? 5 4. How is this proposal consistent with the building block approach? 6 5. How does this proposal account for economic asset & liability mismatches? 6 6. How is the CBY computed for? What are its main drivers? How does it compare to current market rate curve? How does a disposal of an interest-rate financial instrument alter the initial CBY? How does a disposal of an equity financial instrument alter the initial CBY? Does this proposal account for unrealized gains/losses in the income statement and, if yes, what is the rationale? If impairment of equity financial instrument was to be taken into account P&L, how would it alter the CBY? Is the CBY a current market rate or locked interest rate? If 100% of the assets were to accounted for at FV-P&L, how is the CBY different from the one of a portfolio made up exclusively of assets accounted for at FV-OCI? How is an accounting mismatch avoided regarding assets accounted for at FV-P&L if CBY unwinds the cost of the best estimate and differences between current market rates and CBY are accounted for in OCI? Is it a top-down or a bottom-up rate or conversely is its computation insensible to the choice of the method? 9 7. How does this proposal account for options & guarantees? 9 8. How and when the contractual service margin is adjusted? 9 9. What is the driver (time, reserves, service, claims ) of the contractual service margin? What elements are accounted for within OCI? Which elements accounted for within OCI are recycled? 10 2/18

3 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 12. Which elements accounted for within OCI are not recycled? If a realized gain of the sale of an equity-instrument is not recycled, how accounting mismatch is avoided within the unwinding of the best estimate? Does OCI reserve fully revert to nil at termination of a contract? How OCI reserve is recycled if a contract is derecognized due to early lapse or surrender? Does this proposal account for default premium of interest-rate financial instruments? Does this proposal account for risk premium of equity instruments? What are the interest-rate sensitive assumptions? Is the underlying principle of CBY consistent with the principles of the ED or of its basis for conclusions? Does this proposal give an incentive to invest in risky assets? Is the CBY the same for all preparers? If not, how users of the accounts can compare financial statements of different preparers? If an alternative reference was chosen to compute the unwinding rate of insurance liabilities, would it be better? How does this proposal differ from the one CNP Assurances presented to the Board in april/may 2011? How does this proposal answer to Stephen Cooper s dissenting view? Does this proposal require a new fair value option and why? How is this proposal different from the Allianz model? How is this proposal differing from MCEV measurements and presentation? How is this proposal differing from Solvency 2 measurements? 15 3/18

4 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 30. Does this proposal embody non market-consistent measurements? Why is this proposal a better alternative to replicating portfolio technique (RP)? How easily can this proposal be applied by preparers? How is this proposal consistent with existing IFRS9 standards and EDs? How is this proposal not consistent with existing IFRS9 standards and EDs? How is this proposal consistent with macro-hedging coming DP? How does this proposal account for new installments? Is this proposal compatible with an accounting of the bond portfolio at amortized cost? Can this proposal account for all participating contracts? Can this proposal account for non-life long term contracts? How does this proposal account for expected inflation of claims? How does this proposal account for non-expected inflation of claims? If an extensive use of the contractual service margin (e.g. merger of existing proposed contractual service margin and OCI) was to be proposed, will it be consistent with this proposal s principles? 18 4/18

5 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 1. How does this proposal simplify accounting for participating contracts? This proposal simplifies the accounting for participating contracts, because it is applied consistently to all cash flows arising from the contract with no bifurcation or unbundling of rights and obligations towards policyholders needed, while the mirroring approach requires to separate the cash flows depending on their nature (directly linked, indirectly linked and not linked) and to account for these changes separately. Such bifurcation is overly complex because options and guarantees embedded in the Insurance products are not modeled separately and because the percentage of asset dependant cash flows suggested in the mirroring approach is not stable over time (please see demonstration in the slides). Our proposal accounts in a consistent way for all cash flows required by the building block approach in line with the objectives of the Board to account for effects of economic mismtaches and of options and guarantees. 2. Does this proposal require to eliminate the exception of 33 of ED/2013/7? The scope of the exception described in 33 may seem too narrow to cover all types of participating contracts. Our proposal could apply to all participating contracts, even if the two conditions (the contract requires the entity to hold underlying items and specifies a link between payments to the policyholder and the returns on those underlying items) set in the ED are not met. Nevertheless, our proposal can still apply to the exception of 33 (as an alternative to 34 ) and thus doesn t require its elimination even though CNP Assurances supports an unified approach to all participating contracts. 3. How does this proposal answer to main concerns of ED/2010/8? One of the main concerns raised by insurance companies is the elimination of accounting mismatches that could arise between the accounting of assets and liabilities while they are economically matched. Financial assets can be classified under FV-PL, FV-OCI or amortized cost categories depending on their nature and the entity s business model. On the other hand: ED: specified that changes in the insurance liability should be fully booked in P&L ED: specifies that, under the general approach requirements, changes in the insurance liability should be booked in P&L for the interest expense calculated at a locked-in discount rate at the inception of the contract (updated discount rate for cash flows that vary directly with underlying asses returns) and in OCI for the effect of the change in the discount rate (difference between the current and the lockedin/updated interest rate) Concerns were raised with regard to 2010 ED by companies which business model would result in classifying their financial assets mainly in the FV-OCI or amortized cost categories because of the accounting mismatches that would have arised if changes in the insurance liability were fully booked through P&L and of the spurious volatility that would have resulted from the use of current market rates to unwind the liability in the statement of profit or loss (PoL). The 2013 ED has introduced the OCI category and is partly responding to those concerns, nevertheless, it raised new concerns from insurers which business model results in classifying assets in the FV-PL. Our understanding of current alternative approaches (before full disclosure of answers on the IASB website) is that our proposal is the only alternative approach that can satisfy all insurers whatever their business model and asset-liability management are: 5/18

6 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A - The CBY rate (Current Book Yield) is used as pivotal rate to calculate the interest expense that would be booked through P&L, the effect of change between current discount rate and the CBY rate is booked in OCI. - The CBY is an asset based rate that is calculated on the basis of financial revenue booked through PL. Thus, if assets are classified in the FV-PL, changes in their value will be captured in the CBY rate. 4. How is this proposal consistent with the building block approach? Our proposal consists in measuring the insurance contracts according to the building block approach as proposed in the ED. The main difference with the current proposal of the general building block approach is the calculation of the interest expense based on the CBY rate instead of a locked-in discount rate. 5. How does this proposal account for economic asset & liability mismatches? Our proposal allows avoiding accounting mismatches when assets and liabilities are economically matched. In case of economic mismatch, the P&L impact is sill consistent between financial revenues for assets and interest expense for liabilities and the economic mismatches are progressively accounted for in P&L according to the CBY computation methodology that takes into account the effects of reinvestments in unmatched periods and the effect and the effects of unanticipated disposals of assets. 6. How is the CBY computed for? 6.1. What are its main drivers? The CBY is derived from the projected risk neutralized asset cash flows: - Asset income includes interest income, dividends, realized/unrealized gains and losses recorded in P&L - Yield basis is the average asset value (FV for assets accounted at FV-PL, amortized cost value for asset recorded at FV-OCI) - Yearly yields are compound to set the CBY discount curve - Discount curve is adjusted to eliminate components which do not reflect the liabilities. - Reinvestment assumptions are applied for yearly yields where assets and liabilities durations are unmatched Please see slide 5 of Appendix 2 for the precise computation formula. 6/18

7 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 6.2. How does it compare to current market rate curve? The CBY rate curve is different from the current market rate curve because it is based on the business accounting model: the discount rate would be the same if assets are classified in FV-PL category. In other cases (FV-OCI category), the CBY curve will not include the effects of changes in market rates for assets already held. The rationale of this is to incorporate the business model of the insurers when allocating and managing their assets and the corresponding capacity to credit policyholders How does a disposal of an interest-rate financial instrument alter the initial CBY? The initial CBY is impacted by the disposal of an interest rate financial instrument through: - The recycling of realized gain or loss of the disposal in P&L - The P&L impacts projected of the reinvested financial instrument, based on current market rate at the reinvestment date 6.4. How does a disposal of an equity financial instrument alter the initial CBY? The initial CBY is impacted by the disposal of an equity financial instrument through: - The recycling of realized gain or loss of the disposal in P&L (except if classified in FV-OCI with no recycling) - The P&L impacts projected of the reinvested financial instrument, based on current market rate at the reinvestment date 6.5. Does this proposal account for unrealized gains/losses in the income statement and, if yes, what is the rationale? This proposal accounts for unrealized gains/losses in the income statement, only for assets measured at FV-PL. The rationale is that CBY rate needs to capture financial returns booked in P&L, in order to reflect a consistent interest expense for the unwinding of the insurance liability. When assets are classified in FV- OCI or Amortized cost, unrealized gains/losses will impact P&L through the CBY computation methodology for periods where they are realized in asset projections. 7/18

8 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 6.6. If impairment of equity financial instrument was to be taken into account P&L, how would it alter the CBY? Impairment of equity instrument affects the asset returns, as accounted through P&L. Impairment are considered as a negative change in fair value that is captured in the calculation of the CBY rate. The reversal of the impairment will also be captured, though neutralized with the realized loss if recycled to P&L, when it occurs Is the CBY a current market rate or locked interest rate? CBY is neither a full current market rate nor a locked in interest rate. The initial CBY is similar to interest rate at inception because it is the interest rate at which asset book returns are calculated. The duration mismatches between assets and liabilities and reinvestment assumptions for matured or sold assets impact the CBY calculation as the reinvested cash flows are projected using the current market rate at the reinvestment date. It is nevertheless current in the sense it is recomputed at each closing of the accounts and incorporates all new market rates for the mismatched portion of the assets. If all assets were accounted for at FV-PL or if there was a full mismatch of assets and liabilities (e.g. full cash assets and 10 years liability), then CBY would equal current market rate. If assets and liabilities were perfectly matched and all assets were accounted for at FV-OCI, the P&L would not be impacted for movements in current market rates 6.8. If 100% of the assets were to accounted for at FV-P&L, how is the CBY different from the one of a portfolio made up exclusively of assets accounted for at FV-OCI? The difference in the CBY calculation will result from the change in fair value that is booked through P&L only when assets are classified under FV-PL. CBY rate calculated for a portfolio at FV-OCI would not include such unrealized gains/losses 6.9. How is an accounting mismatch avoided regarding assets accounted for at FV-P&L if CBY unwinds the cost of the best estimate and differences between current market rates and CBY are accounted for in OCI? A CBY that is calculated on the basis of a FV-PL is not expected to be significantly different from the current market rate (considering that all changes in fair value of the portfolio are captured in the CBY). Consequently, the unwinding of the BEL would be fully accounted for in P&L, with no remaining effect in OCI. 8/18

9 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A Is it a top-down or a bottom-up rate or conversely is its computation insensible to the choice of the method? The current book yield is an asset based rate, which is adjusted so that they reflect the characteristics of the cash flows of the insurance contract liability: those adjustments can be performed either using a topdown or a bottom-up approach. In our proposal, the CBY is calculated in a risk neutral environment using a mechanic close to a bottom up. Nevertheless, the targeted model is to use a CY determined from a top down approach. Theoretically, the two approaches should converge. 7. How does this proposal account for options & guarantees? Under our proposal, the options and guarantees are split into 2 components: intrinsic value and time value of options and guarantees. The time value is determined by difference between the stochastic and the deterministic BEL while the intrinsic value of options and guarantees is part of the deterministic BEL. The time value will, in fine, either be realized within the intrinsic component, or reverse and never become an amount paid to policyholder. To avoid distorting the long term performance of the insurer, the changes in time value of options and guarantees (TVOG) calculated at locked in interest rate assumptions are accounted through P&L (it corresponds to the part that has been included in the contract pricing), and the change in TVOG that corresponds to difference between measurement at current and locked in interest rate assumptions are accounted through OCI. However, time value computed at initial interest rate is part of CSM at inception and, either gradually amortized through PoL, or immediately if option is exercised. 8. How and when the contractual service margin is adjusted? The contractual service margin, under our proposal, represents to the unearned profit of the shareholder (after full allocation to policyholders of their rights to existing backing assets and their related financial income), at inception and at subsequent measurement and is recalculated prospectively each period. It is unlocked for all effects of changes in expected BEL that could impact the insurer future profit (excluding TVOG which are treated separately). In the case of participating contracts, the CSM is also adjusted for reinvestment assumptions and changes in the expected return of underlying items (for the portion that is earned by the shareholder). The prospective recalculation of CSM includes implicit accretion of interest with interest rate calculated with the CBY rate 9. What is the driver (time, reserves, service, claims ) of the contractual service margin? The driver of the contractual service margin should best reflect the allocation of services in the contract. The allocation of services could be reflected in the reserves change, in the premiums received or asset management fees. In our projections, CSM was released as benefits were provided to policyholders (maturities and surrenders). 9/18

10 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 10. What elements are accounted for within OCI? Under our proposal, the effects of changes in discount rate are accounted through OCI: - For the Best Estimate (deterministic), the difference between the measurement at current discount rate and the measurement at CBY discount rate. - For the TVOG, The difference between the measurement at current discount rate and the measurement at discount rate at the inception (locked-in rate) 11. Which elements accounted for within OCI are recycled? The effects of changes in discount rates as described in Q9, for both BEL and TVOG, are deferred in OCI and recycled through P&L automatically with the insurance unwinding and with the occurrence of the outflows for the effects of changes in discount rate that have not been reversed over time. Since CBY and market rates converge at maturity of the contract, all OCI reserve is either recycled within PoL when assets are realized or gradually unwind overtime and revert to nil when assets are held to maturity in a perfect asset-liability matching. 12. Which elements accounted for within OCI are not recycled? The effects of changes in discount rates in OCI that would not be recycled through P&L are those that correspond to fluctuations in market interest rate and reverse before the occurrence of the outflows (see Q10). 13. If a realized gain of the sale of an equity-instrument is not recycled, how accounting mismatch is avoided within the unwinding of the best estimate? The accounting mismatch is avoided within the unwinding of the best estimate because the realized gain or loss that has not been recycled to P&L would not be captured in the CBY and consequently will not impact the interest expense accounted in P&L. 14. Does OCI reserve fully revert to nil at termination of a contract? Yes, the OCI reserve fully reverts to nil at the termination of the contract: - The OCI movements corresponding to rate fluctuations are reversed progressively - Those remaining are recycled to P&L through the unwinding of the BEL and the realization of outflows (see Q10). 10/18

11 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 15. How OCI reserve is recycled if a contract is derecognized due to early lapse or surrender? If the contract is derecognized due to early lapse or surrender, OCI reserve will automatically be recycled through the realized cash flows of the contract in the PoL. 16. Does this proposal account for default premium of interest-rate financial instruments? The CBY excludes expected defaults since it is calculated in a risk neutral environment: no premium for credit risk. This is consistent with the. B70 of the ED, where credit risk premiums are not considered to be a relevant factor for insurance contracts. However, one could question this issue since real-world statistics show that insurers manage to book part of this premium and credit part of it to the policyholders consistently with the contractual terms. 17. Does this proposal account for risk premium of equity instruments? The CBY excludes expected market risks since it is calculated in a risk neutral environment: no premium for market risk. This is consistent with the. B70 of the ED, where market risk premiums are not considered to be a relevant factor for insurance contracts. However, one could question this issue since real-world statistics show that insurers manage to book part of this premium and credit part of it to the policyholders consistently with the contractual terms. 18. What are the interest-rate sensitive assumptions? Interest-rate sensitive assumptions are those affected by changes in interest rate and correspond mainly under our proposal to lapses and minimum guaranteed rates. 19. Is the underlying principle of CBY consistent with the principles of the ED or of its basis for conclusions? The underlying principle of CBY is consistent with the principles of the ED in the following: - It is an asset backed rate which reflects the asset dependence of participating contracts - It is market consistent as it is modeled in a risk neutral environment - The insurance liability presented in balance sheet is still measured at a current market rate - Short term impacts that are not representative of the insurer performance and that would reverse over the life of the contract are accounted through OCI 11/18

12 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A If our alternative approach was to be adopted, following amendments should be introduced to the current proposals of the ED : - Paragraphs 33 & 34 & 66 should be deleted (and any other paragraph referring to the mirroring approach) - Paragraph 60(h) should be adjusted as the updated discount rate should apply to all cash flows arising from the contract and not only those directly linked to underlying items - Paragraph B68 should be adjusted in order to correspond to a full unlocking of the CSM : B68(d) should be deleted and B68(e) should be adjusted to include all changes arising from underlying items returns - a paragraph should be added to specify the treatment of time value of options and guarantees should be consistent with the treatment of the BEL and that effects of market rate changes on TVOG should be accounted for in OCI - a paragraph should be added to specify that the updated discount rate would correspond to a market yield for assets that are measured at FV-PL and to an amortised cost based yield for assets that are measured at amortised cost or FV-OCI, and that would be adjusted prospectively for reinvestment assumptions in unmatched durations - Other paragraphs and basis for conclusions should be adjusted consequently (among needed adjustments, paragraphs BC should be deleted) 20. Does this proposal give an incentive to invest in risky assets? Since the computation of the CBY is realized in a risk neutral environment, the risk level of financial assets doesn t affect calculations and investment decisions. 21. Is the CBY the same for all preparers? The methodology for calculating the CBY is the same for all preparers, nevertheless the calculated CBY would be different depending on the asset portfolio classification (FV-P&L vs FV-OCI), duration and reinvestment assumptions. CBY s computation does adapt to most existing regulation that we are aware of in any jurisdiction. 22. If not, how users of the accounts can compare financial statements of different preparers? The calculated CBY would be different as a consequence of different asset measurement and management policies. Users should not analyze assets and liabilities of an insurer separately; those are to be analyzed together considering their dependence and interaction. CBY proposal allows a consistent measurement of insurer s performance through the net impact that is presented in the P&L (between financial revenues and interest expenses), even if assets are classified differently. Therefore, users of the accounts can see directly on the face of PoL the impact on asset-liability management. Some disclosure about its computation (the part coming from the matched portfolio/the part coming from unmatched portfolio) could help. 12/18

13 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 23. If an alternative reference was chosen to compute the unwinding rate of insurance liabilities, would it be better? If an alternative rate such as the risk-free rate of a benchmark-portfolio or the real-world rate of an asset benchmarking a "replicating" common asset portfolio of an insurer was chosen, we only see one advantage at this proposal which would be to establish a readable reference for all users of the accounts. However, we see massive drawbacks and, notably, the following ones: a total disconnection with the business model; a basis-risk between real credited rate to the policyholders and the rate of the benchmark and additional needs to explain experience differences; an instability since this benchmark should be updated to keep track with the transforming benchmark asset portfolio; a wrong incentive to invest in the benchmark asset. 24. How does this proposal differ from the one CNP Assurances presented to the Board in april/may 2011? The CBY approach in our proposal doesn t differ from the one presented to the board in march 15th 2011, but it presents a global view of the treatment to be applied to participation contracts. It consists in combining the use of CBY rate for calculating the interest expense in P&L with the following key items: - A fully unlocked prospective contractual service margin: the rationale behind excluding the financial effects from unlocking the CSM is not clear. It seems more consistent to change the CSM when the financial returns or assumptions are changes for the part that is expected to belong to the shareholder. - Accounting the interest rate effects on TVOG changes through OCI since such changes would reverse over the life of the contract or recycle to P&L if options & guarantees are exercised by the policyholders. Since this earlier presentation, use of OCI within IFRS 9 has been integrated and balance sheet is now exclusively measured on a current basis (and difference with BEL at CBY rate is accounted for in OCI). 25. How does this proposal answer to Stephen Cooper s dissenting view? This proposal answers most of Stephen Cooper concerns with regard to the performance measurement and reduction of accounting mismatches as we have understood them. It also avoids performing arbitrary disaggregation of cash flows. The CBY rates is recalculated to take into account the portfolio classification and reinvestment operations, and thus it enables reflecting the asset dependency of the liability. Such dependency is faithfully reflected with the CBY rate applied to all cash flows of the contract and no disaggregation is needed. Tracking the information is also less complex than it is with a locked-in interest rate. Finally, it allows presenting a current measurement of the insurance contract and reflects in P&L the real performance of the insurer. 13/18

14 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 26. Does this proposal require a new fair value option and why? FV option is not needed under this proposal since the CBY will systematically correspond to the current discount rate when the financial portfolio is classified at FV-PL. The unwinding of liability through P&L is thus an implicit option that goes with classifying assets in the FV-PL category. 27. How is this proposal different from the Allianz model? This proposal is quite similar to the principles presented in Allianz model: The CBY rate and the floating CSM calculation are similar under both proposals to our knowledge and exchanges with our colleagues. The main difference concerns the accounting of time of value of options and guarantees (TVOG): - Under Allianz proposal, the O&G are not separated and calculated/presented consistently with the other components of the insurance liability. With a fully unlocked CSM, changes in TVOG are thus accounted in the CSM - Under our proposal, the TVOG are separated (as a difference between stochastic and deterministic BEL), and booked in OCI for the effect of changes in discount rate and in P&L of the effect of unwinding the TVOG using the interest rate locked in at inception. (Please refer to Q6 for more details). We consider that our approach for accounting the market effects on the TVOG in OCI is the most appropriate proposal for the following reasons: - It is consistent with the IASB principle to account effects of market fluctuations that are expected to unwind over time in OCI - Changes in TVOG due to market rate changes are not part of the service that would be provided to the policyholders and is not representative of a future profit or loss of the insurer (as it is very likely it will fully reverse over time). As such, it would obscure the future performance of the insurer that is presented in the CSM. Under our approach, the CSM will transparently reflect the unearned profit of the insurer. - It is consistent with the IFRS 9 Phase III hedging with regard to the treatment of time value of options and guarantees. 28. How is this proposal differing from MCEV measurements and presentation? Under our proposal, the Insurance liability presented in the balance sheet is calculated using a current discount rate that would be, with a bottom-up approach, a risk free rate +illiquidity premium (similar to the discount rate used in MCEV ). The CBY rate is calculated differently because it is based on projecting book returns of the financial portfolio in a risk neutral environment (the risk free rate is an input of the model but the CBY yield curve would also depend on the portfolio composition and reinvestment assumptions). Therefore, if one was computing a PoL according to MCEV terms a difference in the unwinding rate of liabilities would occur. It is important to keep in mind that the CBY rate is used to split the unwinding expense between P&L and OCI, but that the global unwinding effect presented in comprehensive income is still similar to the one calculated in MCEV. 14/18

15 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 29. How is this proposal differing from Solvency 2 measurements? Under our proposal, the Insurance liability presented in the balance sheet is calculated using a current discount rate that would be, with a bottom-up approach, a risk free rate +illiquidity premium (similar to the discount rate used in Solvency 2 without integrating the new specifications from the Long Term Guarantees Assessment exercise). The CBY rate is calculated differently because it is based on projecting book returns of the financial portfolio in a risk neutral environment (the risk free rate is an input of the model but the CBY yield curve would also depend on the portfolio composition and reinvestment assumptions). Therefore, if one was computing a PoL according to Solvency 2 terms a difference in the unwinding rate of liabilities would occur. 30. Does this proposal embody non market-consistent measurements? Market consistency is respected through the computation of CBY in a risk neutral environment 31. Why is this proposal a better alternative to replicating portfolio technique (RP)? From a conceptual point of view: - The RP approach requests the use of the replication assets which might be different from the assets that the company holds thus it s not possible to talk about mirroring - For long term liabilities, the RP might need the use of assets that do not exist on the market - There is no theoretical background to measure the error performed when using the RP approach From an operational l point of view: - The RP approach is difficult to calibrate: - It s possible to obtain significantly different set of replicating assets for the same liability - It s possible to obtain significantly different set of replicating assets for the same business from one year to another - The sensitivities when using the RP might not reflect the sensitivities of the liabilities 15/18

16 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 32. How easily can this proposal be applied by preparers? Our proposal is much easier to apply than the mirroring approach as proposed by the IASB: - The calculation methodology is easy to implement in the systems - It is easy to document and reconcile to the accounting records, and does not involve the use of significant judgment by the preparer - It involves calculating a yield curve for each period with and doesn t require the tracking of interest rates since inception 33. How is this proposal consistent with existing IFRS9 standards and EDs? Our proposal is consistent with IFRS 9 and more specifically the reopening of the standard and introduction of FV-OCI for bonds. The combination of our proposal with IFRS 9 for the bonds category results in a current/current measurement of the balance-sheet and an approximation of a cost/cost measurement in P&L. Also, our approach gives more flexibility for the elements captured in the CBY rate and consequently avoids accounting mismatches with assets that would mandatorily be classified at the FV-PL category (derivatives, structured products..) 34. How is this proposal not consistent with existing IFRS9 standards and EDs? There may be an accounting mismatch arising for assets classified in amortized cost category that would only display within the OCI reserve; in the PoL there is no mismatch with the general principle of this proposed alternative method. Such mismatch is more linked to the general principle of IFRS 4 which consists in performing a current measurement of the liability while the amortized cost assets would be measured on a cost basis. IASB has resolved this issue by reopening IFRS 9 and introducing the FV-OCI category to specifically address insurance companies accounting issues. 35. How is this proposal consistent with macro-hedging coming DP? Our proposal could be consistent with the macro-hedging coming DP with regard to the treatment of TVOG if this DP allows accounting for of the TVOG of derivatives hedging assets in OCI: it would make sense to account for TVOG embedded in the insurance liabilities consistently if natural hedging of the insurance liabilities by backing assets insurers invest in assets consistently with the O&G sold to the policyholders was considered within the scope of this DP. 16/18

17 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 36. How does this proposal account for new installments? New installments are included in the contract boundaries and are projected in the cash flows estimations using assumptions that consistently reflect the expected new installments of the portfolio. 37. Is this proposal compatible with an accounting of the bond portfolio at amortized cost? There may be an accounting mismatch arising for assets classified in amortized cost category (see Q33). Such mismatch is more linked to the general principle of IFRS 4 which consists in performing a current measurement of the liability while the amortized cost assets would be measured on a cost basis. Nevertheless, the use of CBY rate results in reporting the accounting mismatch in OCI instead of a misleading measure of performance in P&L (which is still perfectly matched with assets in AC category) 38. Can this proposal account for all participating contracts? This proposal is applicable all contracts where there exists an interaction between asset returns and liabilities expenses, i.e. participating contracts. 39. Can this proposal account for non-life long term contracts? This proposal can be theoretically applied for any category of contracts, including non life contracts. Nevertheless, we believe it is more relevant to specifically apply it to participating contracts because the main objective of our proposal is to avoid accounting mismatches when cash flows are economically matched. Application to non participating contracts requires other studies and documentation e.g. how to compute duration of backing assets; CNP Assurances has considered that it had no mandate to express itself on non-life contrcts without further exchange with its peers and further work on its own non-life portfolio. 40. How does this proposal account for expected inflation of claims? For cash flows that are impacted by inflation (e.g. costs) the projection model is taking into account updated assumptions which are similar to the assumptions used in the MCEV. 41. How does this proposal account for non-expected inflation of claims? The difference between expected value of claims and the incurred claims (including change in inflation) is accounted for in the experience adjustments account. 17/18

18 CNP Assurances Appendix 1-CNP Assurances alternative approach Q&A 42. If an extensive use of the contractual service margin (e.g. merger of existing proposed contractual service margin and OCI) was to be proposed, will it be consistent with this proposal s principles? The rationale behind merging CSM and OCI proposals is not clear, we believe those two components can not be combined because the first is representative of the shareholder profit margin while the second include BEL unwinding effects due to interest rate changes that are expected to reverse over the life of the contract. 18/18

19 Appendix 2 CNP Assurances alternative approach: Key principles & Field testing results October 2013 IFRS 4 Phase II- ED 2013/06 L assureur de toute une vie

20 CNP Assurances alternative approach OBJECTIVE Introduce the key principles of CNP Assurances alternative approach and present the field testing results CONTENTS 1. Key principles of the CBY approach 2. Implementation of the CBY approach 3. Field-testing results - Alternative approach 4. Field-testing results - Mirroring approach 5. Appendices 2

21 1. Key principles of the CBY approach Main conclusions of our previous studies Step 1 March 2011 (before ED IFRS 9 version 2012) In the context of the 2010 ED publication, the ALR (Asset Liability Rate) is the appropriate discount rate to be used for participating contracts. It avoids volatility that is due to market fluctuations and takes gradually into account the effects of options and guarantees, as well as assets/liabilities mismatches. Step 2 October-November 2012 The OCI is introduced in IFRS 4 Phase II. The ALR or CBY rate (Current Book Yield), has been confirmed as the most appropriate discount rate for participating contracts because it enables to discount liabilities at the same rate as assets return, which satisfies the mirroring approach objectives. The study confirms that the effects of changes in cash-flows should be taken into account in P&L, while the effects of market rates changes should be accounted in OCI. Step 3 March 2013 The TVOG (Time Value of Options and Guarantees) is introduced in the study and is estimated at market rate. This component is significantly more volatile than the rest of Best Estimate. Its volatility is mainly explained by its sensitivity to market assumptions, consequently the time value at initial assumptions should be taken into account in P&L and the other effects (principally market rate changes) should be accounted in OCI. The breakdown of the BE into 3 components, as proposed by Staff Paper of November 2012, is impractical for French products. The recalibration of Residual Margin according to VIF variations enables to limit the P&L volatility by a progressive recognition of gains/losses over the residual duration of contracts. 3

22 1. Key principles of the CBY approach Principles of CNP Assurances alternative approach CNP Assurances built up an alternative approach for participating contracts which takes into account the conclusions of the studies undertaken during the last three years. Key principles of the alternative approach are the following : Calculating the interest expense in the P&L with a Current Book Yield (CBY rate) that reflects the book return of underlying assets: The BEL is measured with current assumptions according to building block approach, consistently with other contracts The difference between the liability measured at current rate and the liability measured at CBY rate is accounted in OCI. Changes in TVOG are accounted in P&L for the time value at initial assumptions and in OCI for the other effects (mainly market rate changes) Recalibration of the CSM, for every changes impacting the insurer future profits, including those resulting from a change in the returns of underlying assets 4

23 2.Implementation of the CBY approach Building the CBY rate General principle (A) Equity revenues (B) Debt revenues (C) Other revenues (derivatives) Numerator IFRS financial revenue / IFRS Asset (Returns basis) If FV through P&L: Dividends and rent Variation of the URGL Realized gains or losses If FV through OCI: Dividends and rents Realized gains or losses (if recycled to P&L) If FV through P&L: Coupons Variation of the URGL Realized gains or losses If FV through OCI or Cost: Coupons Bonds amortization Fair value A + B + C Under our calculation methodology, the CBY reflects: In the first years of the projection: the CBY reflects the book return of the asset portfolio in a risk neutral environment. Subsequently: the CBY tends to reflect the current rate at which the new acquisitions are mad following reinvestment assumptions. (D) Equity and property If FV through P&L: If FV through OCI: Fair value Cost 5 (E) Bonds (F) Other assets Denominator {*} If FV through P&L: Market value If FV through OCI or Cost: Amortized cost Market Value D + E + F First years: The CBY reflects the book return of asset portfolio {*} From a practical point of view, the denominator should be adjusted with a coefficient that reflects the portfolio movements during the period (acquisitions, disposals) Unmatched period: The CBY tends to reflect the current rate at which assets are reinvested

24 Release of CSM 2. Implementation of the CBY approach Comprehensive income presentation Under the CBY approach, the Comprehensive income is presented consistently with the board proposals : X The CSM is adjusted to reflect the insurer future profits for the period and is released progressively as the services are provided Risk adjustment changes Experience adjustment X X An interest expense calculated at CBY rate is consistent with the asset returns accounted in P&L Operational result X The financial revenues reflect the returns of asset on a «cost basis» when classified in FV-OCI and on a «market basis» when classified in FV-PL Financial revenues Unwinding charge Financial result P&L X (X) X X With the CBY approach, short term market fluctuations are reflected in OCI: Any accounting mismatch resulting from these fluctuations will not obscure the performance of the entity OCI Assets + OCI Liabilities (X) Total Comprehensive Income XX 6

25 2. Implementation of the CBY approach Key performance indicators The key performance indicators that will be communicated to external users needs further investigation independtly of the approach that will be required in IFRS 4 PII: «Summarized Margin» Presentation «Net Insurance Revenue» Presentation The effect of assumptions changes is limited with the CBY discount rate, as it is less volatile than a current market rate. With the CBY rate, the accounting mismatches are not reflected in the financial result. Accounting short term market fluctuations in OCI leads to a transparent presentation of long term performance in P&L consistently with insurers business models 7 Release of CSM and MR Experience adjustment Operational result Financial revenues Liability interest expense Financial results Non-technical costs P&L OCI changes (Assets & Liabilities) Total Comprehensive Income X X X X (X) X (X) X (X) XX Technical revenues Net financial revenues (*) Acquisition & technical fees PNA Fair value changes (through P&L) General costs P&L (*): on a statutory gaap basis X X (X) X X (X) XX

26 3. Field-testing results - Alternative approach General context The IFRS result of investment contracts with dpf (average MGR=0,3%) is projected over 10 years Projections based on data as of 31/12/2012 The asset composition is: Bonds (~83%), Equity and property (~11%) and other products (~6%) Bonds are classified in FV-OCI 4 scenarios are simulated, with stress occurring in the first year of projection (i.e. 2013): Central, interest rate stresses modeled as a parallel shift of the interest rate curve by +/- 100bp and +300bp. For simplification purpose, risk adjustment is calculated as 1% of the Best Estimate 8

27 3. Field-testing results - Alternative approach Projected approaches For comparison purpose, following approaches have been tested: 1st step of the study (Locked CSM and TVOG in P&L): Method A: The Interest expense of the insurance liability in P&L is calculated at current market rate (no OCI). Method B: Interest expense of the insurance liability in P&L is calculated at locked-in market rate at inception (difference between current rate and locked-in rate in OCI) Method C: Interest expense of the insurance liability in P&L is calculated at CBY rate (difference between current rate and CBY rate in OCI) 2st step of the study (introduction of Unlocked CSM and TVOG in OCI): Method D: Interest expense of the insurance liability in P&L is calculated at CBY rate (method C) AND the effect of market rates changes on TVOG are accounted for in OCI. (locked CSM) Method E: Interest expense of the insurance liability in P&L is calculated at CBY rate (method C) AND the effect of market rates changes on TVOG are accounted for in OCI AND unlocked CSM NB: CSM is locked in the first step of the study because excluding excluding the effects of changes in assets returns for factors unlocking the CSM will result in a locked CSM for investment contracts with Dpf 9

28 3. Field-testing results - Alternative approach IFRS results projection (1/2) A/ First Step of the study: Method A Method B Method C Conclusions Adjusted scale Using a discount rate that doesn t reflect assets and liabilities interaction introduces important volatility in the IFRS result in stress-tests (methods A and B). CBY rate reflects a practical approach for applying the mirroring principles. It avoids accounting volatility that is due to market fluctuations and takes into account economic mismatches gradually. 10

29 3. Field-testing results - Alternative approach IFRS results projection (2/2) B/ second Step of the study: CBY rate is confirmed as being the most appropriate discount rate (in P&L) for participating contracts. The second step of the study consists in combining the use of the CBY rate with the other key principles of the approach: Méthode C Méthode D Méthode E Adjusted scale Conclusion The combination of the alternative approach key principles reduces undue volatility in P&L: - Effects of stress scenarios on the unearned profit are accounted gradually in P&L over the residual duration of contracts - Effects of market fluctuations of TVOG that are expected to unwind over time don t obscure the insurer performance 11

30 3. Field-testing results - Alternative approach Breakdown of 1st year impacts Below is presented the accounting treatment for the effect of changes arising in stress tests during the first year of projection: Method C Method D Method E Conclusions Using CBY rates prevents undue volatility by a gradual recognition of Assets/Liabilities mismatches. Accounting market changes effects on TVOG in OCI better reflects future performance as CSM absorbs only changes that reflect the expected unearned profit of the insurer consistently with the service provided to the policyholders. 12

31 3. Field-testing results - Alternative approach Focus on the proposed accounting of TVOG (1/2) A/ Analysis of TVOG volatility TVOG presents an increased sensitivity to market conditions compared to other components of the BEL The variation of TVOG depends on the level of guarantees of the contract, on the client behavior as well as on the legal and contractual conditions. TVOG are therefore volatile from one year to another As such, it is important to analyze carefully different accounting alternatives (P&L, OCI, CSM) in order to ensure consistency with i) ED s principle, ii) service to the policyholder and iii) treatment of TVOG in IFRS9. 13

32 3. Field-testing results - Alternative approach Focus on the proposed accounting of TVOG (2/2) 2/ Analysis of consequences on CSM adjustments Situation 1: the CSM is locked (method C) Situation 2: the CSM is unlocked for all changes including TVOG Situation 3 : the CSM is unlocked except For market effects in TVOG (method E) Conclusions Unlocking the CSM is needed to limit undue volatility in the P&L Accounting TVOG market changes in OCI also limit undue volatility in the P&L and do not obscure the CSM with market fluctuations that are expected to reverse over time Accounting TVOG in CSM could result in an instable CSM due to the volatility of the TVOG 14

33 3. Field-testing results - Alternative approach Balance Sheet roll-forward under our proposal (1/4) A/ Financial statements presentation (stress scenario +100bp) Balance Sheet - Opening Balance Sheet Closing Market Value of Assets (54 856) CSM (836) Risk Adjustment (535) TVOG (505) Market Value of Assets (49 309) PnL (115) OCI (177) CSM (843) Risk Adjustment (477) TVOG (491) The effects of the stress on the BEL are reflected in OCI and P&L depending on their nature Deterministic current rate (52 979) Deterministic rate (47 206) Total Assets Total Equity+Liabilities Total Assets Total comprehensive income of the year Total Equity+Liabilities Total Expected changes Stress impacts Change in CSM and Risk Adjustment amortization Change in estimates and experience adjustments Operational result Investment income Unwinding of BEL and Risk Adjustment Financial result PnL Variation of OCI Assets Variation OCI Liabilities Total Variation of OCI Total Comprehensive Income The CSM adjustments absorb the change in the future profitability of the contract that are generated by the stress scenario. The effect on CSM would have been higher if market rates changes were not accounted in OCI The use of OCI allows to capture a significant part of the market volatility consistently for assets and liabilities 15

34 BS items opening 836 CSM opening 3. Field-testing results - Alternative approach Balance Sheet roll-forward under our proposal (2/4) Expected variations Expected variarion of CSM Total BS variation: -61 Of which PnL: +61 {a} Impact of stress Adjustment of CSM Total BS variation: +68 Of which PnL: -68 {b} BS items closing 843 CSM closing Opening Deterministic BEL (52 979) + Risk Adjustment (535) Unwinding Total BS variation: +321 Of which PnL: {c} Of which OCI: +919 {d} Expected benefits, premiums, costs {e1} No effect on P&L nor OCI as netted with expected cash on asset side Expected release of RA Total BS variation: -42 Of which PnL: +42 {f} Change in estimates Total BS variation: Of which PnL: -70 {g} Of which OCI: {h} Closing Deterministic BEL (47 206) + Risk Adjustment (477) 505 TVOG Opening Expected variation of TVOG Total BS variation: -27 Of which PnL: +27 {i} Revaluation of TVOG Total BS variation: +12 Of which OCI: -12 {j} 491 TVOG Closing Assets (at market value) Opening Expected financial products Total BS variation: +293 Of which PnL: {k} Of which OCI: {l} Investment changes due to expected benefits, premiums, costs {e1} No effect on P&L nor OCI as netted with the expected benefits, premiums, costs on liability side Experience adjustment Total BS variation: -30 Of which PnL: -30 {e2} Difference between real and expected returns Total BS variation: Of which PnL: {m} Of which OCI: {n} Assets (at market value) Closing 16 Total Of which Expected Of which impact of stress Change in CSM and Risk Adjustment amortization {a} + 42 {f} -68 {b} Change in estimates and experience adjustments {e2} 70 {g} Operational result Investment income {k} 168 {m} Unwinding of BEL and Risk Adjustment {c} +27 {i} Financial result PnL Variation of OCI Assets {l} {n} Variation OCI Liabilities {d} 2021 {h} 12 {j} Total Variation of OCI Total Comprehensive Income

35 3. Field-testing results - Alternative approach Balance Sheet roll-forward under our proposal (3/4) B/ Analysis of changes in balance sheet components (1/2) {a} Expected variation of CSM (P&L + 61) Corresponds to the difference of the CSM at the opening and the CSM at closing if there is no difference between the expectations and the real world This change includes the interest accretion and the CSM release following benefits pattern {b} Adjustment of CSM (P&L -68) This value corresponds to the difference between the previous estimation of the future profits on the contract and the new estimation of the future profits after adjusting the assumptions. The projection of future expected profits is performed using the CBY {c} {d} - Unwinding of BEL and Risk Adjustment (total -321) ({c} P&L -1241): Interest expense on the basis of CBY rate ({d} OCI +919) Corresponds to the difference between the unwinding of BEL at current rate and the unwinding of BEL at CBY rate {e1}{e2} Benefits, premiums, claims ({e1}) Assets movements that are expected considering the projected cash inflows and outflows of the contract (premiums, benefits..) ({e2} P&L -30) Experience adjustment: Additional movements in assets due to unexpected cash outflows and inflows of the contract {f} Expected release of risk adjustment (P&L +42) Expected change in the risk adjustment (for simplification purpose, based on BE change in our case). {g} {h} Changes in estimates (total +1950) (total +1950): Corresponds to the difference between the closing BE at current rate before and after the change in market conditions ({c} P&L -70): Corresponds to the difference between the closing BE at CBY rate before and after the change in market conditions ({d} OCI +2021) Corresponds to the difference between BEL at current rate and BEL at CBY rate after the change in market conditions {i}{j} TVOG ({i} P&L +27) Expected variation of the TVOG (in this case, it it determined based on assumptions at inception). ({j} OCI -12) Corresponds to the changes of TVOG that is accounted in OCI because due to the interest rate change. The impact of the TVOG is limited in this stress scenario but might be more severe in other market conditions. 17

36 3. Field-testing results - Alternative approach Balance Sheet roll-forward under our proposal (4/4) B/ Analysis of changes in balance sheet components (2/2) {k} {l} Expected financial products (total +293) (total +293): Corresponds to the financial products at market rate. The revenues at market rate are low due to the low interest rate context at the end of the year ({c} P&L ): Corresponds to the IFRS financial products: Amortized cost basis for bonds and market basis for other assets. ({d} OCI -933) Effects of expected changes in the Fair value of bonds accounted for FV-OCI {m} {n} Difference between real and expected financial products (total +293) (total -1650): Corresponds to the difference between the expected and realized financial revenues (representing the change in assets value). Thus, this includes the variation of URGL assets measured at FV-OCI, in this example, in the case of an increase of +100 pbs of interest rates, there is a significant impact URL. ({c} P&L +168): Corresponds to the difference between expected and realized financial revenues accounted in P&L: Amortized cost basis for bonds and market basis for other assets. The effects of market rate changes has limited effect in P&L because passed to OCI. ({d} OCI -1817) Market rates changes is fully reflected in OCI because of the large portion of bonds measured at FV-OCI 18

37 3. Field-testing results - Mirroring approach Analysis of the IASB example (1/6) Main differences between IASB example and French products features: Characteristics IASB example French contract Valuation of the underlying assets Market value Book value Guarantee 1000 Capitalized using a minimum guaranteed rate Maturity No maturity Pluri-annual Lapses None Lapses each year Profit share 90%.max(inv income; 0) max(90%.inv income-mgr; 0) MGR: minimum guaranteed rate 19

38 3. Field-testing results - Mirroring approach Analysis of the IASB example (2/6)- Simplified example Assumptions Graphic of benefits split YE 1 Initial Mathematical Reserve (MR) = initial guaranteed capital Contractual profit-sharing Investment income local accounting rules % of investment income 5% per annum Fixed DL IASB Guarantee PS Benefits Minimum Guaranteed Rate (MGR) 0% per annum Lapse 100% at the end of year 1 Benefit Allocation DL F IL Conclusions In this simplified example, elements/parameters used in IASB formula would become: underlying asset A: equal to the initial Mathematical reserve plus investment income measured under the local accounting rules. guaranteed amount: equal to the initial guaranteed capital (100) 90%: corresponds to the profit-sharing rate specified in the contract (85%) 20

39 3. Field-testing results - Mirroring approach Analysis of the IASB example (3/6)- step 1: introducing a discount rate Assumptions Graphic of benefits split YE 1 Initial Mathematical Reserve (MR) = initial guaranteed capital Contractual profit-sharing Investment income local accounting rules % of investment income 5% per annum Fixed DL IASB Guarantee PS Benefits Minimum Guaranteed Rate (MGR) 0% per annum Lapse 100% at the end of year 1 Benefit Allocation DL F Conclusions In this simplified example, elements/parameters used in IASB formula would become: underlying asset A: equal to the initial MR plus investment income evaluated under the local accounting rules discounted with the risk free rate => the A is neither the market value nor the book value (we can call it the Discounted Available Local Gaap Ressource) guaranteed amount: equal to the discounted guaranteed capital 90%: corresponds to the profit-sharing rate specified in the contract (85%) 21 IL

40 3. Field-testing results - Mirroring approach Analysis of the IASB example (4/6)- step 2: introducing a MGR Assumptions Graphic of benefits split YE 1 Initial Mathematical Reserve (MR) = initial guaranteed capital Contractual profit-sharing Investment income local accounting rules % of investment income 5% per annum Fixed DL IASB Guarantee PS Benefits Minimum Guaranteed Rate (MGR) 2% per annum Lapse 100% end of Y1 Benefit Allocation DL F IL Conclusions In this simplified example, elements/parameters used in IASB formula would become: underlying asset A: equal to the initial MR plus financial products evaluated with the local accounting norm while taking into account a part related to the MGR (here, 104.6). This allocation is nevertheless not intuitive since the French profit-sharing contract with a MGR is based on a different profit-sharing rule than the one used by the IASB: max(85% inv income MGR;0) instead of 85%.max(inv income; 0) 22

41 3. Field-testing results - Mirroring approach Analysis of the IASB example (5/6)- step 3: introducing lapses Assumptions Graphic of benefits split YE 1 YE 2 Initial Mathematical Reserve (MR) = initial guaranteed capital Contractual profit-sharing Investment income local accounting rules % of investment income 5% per annum Benefits Minimum Guaranteed Rate (MGR) 2% per annum IASB IASB Lapse 50% end of Y1 et 100% end of Y2 Benefit Allocation Conclusions Beyond a one-year horizon, it is cumbersome to find a consistent formula (i.e. identify an asset A, a guaranteed 1000 and a 90% profit-sharing rate ) because the benefit is the sum of all annual profit-sharing and not a percentage of the overall investment income over the projection. It is necessary to make some further arbitrary choices to work out the different parts of the IASB allocation. 23

42 3. Field-testing results - Mirroring approach Analysis of the IASB example (6/6) Conclusions: The allocation of the IASB cannot be applied directly to profit sharing products as defined in French contracts, for several reasons: French contracts are based on book yields, not on market yields. In case of guaranteed rate in the profit sharing mechanism, the allocation of the IASB cannot be applied directly. The mathematical reserves include previous profit sharing amounts, accumulated over several years. This accumulated profit-sharing will generate additional guaranteed amounts in later years. However, with the adoption of approximations, it is still possible to propose formula that respects the spirit of the IASB allocation.

43 3. Field-testing results - Mirroring approach Tentative bifurcation of cash flows (1/3) Our bifurcation proposal: Insurance liability = Stochastic Best-Estimate (considering it is equivalent to Building block approach) Indirectly Linked = Value of options = BE Stochastic BE deterministic (Approximation of the O&G value as this the formula for calculating the TVOG). Includes the time value of Minimum Guaranteed Rates (MGR) and the effect of dynamic lapses Considering that the intrinsic value of O&G is not material at the inception of the contract in current market practice (contractual obligations vs expected returns of invested assets) Not Linked = Cash-flows linked to MGR Credited interests Non -capitalized lapses x (1-x%) where the «asset dependent» component can be expressed as a x% of the assets Operational complexity: Estimating the discounted value of the future lapses in initial un-capitalized Mathematical Reserves «Directly Linked» component : obtained by deduction of the 2 other components (and consequently based on deterministic BE) We suppose that Directly Linked = x%* VM Assets x% can then be calculated as follows: Where: BE Sto = TVOG + Fix + Asset Dependent BE Sto = BE Sto BE Det + PV[CI] + (1-x%). PV [UCL] + x%. Asset in MV x% = ( BE Det - PV[CI] - PV[UCL] ) / ( VM Assets - PV[UCL] ) 25 PV = Present Value, UCL = Un-Capitalized Lapses, MV = Market Value, CI = Credited Interests

44 3. Field-testing results - Mirroring approach Tentative bifurcation of cash flows (2/3) The Directly linked part can t be a constant proportion of the Assets market value as presented in the IASB simplified example. The Directly linked component varies with asset value changes but also depends on : Surrenders Discretionary Profits sharing Macro-economic variables (Interest rates ) In addition, work assumptions were necessary to perform the bifurcation. Such assumptions were not explicitly expressed in the IASB examples 26

45 3. Field-testing results - Mirroring approach Tentative bifurcation of cash flows (3/3) Implementing the proposed breakdown : P&L and OCI breakdown Results analysis The insurance liability is partly disconnected from the Assets because the asset dependent component is not only linked to assets value but also depends on surrenders, discretionary profit sharing and market rates. The P&L changes in stress tests are significant : -169% for the -100bp scenario +655% for the +100bp scenario -16% for the +300bp scenario 27

46 Appendices CBY and local GAAP: An universal approach CBY approach and comprehensive income presentation Reconciliation between VIF MCEV and CSM IFRS Balance sheet vs SII & MCEV Field-testing results: presentation and analysis 28

47 4. Appendices (1/19) CBY and local GAAP: An universal approach The CBY approach takes into account local regulatory requirements: BEL Current rate Discounting with current rate Cash flows corresponding to contractual obligations BEL CBY rate Discounting with CBY rate The cash flows projection can be done in the actuarial model that is used for MCEV or Solvency II projections. Consequently, the cash flow projection takes into account: o The compliance with local regulatory requirements (e.g. : French Insurance Code), o The compliance with general and special contractual conditions, o The assumptions on expected behavior of the policyholders (e.g. : surrenders) based on observable historical data. o The financial policy of the entity. 29

48 4. Appendices (2/19) CBY approach and comprehensive income presentation CSM Amortization of the CSM as estimated and adjusted for any change in expected future profits. Experience adjustment Difference between actual and anticipated CF + changes in estimates of the BE at CBY rate Financial revenues Assets on an Amortized cost basis for the assets classified at FV-OCI and on a market value basis for those accounted in FV- PL Unwinding Interest expense calculated at the CBY rate Difference between MV and amortized cost for Assets in FV through OCI Difference between BEL with current rate and BEL with CBY rate Assets 0 (in FV) Release of CSM and MR Experience adjustment Operational result Financial revenues Unwinding charge Financial results P&L CSM 0 RM 0 BE current rate Variation OCI Assets Variation OCI Liabilities Total Comprehensive Income Assets 1 (in FV) IFRS phase 2 result T=1 PL 1 OCI 1 CSM 1 RM 1 BE Current rate 20XX X X X X (X) X X (X) (X) XX Operational results The impact of assumptions changes is limited by the us of a CBY discount rate rather than a current rate that presents more volatility. Financial results: The CBY rate is the most appropriate discount rate for the participating contracts because the liability unwinding is calculated at the same rate as the asset book return. Variations OCI : With the CBY rate, short term market fluctuations are accounted in OCI. 30

49 4. Appendices (3/19) Reconciliation between VIF MCEV and CSM Similarities exist between IFRS 4 Phase II and MCEV standards. These conceptual similarities have to be used with caution given the methodological differences. TVOG (Time value of financial options and guarantees) Risk Margin Initial CSM Present Value of Future Profits TVOG (Time value of financial options and guarantees) CRNH (Cost of residual non hedgeable risks) FCRC (Frictional cost of required capital) Future taxes VIF MCEV Methodological differences limit the comparison between the two standards, in particular: Contract boundaries, discount rate curve, CSM adjustment (only positive in IFRS), difference in assets accounting rules. 31

50 4. Appendices (4/19) IFRS Balance sheet vs SII & MCEV Assets and Liabilities are presented under different accounting and measurement rules depending on the framework Assets Market value of initial Assets (without reinsurance) Solvency II Economic equities Liabilities Future taxes Risk Margin Free Capital SCR CoC Assets Assets IFRS 9 in Fair Value through P&L or through OCI Assets IFRS 9 in amortized costs Property Deferred taxes IFRS phase 2 Liabilities Own funds PVFP stoch. Non-assignable costs Deferred taxes Risk Margin CSM Assets Market value of initial Assets (without reinsurance) MCEV Liabilities Free Capital Required Capital PVFP stoch. (free of Corp. taxes) (free of CNHR) (free of CoC) NAV VIF Economic value of the Liabilities: PV (liabilities) stochastic BEL Other assets Economic value of the Liabilities: PV (liabilities) stochastic BEL Reinsurance Reinsurance 32

51 4. Appendices (5/19) Field-testing results: presentation and analysis 1/ Method A (1/3) : Overview (Interest expense in P&L at current market rate) Comments In method A the market volatility on the asset side is captured through OCI while the volatility on the liabilities side goes to P&L. Therefore, this mismatch generates an important volatility in the IFRS result. Adjusted scale 33

52 4. Appendices (6/19) Field-testing results: presentation and analysis 1/ Method A (2/3) : P&L analysis (as of end of year n+1 ie 2013) P&L central 2013 Underwriting margin 107 Acquisition costs not incremental 0 Experience adjust & changes in estimates 0 Interest on insurance contract liabilities -300 Financial revenues P&L IFRS Change -100bp P&L central ΔFinancial revenues -160 ΔExperience Adjustment 29 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM -23 P&L -100bp Results Analysis P&L variation of -241% Decrease of IFRS financial revenues (- 160) due to reinvestments with lower rates Increase of BEL (-2 339) due to TVOG and increase of the deterministic BE due to lower current rates Experience adjustment (+29) Change +100bp P&L central ΔFinancial revenues 168 ΔExperience Adjustment -30 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM 19 P&L +100bp Results Analysis P&L variation of +201% Increase of IFRS financial revenues (+168) due to reinvestments at higher rates Decrease of BEL (+1 919) due to higher current rates used for discounting Experience adjustement (-30) Change +300bp P&L central ΔFinancial revenues 699 ΔExperience Adjustment -193 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM 47 P&L +300bp Results Analysis P&L variation of +505% Increase of financial revenues (+699) due to higher reivestment rates Decrease of BEL (+4 667) due to higher current rates used for discounting Experience adjustement (-193) 34

53 1/ Method A (3/3) : OCI analysis 4. Appendices (7/19) Field-testing results: presentation and analysis OCI central 2013 Contribution of BE 0 Contribution of the assets at FV-OCI -933 Change in OCI -933 OCI central -933 ΔBE 0 Δbonds OCI -100bp Results analysis Stress impact on the OCI of Increase of bonds market value due to lower rates. No OCI on the liabilities side in method A OCI central -933 ΔBE 0 Δbonds OCI +100bp Results analysis Stress impact on the OCI of Decrease of bonds market value due to higher rates. No OCI on the liabilities side in Method A OCI central -933 ΔBE 0 Δbonds OCI +300bp Results analysis Stress impact on the OCI of Decrease of bonds market value due to higher rates. No OCI on the liabilities side in Method A 35

54 4. Appendices (8/19) Field-testing results: presentation and analysis 2/ Method B (1/3) : Overview (Interest expense in P&L at locked in market rate) Comments The change in P&L due to interest rate movements are significant in locked-ed: Asset remains stable because of the accounting of the bonds at cost BE varies significantly because even if the discount rate is fixed, the benefits do vary after a stress (mainly effect of lapses) Adjusted scale Different scale 36

55 4. Appendices (9/19) Field-testing results: presentation and analysis 2/ Method B (2/3) : P&L analysis P&L central 2013 Underwriting margin 107 Acquisition costs not incremental 0 Experience adjust & changes in estimates 0 Interest on insurance contract liabilities -300 Financial revenues P&L IFRS Change -100bp P&L central ΔFinancial revenues -160 ΔExperience adjustment 29 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM 30 P&L -100bp Change +100bp P&L central ΔFinancial revenues 168 ΔExperience adjustment -30 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM -34 P&L +100bp Results Analysis P&L variation of +276% Decrease of IFRS financial revenues (- 160) due to reinvestments with lower rates Decrease of BEL (+2 951) due to the change in future cash-flows while the discount rate is locked Experience adjustment (+29) Results Analysis P&L variation of -319% Increase of IFRS financial revenues (+168) due to reinvestments at higher rates Increase of BEL (-3 398) due to the change in future cash-flows while the discount rate is locked Experience adjustement (-30) Change +300bp P&L central ΔFinancial revenues 699 ΔExperience adjustment -193 ΔChange in Best Estimate ΔChange in Risk Adjustment and CSM -97 P&L +300bp Results Analysis P&L variation of -894% Increase of financial revenues (+699) due to higher reivestment rates Increase of BEL (-9 652) due to the change in future cash-flows while the discount rate is locked Experience adjustement (-193) 37

56 4. Appendices (10/19) Field-testing results: presentation and analysis 2/ Method B (3/3) : OCI analysis OCI central 2013 BE Contribution 919 Bonds Contribution -933 Change OCI -14 OCI central -14 ΔBE Δbonds OCI -100bp Results analysis Stress impact on the OCI of Negative BE impact of Increase of bonds market value due to lower rates. OCI central -14 ΔBE Δbonds OCI +100bp Results analysis Stress impact on the OCI of Positive BE impact of 4451 Decrease of bonds market value due to higher rates. OCI central -14 ΔBE Δbonds OCI +300bp Results analysis Stress impact on the OCI of Positive BE impact of Decrease of bonds market value due to higher rates 38

57 4. Appendices (11/19) Field-testing results: presentation and analysis 3/ Method C (1/3) : Overview (Interest expense in P&L at CBY rate) Comments The change in P&L due to interest rate movements are small in Method C due to OCI, however TVOG changes are accounted in the P&L. NB: Scale different from the one used in the summary 39

58 3/ Method C (2/3) : P&L analysis 4. Appendices (12/19) Field-testing results: presentation and analysis P&L central 2013 Underwriting margin 107 Acquisition costs not incremental 0 Experience adjust & changes in estimates 0 Interest on insurance contract liabilities Financial revenues P&L IFRS 114 Change -100bp P&L central 114 ΔFinancial revenues -160 ΔExperience adjustment 29 ΔChange in Best Estimate -80 ΔChange in Risk Adjustment and CSM -1 P&L -100bp -97 Results Analysis P&L variation of -185% Decrease of IFRS financial revenues (-160) due to reinvestments with lower rates Low increase of the BEL (-80) due to the use of CBY Experience adjustment (+29) Change +100bp P&L central 114 ΔFinancial revenues 168 ΔExperience adjustment -30 ΔChange in Best Estimate -81 ΔChange in Risk Adjustment and CSM -1 P&L +100bp 171 Results Analysis P&L variation of +50% Increase of IFRS financial revenues (+168) due to reinvestments at higher rates Low increase of BEL (-81) due to use of the CBY Experience adjustement (-30) Change +300bp P&L central 114 ΔFinancial revenues 699 ΔExperience adjustment -193 ΔChange in Best Estimate -587 ΔChange in Risk Adjustment and CSM -6 P&L +300bp 28 Results Analysis P&L variation of -75% Increase of financial revenues (+699) due to higher reivestment rates Moderate Increase of BEL for a strong stress due to the use of CBY (-587) Experience adjustement (-193) 40

59 4. Appendices (13/19) Field-testing results: presentation and analysis 3/ Method C (3/3) : OCI analysis Results analysis OCI central 2013 Contribution of BE 919 Contribution of the assets at FV-OCI -933 Change in OCI -14 OCI central -14 ΔBE (excluding TVOG) Δbonds OCI -100bp -191 Stress impact on the OCI of -177 Negative BE impact of due to lower current rates used for discounting Increase of bonds market value due to lower rates. OCI central -14 ΔBE (excluding TVOG) Δbonds OCI +100bp 188 Results analysis Stress impact on the OCI of +202 Positive BE impact of 2 020due to higher current rates used for discounting Decrease of bonds market value due to higher rates. OCI central -14 ΔBE (excluding TVOG) Δbonds OCI +300bp 205 Results analysis Stress impact on the OCI of 5089 Positive BE impact of due to higher current rates used for discounting Decrease of bonds market value due to higher rates 41

60 4. Appendices (14/19) Field-testing results: presentation and analysis 4/ Method D (1/3) : Overview (Interest expense in P&L at CBY rate+ TVOG in OCI) Comments The change in P&L due to interest rate movements is small in Method D due to OCI and to the accounting the reestimation of TVOG in OCI. The P & L is made less sensitive to unanticipated changes in interest rate. NB: Scale different from the one used in the summary 42 Etude CNP IFRS

61 4/ Method D (2/3) : P&L analysis 4. Appendices (15/19) Field-testing results: presentation and analysis P&L central 2013 Underwriting margin 107 Acquisition costs not incremental 0 Experience adjust & changes in estimates 0 Interest on insurance contract liabilities Financial revenues P&L IFRS 114 Change -100bp P&L central 114 ΔFinancial revenues -160 ΔExperience Adjustment 29 ΔChange in Best Estimate 12 ΔChange in Risk Adjustment and CSM 0 P&L -100bp -4 Change +100bp P&L central 114 ΔFinancial revenues 168 ΔExperience Adjustment -30 ΔChange in Best Estimate -70 ΔChange in Risk Adjustment and CSM -1 P&L +100bp 182 Results Analysis P&L variation of -103% Decrease of IFRS financial revenues (- 160) due to reinvestments with lower rates Low decrease of BEL (- 12) due to the use of CBY and the treatment of TVOG through OCI No absorption by CSM Results Analysis P&L variation of +60 % Increase of IFRS financial revenues (+168) due to reinvestments at higher rates Low increase of BEL (+70) due to the use of CBY and the treatment of TVOG through OCI No absorption by CSM 43 Change +300bp P&L central 114 ΔFinancial revenues 699 ΔExperience Adjustment -193 ΔChange in Best Estimate -377 ΔChange in Risk Adjustment and CSM -4 P&L +300bp 240 Results Analysis P&L variation of +110% Increase of financial revenues (+699) due to higher reivestment rates Low increase of BEL (+377) due to the use of CBY and the treatment of TVOG through OCI No absorption by CSM

62 4. Appendices (16/19) Field-testing results: presentation and analysis 4/ Method D (3/3) : OCI analysis Results analysis OCI central 2013 Contribution of BE 919 Contribution of the assets at FV-OCI -933 Change in OCI -14 OCI central -14 ΔBE deter. +TVOG Δbonds OCI -100bp -284 Stress impact on the OCI of -270 Negative BE impact of due to the lower interest rates and the treatment of TVOG through OCI Increase of bonds market value due to lower rates. OCI central -14 ΔBE deter. +TVOG Δbonds OCI +100bp 177 Results analysis Stress impact on the OCI of +191 Positive BE impact of 2009 due to the higher interest rates and the treatment of TVOG through OCI Decrease of bonds market value due to higher rates. OCI central -14 ΔBE deter. +TVOG Δbonds OCI +300bp -8 Results analysis Stress impact on the OCI of 6 Positive BE impact of due to the higher interest rates and the treatment of TVOG through OCI Decrease of bonds market value due to higher rates 44