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Embedded Value as

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Principle of no value destruction - materialised by Embedded Value & NB Value ... Embedded Value forces to split profit between operational & non recurring ... – PowerPoint PPT presentation

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Title: Embedded Value as


1
  • Embedded Value as
  • a management tool
  • Sylvaine Salahub
  • CNP Assurances
  • 16 June 2003

2
Embedded Value as a management tool
  • Historic of Embedded Value in CNP
  • The methodology retained
  • The impact on big deals
  • The day to day basis

3
Historic of Embedded Value in CNP
  • 1991 calculated for the 1st time
  • 1998 EV was used to assess share price
  • Since communication of EV each 1/2 year to the
    market
  • 2000 CNP was the 1st French insurer to include
    EV NB value in its annual report

4
CNP Embedded Value figures disclosed
40,4
44,5
43,5
44,9
per share
5
CNP Value of New Business disclosed
per share
6
CNP Economic Assumptions 2002 -France
  • Bond yield 4.3 OAT
  • Equities yield OAT 2 points 6.3(net
    dividends and realised gains)
  • Discount rate 7.8
  • 25 of solvency margin covered by subordinated
    debt
  • Treatment of top-up premiums mainly included in
    New Business
  • Administrative expenses standard
    assumptionincrease in unit costs in line with
    inflation (1.5/year)
  • Corporate tax rate 35.4
  • Dividend tax credit 10

7
CNP Sensitivities 2002 - France
/share
  • NAV1 point increase in bond yields ? -0.710
    increase in CAC 40 ? 1.0
  • IN FORCE1 point increase in bond and equities
    yield ? 2.61 point increase in discount
    rate ? -2.1
  • EMBEDDED VALUE (NAV IN FORCE)1 point increase
    in bond and equities yield ? 1.91 point
    increase in discount rate ? -2.1

Sensitivity of Embedded Value to a moderate
increase in interest rates is low
8
CNP was the 1st French insurer to publish
Embedded Value
  • Therefore
  • Need to answer multiples methodology questions
    relating to French specificity
  • Choice was made by the Board to articulate
    published figure with "real life"
  • In particular, reconcile analysis with Asset
    Liability Model Accounting Analysis already
    developed

9
Overview of some French specificity
  • Capitalisation Reserve
  • Profit sharing
  • Top up premiums
  • Group business

10
CNP methodology NAV In Force
  • NAV coherent with accounting principle
  • Included Capitalisation Reserve
  • Less goodwill
  • Plus value of unrealised gains net of tax in
    proportion of shareholders' right on
    shareholders' fund
  • In Force on continuing realistic basis
  • Profit sharing in line with past actual Company
    policy
  • Financial rate of return modelled based on long
    term projection including future premiums
  • "Free reserves" locked-in

11
CNP methodology Top Up Premiums
  • A French characteristic of savings contracts
  • Impact of 8 years' tax inheritance tax
    incentives
  • Profitability of top up premiums
  • Product loading at the same level than new
    premium
  • With reduced cost
  • Assimilated to single premium included as New
    Business rather than In Force in Embedded Value
    calculations

12
CNP methodology Group Business
  • A part from Credit Insurance, all premium are
    assimilated to single premium
  • Profit sharing is modelled
  • Statutory cost of locking-in is modelled
  • Surplus reserve are locked in

13
CNP methodology Cost of Locking-in
  • Full cost of statutory solvency margin net of
    subordinated debts
  • Based on new money rate assumptions
  • Based on actual assets allocation
  • Deducted from In Force New Business Value

14
CNP Assurances Characteristics
  • Dominant position in the French Market
  • Savings
  • Group Business
  • Pensions
  • International development Brazil, China
  • Main partners are also shareholders

15
Embedded Value a dissuasive weapon
  • Embedded Value is a reference for
  • Negotiation with partners (Launch of Assurposte
    agreement with Caisses d'Epargne summer 2000)
  • International development bought of 50,75 of
    Caixa Seguros in 2002
  • Future developments...

16
Use of EV negotiation with partners
  • Principle of no value destruction - materialised
    by Embedded Value NB Value
  • Financial assumptions have been disclosed
  • Impact of future agreement can be measured for
    partner insurer

17
Use of EV bought of Caixa Seguros
  • Acquisition price build on a operational plan
    including the value of a detailed Business Plan
  • Volume versus value by product are monitored
    monthly

18
The day to day EV value of new business
  • For operational team new product must "increase
    value of new business"
  • Sensitivities are measured
  • Value of new business is used to monitor future
    development

19
The day to day EV a shared tool
  • Internal analysis feeds EV
  • lt-gt EV feeds internal analysis
  • Embedded Value forces to split profit between
    operational non recurring
  • Profit projection are in phase with accounting
    analysis
  • Policy on profit sharing can be illustrated
    monitored using the same model as ALM

20
The day to day EV a shared tool
  • Shareholders' interest has been identified and
    therefore can be monitored
  • Accounting rules reinforced the use of EV NB
    Value approach ( impairment test)
  • Models in force could be used as a base of other
    developments such as IFRS

21
Embedded Value Future challenges
  • French market more comparable actors to
    published value (Bank insurers)
  • CNP Assurances reinforce the use of EV NB in
    line with strategic plan e.g. target value added
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