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Embedded Value as


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

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

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

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
  • 2000 CNP was the 1st French insurer to include
    EV NB value in its annual report

CNP Embedded Value figures disclosed
per share
CNP Value of New Business disclosed
per share
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
  • 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

CNP Sensitivities 2002 - France
  • 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
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

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

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
  • Financial rate of return modelled based on long
    term projection including future premiums
  • "Free reserves" locked-in

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

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

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

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

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...

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

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

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

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
  • Policy on profit sharing can be illustrated
    monitored using the same model as ALM

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

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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