Accountant Perspective
On Appraisal Value
Derivation
Conference: Dynamic Solvency Testing & Appraisal Value
Thursday, 8 December 2005
Ballroom Sahid Hotel Jaya – Jakarta
08 Dec 2005
Presented by : Simon Imanto – Head Finance and Accounting
PT AIG Life
1
Topics
• How to Measure a Life Insurance Company
• Different Measures of the Same
• Statutory Profits
– Key Drivers
• Achieved Profits
– Profit Factors
– Key Drivers
– Reporting
– Areas for Focus
08 Dec 2005
2
How to Measure a Life Insurer
Some methods are used by:

Info Bank Magazine

Investor Magazine

Bisnis Indonesia Newspaper
08 Dec 2005
3
Info Bank Magazine
1. Risk based capital (RBC)
2. Liquidity
3. Statutory deposit / reserve
4. Investment / reserve + claim payable
5. Fixed asset / equity
6. Gross premium growth
7. Net premium income / equity
8. Net investment income / average of investment
9. Expense (claim + expense + commission)/net premium
income
10. Profit (loss) before tax / average of equity
08 Dec 2005
4
Investor Magazine
1.
Asset growth 4 years
2.
Shareholders’ equity growth 4 years
3.
Technical reserves growth 4 years
4.
Net premium income growth 4 years
5.
Investment return growths 4 years
6.
Total revenue growths 4 years
7.
Net profit growths 4 years
8.
Underwriting profit growths 4 years
9.
Return on assets (ROA)
10. Return on equity (ROE)
11. Risk based capital (RBC)
12. Total asset turn over (TATO)
13. Market share based on net premium
08 Dec 2005
5
Bisnis Indonesia Newspaper
1. Risk based capital (RBC)
2. Liquidity
3. Productive asset ratio
4. Solvency
5. Investment return
6. Return on equity
7. Cash flow
8. Economic scale
08 Dec 2005
6
Statutory Reports
PUBLISHED FINANCIAL STATEMENT YEAR 2004 (in the newspapers)
Balance Sheets
A
B
INVESTMENT
Total Investment
4,760,322
3,541,061
NON INVESTMENT
Total Non Investment
481,360
300,630
Total Assets
5,241,682
3,841,691
PAYABLE
Total Payable
TECHNICAL RESERVE
Total Technical Reserve
Total Liabilities
Subordinate Loan
EQUITY
Paid in Capital
Stock Agio
Reserve (Advance of Paid in Capital)
Increase (Decrease) Marketable Securities
Fixed Assets Valuation Difference
Unrealised Profit of Stock
Retained Earning
Total Equity
Total Liabilities and Equity
08 Dec 2005
C
D
E
F
3,097,049
2,672,067
2,568,145
2,437,858
318,963
3,416,012
123,141
2,795,208
111,720
2,679,865
135,688
2,573,546
614,001
197,121
76,868
179,404
14,715
329,598
3,653,301
4,267,302
-
3,283,004
3,480,125
-
2,941,200
3,018,069
-
2,249,662
2,429,066
-
923,186
937,901
-
1,924,371
2,253,969
-
477,711
22,289
2,836
107,612
(138,692)
502,624
974,380
5,241,682
4,500
12
5,046
974
7,862
343,172
361,566
3,841,691
235,000
3,038
114,102
45,805
397,944
3,416,012
111,500
10,000
30,606
214,036
366,142
2,795,208
1,497,813
104,646
(702,620)
593
161,768
679,764
1,741,964
2,679,865
4,500
51,700
263,377
319,577
2,573,546
7
Statutory Reports
Profit & Loss Statements
A
– cont.1
B
C
D
E
F
Income
Premium Income
Reinsurance Premium
Decrease (Increase) UP
Total Net Premium Income
2,051,576
(24,894)
(2,502)
2,024,180
1,045,684
(14,544)
152,353
1,183,493
1,527,648
(8,676)
(2,921)
1,516,051
1,561,393
(18,649)
95
1,542,839
774,243
(10,411)
235
764,067
1,077,840
(12,028)
2,664
1,068,476
Investment Income
Other Management Fee
Other Income
Total Income
518,264
5,342
5,215
2,553,001
351,660
15,403
116,722
1,667,278
283,470
1,275
14,204
1,815,000
428,801
7,591
1,979,231
443,071
1,658
1,208,796
207,859
7,842
57,912
1,342,089
Expenses
Total Claim and Benefit
1,838,517
970,152
1,404,624
1,333,817
827,015
1,067,784
Amortization of Deferred Acquisition Cost
Marketing
General and Administration
Other Income (Expense)
Total Expenses
201,515
3,139
178,312
122,907
2,344,390
219,810
5,045
168,508
(25,407)
1,338,108
62,993
74,437
206,612
19,942
1,768,608
333,121
59,592
89,166
546
1,816,242
28,607
3,147
26,660
885,429
111,800
6,420
75,008
1,261,012
208,611
(15,256)
193,355
329,170
(38,623)
290,547
46,393
(588)
45,805
162,989
(970)
162,019
323,367
23,738
347,105
80,967
(68)
80,899
Profit (Loss) Before Tax
Income Tax
Profit After Tax
08 Dec 2005
8
Different bases but what’s the difference?
•
Local Statutory
•
Income Less Expenditure
•
Cash
•
US GAAP
•
Modified Statutory Basis (MSB : UK GAAP)
•
Achieved Profits
08 Dec 2005
9
The difference is ….
ONLY TIMING DIFFERENCES
• Statutory Profits is a one year snapshot
• Achieved Profits takes into account the income and
expenditure arising over the entire life that the
policy is in-force
08 Dec 2005
10
Statutory Profit - Key Drivers
 Sales Volumes (growth rates, new business strain)
 Product Mix (reserving basis, new business strain)
 Distribution Cost
 Persistency (renewal premiums)
 Expenses
 Claims
 Investment Performance
08 Dec 2005
11
Problems with Statutory Profit

Only one year profit - does not reflect total
value to company of business written

New business strain leads to loss

Not a reflection of underlying profitability
08 Dec 2005
12
Achieved Profits
08 Dec 2005
13
Achieved Profit

New Business Achieved Profit - accounts for all
expected future profits in the year that business
is sold, on a discounted basis

In Force Achieved Profit – expected IFAP is the
increase in the value of profits over the year as
the discounting period reduces

Experience variances are differences between
expected achieved profits during the year and
actual achieved profits
08 Dec 2005
14
Achieved Profit

Reflects value to company of business written

No new business strain

Cost of capital allowed for

Experience variances show where better or worse
performance than assumed
08 Dec 2005
15
Achieved Profits - Achieved or Achievable??
 Achieved Profits is based on assumptions of future
events:
 Investment returns
 Persistency
 Claims
 Expenses
 Tax
 Then discounted to a Net Present Value using
a selected Risk Discount Rate
08 Dec 2005
16
Achieved Profits Key Drivers

New Business Achieved Profits (NBAP):
 Sales Volume
 Profit Factor:
 Product type & emergence of statutory profits
 Assumptions (economic & non-economic)
 Risk Discount Rate

In-force Achieved Profits (IFAP)
 Risk Discount Rate
 Actual experience of:
 Expenses
 Persistency
 Claims
 Assumption changes
08 Dec 2005
17
Achieved Profits
Achieved Profits = Change in Embedded Value +
current year Statutory Profit
Embedded Value = Net Present Value of future
expected Statutory Profits
08 Dec 2005
18
Achieved Profits Key Reporting Measures
 Weighted New Business Sales (“APE” or “FYP”)
[Regular + 10% Single Premium]
 NBAP
[NBAP from regular & single]
 AP Margin % = ___NBAP__
APE or FYP
08 Dec 2005
19
Achieved Profits
NEW BUSINESS ACHIEVED PROFITS
A
Headline figure
IN-FORCE ACHIEVED PROFITS:
Unwind of discount rate on b/fwd smoothed EV
B
Achieved Profit Experience Variances
Expenses
Persistency
Claims
08 Dec 2005
C1
C2
C3
Total experience variances
C = C1+C2+C3
Shareholder fund
D
Change of assumptions
E
Total In-Force Achieved Profits
F = B+C+D+E
OPERATING ACHIEVED PROFITS
G=A+F
Investment Related Variances
H
TOTAL ACHIEVED PROFITS BEFORE TAX
I=G+H
Indicator of how close to reality
are the assumptions
20
Achieved Profits
An Example
Achieved Profits FY 2005
New Business Achieved Profits (Reg + Single)
A
FY 2005
Rp'million
35,000.0
In-Force Achieved Profits
Unwind of discount rate on b/fwd smoothed EV
B1
11,000.0
Achieved Profit Experience Variances
Expenses
Persistency
Claims
Others (please specify) - Future losses on NB
Total experience variances
B2a
B2b
B2c
B2d
B2
(17,500.0)
3,000.0
2,000.0
(12,500.0)
Shareholder fund
B3
-
Change of assumptions(please explain in commentary)
B4
-
Total In-Force Achieved Profits
B
Total Operating Achieved profits
Investment Related Variances
Total Achieved Profit Before Tax
Tax
08 Dec 2005
Total Achieved Profit after tax
(1,500.0)
C=A+B
33,500.0 1)
D
12,500.0 2)
E=C+D
F
G=E+F
46,000.0
46,000.0
21
Achieved Profits - An Example
Full Year 2005 - Achieved Profits
Total Value of Shareholders' Fund
Stat Basis
Rp'million
Embedded
Value
Rp'million
Total Fund on an
achieved basis
Rp'million
Accumulated Achieved Profits B'fwd at 31/12/2004
Embedded value
Share capital
Share premium
Profit & Loss account
Total
120,000.0
100,000.0
10,000.0
(40,000.0)
70,000.0
120,000.0
Full Year 2005 Movements
Prior year adjustments
Profit & Loss account
New Share Capital
Change of ownership
Statutory Profit
20,000.0
20,000.0
15,000.0
15,000.0
Operating Achieved profits
Investment related experience variances
33,500.0
12,500.0
33,500.0 1)
12,500.0 2)
Achieved profits on ordinary activities before tax (including
actual investment gains)
46,000.0
46,000.0
Tax
Tax on statutory basis
Tax on achieved profits
08 Dec 2005
120,000.0
100,000.0
10,000.0
(40,000.0)
190,000.0
Dividend
FX Movement
Accumulated Achieved Profits C'fwd as at 31/12/2005
-
-
-
22
105,000.0
166,000.0
271,000.0
Asset Valuation
08 Dec 2005
23
MOF Decree
424/KMK.06/2003
Summary of financial soundness – see attached
Considered Points for revising :
• Gov. Bonds : based on book value
• Statutory Deposits : could be allowed investing on Gov.
Bonds
08 Dec 2005
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Deferred Tax
08 Dec 2005
25
Deferred Tax
Identify timing/temporary difference between fiscal &
Accounting
Differentiation Balance Sheet according to Fiscal &
Accounting:
• Fixed Assets
• Bad Debt Expenses
• Accrual Expenses – Expense incurred but non-deduct able
cost according to fiscal
To be recounted BV per accounting records vs fiscal
• If the fiscal BV > accounting BV = Deferred Tax Liability
• If the fiscal BV < accounting BV = Deferred Tax Assets
08 Dec 2005
26
Deferred Tax – cont.1
Temporary Difference:
• A different between the tax basis of an asset or liability
and its reported amount in the financial statements that
will result in taxable or deductible amounts in future years
when the reported amount of the asset or liability is
recovered or settled, respectively
Timing Difference:
• Differences between the periods in which transactions
affect taxable income and the periods in which they enter
into the determination of pretax income
08 Dec 2005
27
Type of Temporary Differences
• Revenues or gains that are taxable after they are recognized
in financial income (e.g., percentage of completion for
financial purposes and completed contract for tax purposes,
or use of the full accrual method for financial purposes and
the installment method for tax purposes)
• Revenues or gains that are taxable before they are
recognized in financial income (e.g., including the entire
amount of advance rental payments in taxable income but
deferring and recognizing when earned for financial purposes)
• Expenses or losses that are deductible after they are
recognized in financial income (e.g., accrual of product
warranty expense for financial purposes but deducting when
paid for tax purposes)
08 Dec 2005
28
Type of Temporary Differences (2)
• Expenses or losses that are deductible before they are
recognized in financial income (e.g., depreciating an asset
under the accelerated depreciation method for tax purposes
but under straight-line for financial purposes)
• Business combinations accounted for by the purchase method
(i.e., the differences between the assigned values and the tax
bases of the assets and liabilities recognized)
• An increase in the tax bases of assets because of indexing for
inflation
08 Dec 2005
29
Deferred Tax – an example
Pre-tax accounting income
Temporary differences:
- Depreciation
Taxable income
2004
100,000
2005
100,000
2006
100,000
2007
100,000
5,000
105,000
15,000
115,000
(15,000)
85,000
(5,000)
95,000
Tax rate
Income tax expense
30%
25,500
30%
28,500
30%
31,500
30%
34,500
Depreciation method
Tax
Accounting
Temporary difference
40,000
25,000
15,000
30,000
25,000
5,000
20,000
25,000
(5,000)
10,000
25,000
(15,000)
Cummulative Temp. Diff
Tax rate
Deferred Tax Liability
15,000
30%
4,500
20,000
30%
6,000
15,000
30%
4,500
-
08 Dec 2005
30
Deferred Tax – an example (2)
2004
100,000
2005
100,000
Income tax expense
- Current
- Deferred
Total income tax expense
25,500
4,500
30,000
28,500
1,500
30,000
31,500
(1,500)
30,000
34,500
(4,500)
30,000
Net income
70,000
70,000
70,000
70,000
Pre-tax income
Journal entries
2004 Dr. Income tax expense - deferred
Cr. Deferred tax liability
2007
100,000
4,500
4,500
2005 Dr. Income tax expense - deferred
Cr. Deferred tax liability
1,500
2006 Dr. Deferred tax liability
Cr. Income tax expense - deferred
1,500
2007 Dr. Deferred tax liability
Cr. Income tax expense - deferred
4,500
08 Dec 2005
2006
100,000
1,500
1,500
4,500
31
Valuation of Tax Losses
08 Dec 2005
32
An Examples:
Tax Loss Utilization
Rp. Million
2001
2002
2003
2004
Result - Profit before Tax (5,000.0) (7,500.0) (2,500.0)
2,000.0
2005
2006
2007
2008
1,500.0 (6,000.0)
3,000.0
5,000.0
B/F losses
0.0 (5,000.0) (12,500.0) (15,000.0) (13,000.0) (11,500.0) (17,500.0) (13,000.0)
new (losses)
(7,500.0) (2,500.0)
0.0
0.0 (6,000.0)
0.0
0.0
Loss utilisation: by year of loss
2001 5,000.0
2,000.0 1,500.0
1,500.0
2002 7,500.0
3,000.0 4,500.0
2003 2,500.0
2,500.0
2004
0.0
2005
0.0
2006 6,000.0
2,500.0
2007
0.0
Loss C/F
(12,500.0) (15,000.0) (13,000.0) (11,500.0) (17,500.0) (13,000.0) (3,500.0)
08 Dec 2005
33
An Examples:
Tax Loss Utilization (2)
Year Tax loss
2001
2002
2003
2004
2005
2006
2007
Total
08 Dec 2005
5,000.0
7,500.0
2,500.0
6,000.0
16,000.0
Year
Wasted Year
2007 1,500.0
2008 4,500.0
2009
2010
2011
2012 N/A
2013
6,000.0
2004
2007
2008
2008
-
Used-1
2,000.0
3,000.0
2,500.0
2,500.0
10,000.0
Year
Used-2
2005 1,500.0
34
Accountant Perspective On Appraisal
Value Derivation
Thank You
08 Dec 2005
35