KPMG Insurance Reporting Roundup 2012 FINAL

FINANCIAL SERVICES

Insurance Reporting Round-Up

Survey based on the 2011 year end results of major European insurers

June 2012

kpmg.co.uk/insurance

The following people have made significant contributions to this publication:

Danny Clark

Matthew Francis

Matthias Grsbrink

Bettina Hammers

David Holliday

Aleksandra Pomeranska

Alfons van der Vyver

Contents

Chapter 1: Summary 1

Chapter 2: At a Glance 3

Chapter 3: Key Performance Indicators 5

Chapter 4: Financial Performance 9

Chapter 5: Embedded Value 15

Chapter 6: Premiums and New Business 19

Chapter 7: Investments and Intangible Assets 23

Chapter 8: Capital, Risk and Solvency 33

Chapter 9: Basis of Preparation 41

Glossary 43

2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

1 | Insurance Reporting Round-Up 2012

Summary

Welcome to the latest edition of Insurance Reporting Round-Up. This edition reviews the 2011 financial information published by Europes largest insurers, seeking to identify trends in performance and the way in which performance is reported.

The stalling economic recovery, lower interest rates, increasing credit spreads, falling equity markets and record levels of natural catastrophe losses made 2011 a challenging year for European insurers. Yet against this background the insurers in our survey produced a robust set of results, while achieving an aggregate increase of 2.1 percent in total equity compared to the prior year, further demonstrating the relative stability of the European insurance industry.

Profitability

The aggregate IFRS profit or loss before tax earned by the 16 companies in our survey was 9.9 percent lower than in the prior year, but individual results were mixed with the majority of the companies in the survey reporting an increase in their IFRS profit or loss before tax.

Investment returns were adversely affected by higher impairment losses on financial assets. However, the effects of the increased volatility in financial markets were not all negative. In addition, the full impact of the reduction in investment returns was not reflected in IFRS profit or loss because part of the reduction was attributed to policyholders and part was recognised in other comprehensive income.

Although the claims ratios of companies with significant exposures to catastrophe risk were adversely affected by the high level of accumulated losses in 2011, most companies reported improvements in claims experience in other areas.

New business

In general, as in 2010, companies reported stronger growth in the developing markets of Asia and Latin America than in more mature markets. Total net earned premiums for non-life business increased by 1.4 percent, mainly as a consequence of price increases.

A number of the insurers reported increases in volumes of savings-type products in the UK, but these increases were generally more than offset by reduced sales volumes of savings products in the rest of Europe and in North America. Some insurers cited disinvestments or management actions to withdraw or reduce sales of unprofitable or capital intensive products as a reason for the reduction in sales volumes of life insurance contracts.

Balance sheets

Most of the insurers reported increases in their total equity over the year. Although some recognised significant losses on Greek sovereign debt, most reported that the steps they had taken to reduce their exposures prior to the announcement of the restructuring of Greek government bonds meant that they were able to absorb the consequential losses without severely impacting their capital ratios.

At the end of 2011, the total value of Greek sovereign debt (after incurred impairment losses) held by the surveyed group was 2.7 billion. A more significant default, for example by Spain, would have a significantly greater impact. At 31 December 2011, the surveyed insurers total direct exposure to the sovereign debt of Spain was 42 billion, although it must be remembered that a proportion of this exposure would be borne by policyholders rather than shareholders.

Most companies reported little change in their regulatory solvency levels (measured under Solvency I) compared with the prior year.


Insurance Reporting Round-Up 2012 | 2

Financial reporting

Compiling this publication served to remind us of the diversity in accounting and reporting practices that currently exist in the European insurance industry. The lack of consistency in the way that insurers report their financial results makes it more difficult for analysts and investors to analyse and compare an insurers performance. In an era where there is tough competition for capital, the complexity and lack of comparability of insurers financial information puts the industry at a disadvantage to other sectors in which the financial position of a company is easier to compare with its peers.

The proposed new International Financial Reporting Standard for insurance contracts (IFRS 4 phase II) should go some way to resolve this. We expect the final standard to be issued in the second half of 2013, however, this is a best case scenario and this timing could be under threat if stakeholders lose focus on bringing the project to a conclusion.

Although IFRS 4 phase II is expected to improve both transparency and consistency in financial reporting under International Financial Reporting Standards, with benefits for both investors and the insurance industry, this is only one of the accounting bases under which insurers, and in particular life insurers, currently report. We see external reporting by insurers developing further in a number of other areas:

Non-GAAP profit measures are presented by all of the insurers in our survey in their results presentation or annual report. These measures are generally helpful because they separate exceptional and other items from the insurers underlying performance. This enables users to better understand the insurers performance from year to year. The down-side is that they do not necessarily aid comparability between insurers because there is no consistent view within the industry of what the non-GAAP profit measure should include. We do not expect non-GAAP profit measures to disappear completely when IFRS 4 phase II becomes effective, but the extent to which they will be given prominence, and the extent to which the adjustments made to IFRS profit or loss become more standardised, might be one way of gauging the success of the IASBs insurance project.

Embedded value reporting is currently applied inconsistently, with no timeline for convergence on a single set of agreed principles. Our survey identified a decline in the relative importance of embedded value metrics used by the insurers in the survey. This would appear to be as a consequence of Solvency II, which is driving companies to reconsider how they measure value in their business. Indeed, AEGON has decided to drop embedded value reporting altogether from 2012 and replace it with information based on Solvency II, including a market-consistent measure of the value of its new business. We would expect other insurers to consider whether they should follow AEGONs lead.

Solvency measures have seen increasing prominence in financial reporting since the start of the global financial crisis, but they do not currently provide a reliable and comparable measure of financial strength between different insurers because of significant differences in assumptions and methods used. We would expect that Solvency II will bring more consistency to these measures with the group solvency ratio becoming a market benchmark.

In the nearer term, we believe that Solvency II will continue to drive developments in key performance metrics. Although we have seen an increase in the use of solvency, cash generation and return on capital metrics by insurers in the past few years, the linkage between risk, capital, and cash generation is often unclear. We believe that insurers might derive more of these performance metrics from Solvency II in the future, because of its explicit links between risk, capital requirements and cash generation.

It will be fascinating to see how the Solvency II information and IFRS phase II information come together and whether these new metrics will help insurers to better explain their performance to stakeholders. It is in the interests of all key stakeholders, including insurance companies, trade bodies, rating agencies, investors and accounting firms, that insurers financial reporting becomes more transparent and comparable, and that any differences between reporting bases are clearly communicated and understood.

Danny Clark Partner, Financial Services


3 | Insurance Reporting Round-Up 2012 Insurance Reporting Round-Up 2012 | 4

2. At a Glance

Net earned premiums are gross earned premiums less earned reinsurance premiums. All balance sheet amounts are as at 31 December 2011, 2010 and 2009 and all income related amounts are for the year ending on the relevant balance sheet date.

Total assets (m) Total equity (m) Net earned premiums (m) Profit/(loss) after tax (m)

Dec 2011 Dec 2010 Dec 2009 Dec 2011 Dec 2010 Dec 2009 Dec 2011 Dec 2010 Dec 2009 Dec 2011 Dec 2010 Dec 2009

AEGON 345,577 332,222 298,540 25,734 23,543 18,993 16,114 19,238 17,746 872 1,760 204

Allianz 641,472 624,945 583,717 47,253 46,562 42,229 63,668 63,337 59,792 2,804 5,209 4,255

Aviva 372,790 441,686 422,930 18,334 21,153 18,004 34,641 39,545 37,629 69 2,179 1,514

AXA 730,085 731,390 708,252 50,932 53,868 50,192 80,021 82,939 84,408 4,516 3,091 4,033

CNP 321,011 319,609 301,877 13,217 13,178 12,426 29,919 32,241 32,523 1,141 1,288 1,122

Generali 423,057 422,430 423,817 18,121 20,065 19,924 62,739 65,727 64,036 1,153 1,968 1,670

ING 335,387 325,659 290,219 23,537 20,270 15,967 25,268 25,713 28,555 1,220 (1,540) (584)

Legal & General 389,906 386,510 354,492 6,284 5,817 5,010 5,852 5,464 5,427 833 944 972

Mapfre 54,856 48,672 43,106 9,727 7,796 7,094 17,093 14,823 13,714 1,220 1,064 1,036

Munich Re 247,580 236,358 223,412 23,309 23,028 22,278 47,412 43,075 39,526 712 2,430 2,564

Old Mutual 193,790 230,985 195,486 12,958 13,693 12,783 3,753 3,639 3,171 1,114 (28) (136)

Prudential 326,490 311,246 271,802 10,932 9,637 7,522 29,112 27,884 23,006 1,721 1,654 780

Standard Life 191,091 183,922 174,968 5,154 5,058 4,479 3,737 3,628 3,687 398 568 207

Swiss Re 174,462 176,396 179,751 24,163 20,780 19,573 15,291 14,108 16,270 2,009 1,532 356

Talanx 115,268 111,100 101,213 8,706 7,980 7,153 19,456 18,675 17,323 897 667 893

Zurich 298,007 290,094 285,108 26,271 25,672 23,961 30,797 32,676 33,904 2,722 2,518 2,859

Total 5,160,829 5,173,224 4,858,690 324,632 318,100 287,588 484,873 492,712 480,717 23,401 25,304 21,745

2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.


3. Key Performance Indicators


More insurers present an alternative profit measure within their KPIs than an IFRS profit measure

In last years survey we considered the key financial performance metrics highlighted by the insurers in their presentations to analysts and investors as part of their results announcements.

The content of these results presentations provides an indication of what the insurers in our survey consider to be the most important and useful key financial performance indicators (KPIs). We have repeated this exercise this year in order to identify changes in the reported information and any emerging trends.

Approach

We have summarised these financial KPIs in the table on pages 7 and 8. In general, we have used the same terminology as the source, although in a few instances, for clarification, we have amended the terminology used. The overriding caveat for the information presented is that it is limited to the financial metrics presented in the first few pages of the financial performance section of the results presentations.

Our observations

The key metrics are presented in the order they appear in the results presentations. IFRS (or US GAAP) profit or loss was presented as a key financial metric by only 10 (2010: 12) of the insurers in the survey. Although AEGON and AXA presented net income as a key measure in 2010, they chose not to present an IFRS profit measure as a headline measure this year. In 2010, only Mapfre and Swiss Re did not present a non-GAAP profit measure as a key financial measure in their analyst presentations. CNP and Munich Re also chose not to present a non-GAAP profit measure as a key financial measure this year.



Generali and Talanx joined Allianz, AXA and Prudential in reporting a solvency measure as a key financial measure

Gross volume information featured less prominently this year as AEGON, Munich Re, Old Mutual and Prudential all appear to have dropped gross volume measures from their headline metrics. It is worth noting, however, that only Talanx and Mapfre presented gross written premiums, as reported in their IFRS income statements, as a key financial metric in their results presentations. Most of the insurers included deposits received in respect of investment contracts and mutual funds in their annual premium equivalent (APE) and other sales measures.

Increased focus on solvency measures

Generali and Talanx joined Allianz, AXA and Prudential in reporting at least one solvency measure as a key financial measure in their analyst presentations. Allianz included an economic solvency measure within its KPIs for the first time this year. Aviva, Legal & General and Standard Life presented IGD surplus as a headline measure in their stock exchange releases but did not present a solvency measure as a financial highlight in their analyst presentations.

Unlike the prior year, AEGON, AXA and Generali did not include an embedded value measure in their key financial highlights. Aviva chose to include an embedded value new business measure this year, although it did not include an embedded value measure in its key performance metrics in the prior year. The net effect continued the a trend observed in previous years and in the current year only six of the insurers in the survey included embedded value information as a financial highlight in their analyst presentations. In any case, embedded value metrics were generally presented after GAAP and alternative profit measures.

We observed that most insurers presented a different set of financial KPIs from the prior year. Only Mapfre and Zurich made no changes to the key financial metrics presented in their analyst presentations, while AEGON, Aviva, AXA, Generali and Munich Re all made considerable changes this year.

It is not surprising that many of the insurers choose different headline metrics each year in order to explain their performance in the best light. Insurers are no different from other reporters in this respect. However, if one of the surveyed insurers decides to give greater prominence to a particular performance measure in its analyst presentation this does not necessarily mean that it has made wholesale changes to the key financial information that it provides to investors. The analyst packs are generally comprehensive and include a wide range of financial metrics. We have not lost sight of this, but intentionally show only those metrics that enjoyed the greatest prominence in the results presentations.

It remains to be seen whether the ongoing developments in insurance reporting, including IFRS 4 Phase II and Solvency II, will lead to greater consistency in reported KPIs. Both the IASBs new financial reporting standard and the public disclosure guidelines under Solvency II are expected to increase comparability and consistency in the financial information presented by European insurers, and may lead to the introduction of new financial performance measures. As discussed further in chapter 8 Capital, Risk and Solvency, it appears that insurers are slowly starting to prepare their stakeholders for the forthcoming changes under Solvency II. It remains to be seen how different insurers will approach the presentation and explanation of new metrics given the differences in their strategies, business and drivers of performance.

Mapfre Munich Re Old Mutual Prudential Standard Life Swiss Re Talanx Zurich

Revenues Net profit IFRS adjusted operating profitIFRS operating

profit Operating profit Net incomeGross written

premiumBusiness

operating profit

Gross written premium

Shareholders' equity

IFRS adjusted operating EPS

Total profit before tax

Assets under administration

P&C combined ratio

Net premium earned

Net income attributable to shareholders

Managed savings Dividend Group RoE Shareholders fundsThird-party

assets under administration

L&H benefit ratio Combined ratioGeneral

insurance combined ratio

Non-life combined ratio

Return on investments Dividend

EEV new business profit

Long-term savings net flows

Return on investments

Net investment income

Global Life new business value

Net result Combined ratio Embedded value operating profit

Investment management

third-party net flows

RoE Operating profit (EBIT)Farmers Mgmt

Services managed GEP margin

EPSEmbedded value

shareholders' funds

EEV operating profit before tax EPS

Net profit (after tax)

Shareholders equity

Underlying free surplus generation

Shareholders equity

Group net income (after minorities) RoE

Net remittances Dividend per shareBook value per share RoE

Business operating profit (after tax) RoE

IGD surplus Group solvency

Dividend


Key financial performance indicators from results presentations

AEGON Allianz Aviva AXA CNP Generali ING Legal & General

Proposed dividend Total revenues

IFRS operating profit

Underlying earnings

Revenue & new money Operating result

Insurance underlying result

before tax Operational

cash generation

RoE Operating profit New business internal rate of

return Operating free

cash flows Attributable

net profit Net result Insurance

operating result Net cash

generation

Underlying earnings

before tax Net income

General business combined

operating ratio Solvency I ratio

Average technical reserves

Regulatory solvency I ratio

Life general account assets

and investment spread

Worldwide sales (APE)

Fee-based earnings (as % of underlying

earnings)

Proposed dividend

Operating capital generation Debt gearing Net assets

Economic solvency ratio

Administrative expenses /

operating income Operating profit

Normalised operational free

cash flow Shareholders

equity IFRS NAV Economic

solvency ratio Dividend Dividend per

share APE RoE

FCD solvency ratio Dividend Dividend MCEV per share Payout ratio RoE

EEV operating profit

Economic solvency EEV per share

Dividend

Volume information (excluding net measures)

Underlying earnings or operating profit

GAAP profit after tax

EEV measures

Solvency measures

Capital market measures

Cash generation

Combined ratio


Key financial performance indicators from results presentations

AEGON Allianz Aviva AXA CNP Generali ING Legal & General

Proposed dividend Total revenues

IFRS operating profit

Underlying earnings

Revenue & new money Operating result

Insurance underlying result

before taxOperational

cash generation

RoE Operating profitNew business internal rate of

returnOperating free

cash flowsAttributable

net profit Net resultInsurance

operating resultNet cash

generation

Underlying earnings

before taxNet income

General business combined

operating ratioSolvency I ratio

Average technical reserves

Regulatory solvency I ratio

Life general account assets and investment

spread

Worldwide sales (APE)

Fee-based earnings (as % of underlying

earnings)

Proposed dividend

Operating capital generation Debt gearing Net assets

Economic solvency ratio

Administrative expenses /

operating incomeOperating profit

Normalised operational free

cash flowShareholders

equity IFRS NAVEconomic

solvency ratio DividendDividend per

share APE RoE

FCD solvency ratio Dividend Dividend MCEV per share Payout ratio RoE

EEV operating profit

Economic solvency EEV per share

Dividend


Mapfre Munich Re Old Mutual Prudential Standard Life Swiss Re Talanx Zurich

Revenues Net profit IFRS adjusted operating profit IFRS operating

profit Operating profit Net income Gross written

premium Business

operating profit

Gross written premium

Shareholders' equity

IFRS adjusted operating EPS

Total profit before tax

Assets under administration

P&C combined ratio

Net premium earned

Net income attributable to shareholders

Managed savings Dividend Group RoE Shareholders funds Third-party

assets under administration

L&H benefit ratio Combined ratio General

insurance combined ratio

Non-life combined ratio

Return on investments Dividend

EEV new business profit

Long-term savings net flows

Return on investments

Net investment income

Global Life new business value

Net result Combined ratio Embedded value operating profit

Investment management

third-party net flows

RoE Operating profit (EBIT) Farmers Mgmt

Services managedGEP margin

EPS Embedded value

shareholders' funds

EEV operating profit before tax EPS

Net profit(after tax)

Shareholders equity

Underlying free surplus generation

EEV operating capital and

cash generation

Shareholders equity

Group net income (after minorities) RoE

Net remittances Dividend per share Book value per share RoE

Business operating profit (after tax) RoE

IGD surplus Group solvency

Dividend



4. Financial Performance


The difficult financial market conditions and record levels of catastrophe losses were reflected in the lower level of aggregate profits

IFRS profit or loss before tax

The unfavourable financial market conditions continued in 2011. The aggregate IFRS profit or loss before tax across the companies surveyed amounted to 29.9 billion (2010: 33.2 billion, 2009: 28.9 billion), a decrease of 9.9 percent over the prior year. This represents a reversal of the trend observed in 2010, when the aggregate increase, compared to 2009, was 14.9 percent.

Significant reductions in IFRS profit or loss before tax were reported by Munich Re, Aviva and Allianz (3.0 billion, 2.7 billion and 2.3 billion respectively). However, the majority of the surveyed insurers reported increases in IFRS profit or loss before tax, with ING, AXA and Old Mutual reporting substantial increases of 2.8 billion, 1.6 billion and 1.0 billion respectively, primarily due to disinvestment activity.

The 2.8 billion increase in profit before tax reported by ING can be attributed in part to the disposal of the bulk of its Latin-american operations, which recognised a profit of 1.0 billion. AXAs increase was primarily due to an exceptional charge of 1.6 billion incurred in the prior year on the partial disposal of its UK life & savings operations. Old Mutual recognised an impairment loss of 1.0 billion in respect of its US Life business in 2010. It completed the disposal of this business during 2011.

Most of the companies surveyed recognised reduced investment returns in IFRS profit or loss before tax due to the difficult financial market conditions.


Profit before tax m

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

AEGON Allianz Aviva AXA CNP Generali ING Legal & Mapfre Munich Re Old Prudential Standard Swiss Re Talanx Zurich General Mutual Life

December 2009 December 2010 December 2011

Profit or loss before tax includes both continuing and discontinued operations and is stated after policyholder tax (for those companies that separately present this measure).

Source: KPMG LLP (UK) 2012 This was the most significant contributory factor in the reduction in IFRS profit or loss before tax reported by Aviva. It recognised 1.9 billion of negative investment return variances and economic assumption changes in respect of its long-term business, compared with positive variances of 0.9 billion in 2010. A large proportion of this turnaround (2.1 billion) was attributed to movements in credit spreads in respect of its interest in Delta Lloyd.

A number of companies reported significant increases in impairment losses for financial assets classified as available-for-sale. Allianzs reported 2.3 billion reduction in IFRS profit before tax was largely attributable to a significant increase (2.9 billion) in such impairment losses. These are discussed in more detail in chapter 7 Investments and Intangible Assets.

Companies with significant exposure to natural catastrophe losses (Allianz, Mapfre, Munich Re, Swiss Re, Talanx, and Zurich) all reported increases in losses from these exposures.

Munich Re reported a 3.0 billion reduction in IFRS profit before tax compared to the prior year. A significant part of the reduction can be attributed to the increase in incurred claims in its reinsurance: property and casualty segment. Aggregate losses from natural catastrophes were 4.5 billion, an increase of 2.9 billion over the prior year, representing 28.8 percentage points of net earned premiums compared with 11.0 percent in the prior year. Its IFRS profit before tax was also impacted by write-downs of investments of 4.6 billion, up from 2.2 billion in the prior year.

The impact of the high accumulation of natural catastrophe losses on the combined ratios of the property and casualty insurers is discussed in more detail later in this chapter.



Underlying result

All of the insurance groups surveyed presented an alternative profit measure in their result presentations and/or annual reports. These are mostly referred to as operating profit, however we use the term underlying result to describe these measures in this section. Underlying result is a non-GAAP measure and companies have different definitions for this metric. For this reason, underlying results are not directly comparable between companies, but they are helpful when analysing performance, and provide an important insight into managements view of results as they develop over time.

Underlying result m

(2,000)

0

2,000

4,000

6,000

8,000

10,000

AEGON Allianz Aviva AXA CNP Generali ING Legal Mapfre Munich Old Prudential Standard Swiss Re Talanx Zurich & General Re Mutual Life


Source: KPMG LLP (UK) 2012

The increase in aggregate underlying profit of 4.8 percent in 2010 was not repeated this year. The aggregate underlying profit was 38.1 billion (2010: 40.1 billion, 2009: 38.2 billion), a decrease of 5.0 percent on the prior year. At an individual company level, the results were mixed, with just over half (9 out of 16) of those companies surveyed reporting an increase in their underlying result.

The most substantial reduction in underlying result was the 2.8 billion reduction reported by Munich Re. Munich Res underlying result includes both underwriting and investment returns in full, excluding only net foreign currency exchange losses and finance costs incurred during the year.



Insurers based within continental Europe typically report an underlying measure that excludes realised and unrealised gains on financial instruments. The convention for UK based insurers is to include long term investment returns only within their underlying measure, removing the impact of shorter term fluctuations. The measure reported by Munich Re, includes the full investment return and is comparatively more volatile. The substantial reduction in its underlying result, year on year, is broadly consistent with the reduction in its IFRS profit before tax which is discussed in the section above.




Combined ratio: non-life insurance business

The average1 combined ratio in 2011 across those companies that present this measure was 97.9 percent (2010: 98.0 percent, 2009: 96.4 percent).

Combined ratio %

120

110

100

90

80

70

60

50 Allianz Aviva AXA Generali Legal & Mapfre Munich Re Munich Re Old Swiss Re Talanx Zurich

General Primary Reinsurance Mutual


The combined ratio is the sum of incurred losses and expenses divided by earned premiums in the period. The combined ratios presented are as reported by the companies and have not been recalculated.

Munich Re presents separate combined ratios for its primary, reinsurance and health business segments. We have excluded the health business ratios on the basis of materiality for the purposes of this graph.


The small reduction in the average combined ratio masks two distinct trends. Companies with significant exposures to natural catastrophe losses (Allianz, Mapfre, Munich Re, Swiss Re, Talanx, and Zurich) all reported that their claims ratios had been adversely affected by the high level of accumulated losses experienced in 2011. However, many of these companies reported improvements in their claims ratios for other than catastrophe business and companies without significant exposure to this type of losses (for instance Aviva, AXA, and Generali) reported improvements in their claims ratios.

1. The average combined ratio is calculated using the ratios reported by insurers for their general insurance business as a whole, with the exception of Munich Re, whose average combined ratio is calculated based on the weighted (by gross premiums written) average of the separate ratios reported for its primary, reinsurance and health business segments.


Increases in combined ratios for catastrophe business were offset by decreases in combined ratios for non-catastrophe business

Munich Re and Swiss Re reported the highest overall increases in their combined ratios reflecting their relatively higher concentrations of exposure to natural catastrophe risk arising from their reinsurance businesses.

Talanx reported only a small increase in its combined ratio (from 100.9 percent to 101.0 percent). Although the combined ratio of its non-life reinsurance business increased from 98.3 percent to 104.2 percent, this increase was offset by a reduction in the combined ratio of its direct business from 104.5 percent to 96.6 percent.

Legal & General reported the lowest combined ratio in 2011, in contrast to 2010 when it reported the highest combined ratio due to a concentration of exposure to severe weather incidents in the UK impacting its household book. Its general insurance business is much smaller (measured in terms of written premiums) and its risk coverage is less diverse than the other insurance groups which explains the relative volatility of this performance measure.




5. Embedded Value

AEGON announced that it is to discontinue publishing embedded value metrics

As at 31 May 2012, 12 of the insurers included in our survey had published embedded value supplementary information in respect of 2011.

As in previous years, six of these insurers (Allianz; Aviva; CNP; Munich Re; Old Mutual; and Zurich) reported full compliance with the MCEV Principles2 although some of these disclosed minor areas where they do not fully comply with MCEV Guidance. AXA and Generali, while using market consistent methodology, continued to formally report under the EEV Principles, whereas AEGON; Legal & General; Prudential; and Standard Life continued to adopt a traditional real world approach, although, as in the prior year, Prudential used a market consistent approach to derive an implied risk discount rate for its UK shareholder-backed annuity business.

In May 2012 AEGON announced that it is to discontinue publication of traditional embedded value metrics (EEV and VNB) and, in the future, will replace its EV report with information based on Solvency II.

Changes in methodology

In April 2011, the CFO Forum announced that it had withdrawn its intention to make the adoption of the MCEV Principles mandatory for its members for 31 December 2011 and subsequent year ends. In September 2011, responding to the lack of certainty about Solvency II, it issued interim transitional guidance for companies reporting under the MCEV principles for periods ending on or before 30 June 2012 clarifying that there is no requirement to make allowance for Solvency II when applying the principles.

2. Copyright Stitching CFO Forum Foundation 2008


Sensitivities to movements in sovereign debt spreads were presented by some EV reporters

In the light of these announcements and taking into account ongoing industry discussions, the insurers in our survey did not undertake any major changes to the embedded value reporting methodologies that they apply.

A few MCEV reporters introduced minor adjustments to their approaches. Aviva made restatements primarily to reflect modelling corrections to the valuation of certain US life contracts and an overstatement of asset income identified in 2011. AXA made some adjustments to its economic assumptions used in the stochastic modelling of options and guarantees and included liquidity premiums on some additional products.

Zurich made a more significant change to its methodology. In order to achieve greater consistency with generally applied industry standards, it included a liquidity premium in its reference rates for its key major operating currencies and set the cost of capital applied to residual non-hedgeable risks at 4.0 percent. A liquidity premium was also applied by Zurich for the first time this year to the calculation of the time value of financial options and guarantees.

Sovereign debt

In response to the widening of credit spreads of sovereign debt issued by some European countries (see chapter 7 Investments and Intangible Assets), the CFO Forum stated, in December 2011, that including an allowance for these conditions as a component of the reference rate in EV reporting, or disclosing a sensitivity to such parameters as additional information would represent an initial step towards convergence of MCEV with Solvency II. A number of insurers addressed this statement in their 2011 reports through sensitivity disclosures, but none explicitly made such an allowance.

Allianz and AXA disclosed the impact of applying a government spread premium (GSP) of 190 basis points to reference rates for its Euro denominated liabilities in place of an illiquidity premium. Generali disclosed the sensitivity of adding a GSP of 177 basis points to its reference rates instead of an illiquidity premium. Aviva calculated the sensitivity of using the ECB AAA and other government curve in reference rates for liabilities in Italy and Spain but did not disclose the level of the GSP applied.



EV of covered business m

AEGON Allianz Aviva AXA CNP Generali Legal & Munich Re Old Mutual Prudential Standard Life Zurich General


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000


Embedded value of covered business

In aggregate, the embedded value of covered business for the 12 reporting companies decreased by 8.8 percent to 201.6 billion. This reversed an upwards trend in previous years (2010: increase of 7.4 percent; 2009: increase of 23.2 percent) and reflected the difficult conditions in financial markets.

The extent to which spreads widened between government bond yields in many European countries and swap rates during the year was unparalleled. When combined with higher corporate bond spreads, lower swap interest rates, poor equity market performance and higher equity and interest rate volatilities, significant negative economic variances and consequently lower embedded values of covered businesses were recognised. The impact was less prominent in the results reported on a real world basis than for market consistent reporters. Legal & General and Prudential were the only two companies surveyed that reported an increase in the EV of their covered businesses during 2011. Prudentials increase was primarily driven by the performance of its Asian business.

EV operating earnings

EV operating earnings is a more stable measure than the movement in the embedded value of covered business because it excludes, inter alia, economic variances (comprising the difference between actual experience during the year and that implied by economic assumptions at the start of the year, and the impact of changes in economic assumptions at the end of the year), and the impact of foreign currency translation effects.



EV operating earnings (net of tax) m

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000




The aggregate EV operating earnings (net of tax) for the embedded value reporting companies increased by 14.4 percent to 27.6 billion (2010: 24.1 billion, 2009: 21.8 billion). Most insurers reported a rising EV operating result, driven by positive experience variances and positive effects of changes to non-economic assumptions.

The increase in Munich Res EV operating result, driven by an improved result in its primary insurance segment, was mainly due to these factors. Its reinsurance segment also achieved a higher EV operating result mainly due to an increase in the value of new business. Allianz reported significant positive other operating variances (1.4 billion), driven by management actions in response to economic changes, such as changing crediting and investment strategies, and modelling changes. The significant improvement in AEGONs EV operating result was driven by stronger in-force performance, in particular in respect of its pensions business, which offset a reduction in the value of new business. The increase also reflected a change from the recognition of high negative changes in operating assumptions in the prior year to a small positive impact in the current year.

On the other hand, AXA and Zurich reported a decrease in EV operating earnings compared to the prior year. Zurich reported adverse experience and other operating variances, as well as unfavourable assumption changes. For AXA the trend in EV operating result was distorted in 2010 by a positive adjustment of 1.5 billion arising from the use of lower loss ratio assumptions for its French group protection business.



6. Premiums and New Business

For the 16 companies included in the survey, total net earned premiums (as presented in chapter 2 At a Glance) were 484.9 billion (2010: 492.7 billion; 2009: 480.7 billion). This represents a decrease of 1.6 percent when compared to the prior year.

The developing markets in Asia and Latin America continued to drive earned premium levels but conditions in more mature markets, in particular for savings products, were more challenging

It is difficult from an analysis of total net earned premiums to obtain an overall view of trends in the relative performance of non-life and life insurance segments. A better understanding can be obtained by comparing the results on a segment by segment basis, as demonstrated by our analysis.

The aggregate net earned premiums for the surveyed group for non-life business increased compared to the prior year contrasting with the aggregate net earned premiums for life business which decreased over the same period.

As in the prior year, insurers reported stronger growth in developing markets for both non-life and life businesses than in more mature markets.

Non-life insurance

The separately reported aggregate net earned premiums for non-life business were 168.0 billion (2010: 165.6 billion; 2009: 159.8 billion). This represents an increase of 1.4 percent compared to the prior year. At an individual company level the results were mixed.

The decrease of 7.3 percent in net earned non-life premiums reported by Aviva was due to the effects of foreign currency translation as the company otherwise experienced an increase of 5.6 percent in its general and health insurance premiums. The company attributed this growth to strong underwriting performance in the UK. In Europe, Aviva attributed growth to successful rating actions in a number of markets.



Net earned premiums - Non-life m

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0 AEGON Allianz Aviva AXA CNP Generali ING Mapfre Munich Re Old Mutual Swiss Re Zurich


It was not possible to separate net earned premiums between life and non-life insurance for Legal & General and Talanx.

Prudential and Standard Life do not underwrite non-life insurance.


In spite of positive market pricing across its personal and commercial lines, AXA reported lower net earned premiums compared with the prior year (decrease of 2.1 percent), driven primarily by business disinvestments.

Zurich reported a 4.1 percent decrease in non-life net earned premiums driven principally by a decrease in its Farmers business which was partially offset by increases across other general insurance lines.

Munich Re reported a 9.0 percent increase in net earned non-life premiums, highlighting satisfactory outcomes in a difficult market of renewal negotiations for reinsurance treaties. While acknowledging that pressures still persist in pricing, it identified that prices were stabilising following the recent downward trend. Following the Australian floods and the Japan earthquake, it reported that prices for natural hazard rose by up to 50 percent. The company attracted new business in developing markets, mainly in Asia, with treaties that provide capital relief through risk transfer contributing a substantial portion.

Mapfre experienced a 13.7 percent increase in net earned non-life premiums benefitting from the development of its international business, in particularly in Latin-american markets, and in its reinsurance business, slightly offset by a decrease in domestic premiums in Spain. The increase also reflected an appreciation of the Euro against the US Dollar and other currencies.



Life insurance

The present value of new business premiums (PVNBP) was presented as a measure by all those companies that reported EV supplementary information. For the 12 companies that presented this measure, PVNBP in aggregate for 2011 was 331.7 billion (2010: 350.3 billion; 2009: 328.2 billion), a decrease of 5.3 percent when compared to the prior year. Only Legal & General, Prudential, Standard Life and Zurich reported increases in this measure. The movement in PVNBP was broadly consistent with the movement in annual premium equivalent (APE) for the companies that reported both measures indicating that any changes in discount rates were not likely to have been a significant contributory factor in the reduction of PVNBP.

Present value of new business premiums m



0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Present value of new business premiums (PVNBP) represents the total of single premium sales and the discounted value of regular premiums expected to be received over the term of new contracts. ING, Mapfre, Swiss Re and Talanx did not present PVNBP as a measure of new business written.




Although sales of savings products were generally diminished due to challenging economic conditions, sales volumes in developing markets continued to grow and some of the UK companies also achieved growth in their home market

Prudential increased its present value of new business premiums by 7.1 percent, driven by significant growth of 18.9 percent in its Asian operations, offset by a decline in its UK insurance operations. The increase was partially attributable to a decrease in the weighted average of discount rates used to calculate PVNBP. Asia now makes up 32.1 percent of Prudentials PVNBP, up from 28.9 percent in the prior year.

Zurich reported that its global life business continued to diversify into higher growth markets in Latin America, Asia-Pacific and the Middle East, and was the main driver of a 6.4 percent increase in PVNBP. It reported strong growth in sales in the UK, particularly in its private banking client and its corporate protection and savings business, but reduced volumes in Germany, Ireland and Spain due to challenging market conditions.

Increased sales volumes in the UK were the main driver behind the increases in PVNBP achieved by both Legal & General and Standard Life.

The most significant reductions, in percentage terms, in PVNBP were reported by AEGON, Old Mutual and Aviva.

AEGON reported a 19.9 percent decrease in PVNBP, primarily as a consequence of re-pricing certain universal life products in the US and anticipated lower levels of sales of individual pensions and new group pension schemes in the UK following reductions in the commission levels paid to advisors on these products.

Old Mutuals 13.9 percent reduction in PVNBP included the impact of the sale of its US Life business. Excluding this impact PVNBP fell by 7.2 percent. This was mainly attributed to a reduction in sales volumes in its Wealth management business, marginally offset by growth in its Nordic business.

Aviva reported a 13.0 percent decrease in PVNBP primarily due to lower sales of savings and protection products in some European countries that were not fully offset by growth in other lines and regions.

Generali reported the most significant decrease in PVNBP in absolute terms (a decrease of 4.8 billion, or 10.0 percent). It suffered reductions in PVNBP in all of its main markets, due to the effects of the financial crisis on its savings business, and in particular on its single premium business in France. It reported a positive development in its protection business.



7. Investments and Intangible Assets

After a positive start to 2011, market sentiment deteriorated significantly over the second half of the year resulting in increased volatility over a range of financial markets

2011 was another challenging year for the financial markets. The effects of the worsening European sovereign debt crisis and Standard & Poors downgrading of the US federal governments debt rating from AAA to AA+ were compounded by downward revisions to growth forecasts in a number of major economies. Concerns about further recessions in the US and Europe led to a worldwide fall on the stock markets in the third quarter of the year, and as investors sought to reduce their exposure to higher risk assets the increased demand caused yields of traditional safe haven sovereign bonds to decline to historic lows.

Almost without exception, equity markets fell over the year. Germanys DAX and Frances CAC 40 fell by 14.7 percent and 17.0 percent respectively, and in the UK, the FTSE-100 index fell by 5.6 percent. In the Far East, the Nikkei 225 fell by 17.3 percent and the Hang Seng by 20.0 percent. However, despite experiencing significant volatility during the year, the S&P 500 index closed less than a point down on the year3.

The development of interest rates has probably a greater significance for the insurance industry because of the relatively high asset allocation to fixed interest securities. Yields on the diminishing number of safe haven government bonds fell over the year but credit spreads on corporate bonds increased, partially offsetting the positive impact on asset values of falling risk free yields. For example, the yield on a 10-year German government bond fell to 1.83 percent from 2.92 percent at the start of the year. Moreover, the European Central Bank lowered its key interest rate to 1.0 percent in December 20113.

3. Source: markets.ft.com



European countries with high budget deficits and a negative economic outlook continue to be a major concern for European insurers

In contrast, risk premiums on the sovereign bonds of some so called peripheral European countries, in particular Greece and Portugal, increased significantly over the year. The major European insurance groups have taken steps over the past few years to reduce their exposure to these peripheral countries (and others such as Ireland, Hungary and Cyprus) and by de-risking their portfolios in this way they appear to have been able to absorb the impact of the restructuring of Greek government debt in March 2012 without significantly impacting their capital reserves.

A more significant default, for example by Spain would be of greater concern, not only to insurers but to the wider financial community because of the significant extent to which both banks (and insurers) are exposed to larger economies. During the year when the governments of both Italy and Spain came under increased pressure from financial markets the European Central Bank (ECB) intervened by purchasing government bonds of these countries in the secondary market.

When investing in bond markets, the insurance industry, like all other institutional investors, has to accept credit risk in addition to market risk. Usually when an economic crisis occurs there is shift away from higher risk assets into safe haven sovereign debt. However, because countries such as the US and France have been downgraded, such strategies are becoming less easy to apply. After a short period of relative calm following the Greek debt restructuring in March 2012, the reaction to the election results in Greece and France at the beginning of May 2012 and Spains 100 billion banking bailout in June 2012 have provided a timely reminder that there is still a long way to go before conditions in the financial markets return to something like normality.

Given the deteriorating financial market conditions and decreases in interest rates, further decreases in investment returns were to be expected this year. As can be seen in the graph on the next page, investment returns have diminished for most of the surveyed insurers in each of the last two years. It is noticeable that the companies experiencing the most significant reductions in the current year include those companies (ING, Legal & General, Old Mutual, Prudential and Standard Life) with the highest proportion of equity securities compared to the other insurers in the surveyed group. This reflects the relatively poor performance of equity markets in the second half of 2011 compared to the previous 18 month period.



Total investment returns %

0

2

4

6

8

10

12

14

16

AEGON Allianz Aviva AXA CNP Generali ING Legal & Mapfre Munich Old Prudential Standard Swiss Re Talanx Zurich General Re Mutual Life


The total investment return ratios represent the total investment result divided by the average year-on-year value of the investment portfolios, as presented in the insurers IFRS primary statements. Within the investment result we have included investment income recognised in profit or loss, as well as any movements in fair values taken directly to other comprehensive income. Within the investment returns and portfolios we have included unit-linked funds, with the exception of Allianz which only presents the changes in fair value of unit-linked assets and unit-linked liabilities on a net basis. We do not use the percentage investment returns reported by the insurance groups in our survey because these are not calculated on a consistent basis across the companies surveyed.


The investment returns of many of the surveyed insurance groups with significant holdings of available-for-sale financial assets were impacted by higher impairment charges compared with the prior year. The insurance groups that suffered the largest impairment losses in 2011 were Allianz, CNP and Generali.

Allianzs net impairment losses of 3.7 billion (2010: 0.8 billion) included a gross impairment of 1.0 billion on Greek sovereign bonds. Additional impairment losses of 1.9 billion on equity investments comprised the remainder of the increase.

CNP recognised cumulative impairment losses of 3.1 billion, compared with only 0.4 billion losses in the prior year. The impairment losses included 1.3 billion on Greek debt securities. Like Allianz, it also recognised a significant increase in impairment losses on equity securities, up from 0.2 billion to 1.6 billion in the current year.



Sovereign debt disclosures did not always clearly distinguish between shareholders and policyholders exposures

Generali booked gross impairment losses of 4.2 billion, comprising losses on available-for sale financial assets of 3.0 billion; investments in unconsolidated subsidiaries, associates and joint ventures of 0.7 billion; and loans and receivables of 0.5 billion. The impairment losses recognised on available-for-sale financial assets increased from 0.6 billion in the prior year. The majority of this increase was attributable to an impairment charge of 2.2 billion on its Greek sovereign debt. Impairments recognised on equity securities increased from 0.5 billion to 0.7 billion.

A number of companies reported the extent to which they had impaired their Greek sovereign debt. The majority of these companies (Allianz, Generali, ING and Talanx) reported that they had written down the value of their Greek sovereign debt to between 20 and 25 percent of its nominal value. CNP and Mapfre reported that they had valued Greek sovereign debt at approximately 30 percent and 50 percent of its face value, respectively.

Mapfre has experienced the most volatility in its total investment return over the past three years. This is almost entirely due to volatility in the cumulative amounts recognised in other comprehensive income for available-for-sale securities. The investment return recognised in profit or loss increased marginally from its 2009 level, in both 2010 and 2011.

Exposures to sovereign debt and hybrid bank securities

Most of the surveyed insurance groups commented in their annual reports on the developing European sovereign debt crisis, including the steps they had taken to de-risk their investment portfolios. Most of the insurers also provided explicit disclosure of their exposures to government bonds and other state-guaranteed securities issued by the countries that had either applied for support from the European Financial Stability Facility or received support from the European Central Bank via government bond purchases in the secondary market (Portugal, Italy, Ireland, Greece and Spain, or PIIGS). Only Swiss Re did not provide details of its exposures in its annual report although it did include this information in its 2011 Q4 analyst pack.

The graph on the next page shows the exposure to sovereign debt in the PIIGS countries for those insurers that reported a gross exposure (measured at fair value) of more than 5 billion at the end of 20114. De-risking actions continued in 2012 and therefore the graph below may not be representative of the current exposures. The disclosures of risk exposures were not always provided by the insurance groups on a consistent basis, with some insurers reporting the exposures within their available-for-sale portfolios only, and with others also separately presenting their exposures within other portfolios. In case of Aviva, CNP, Generali and Zurich, the exposures reported included those investments where the risk is borne by the policyholders, in addition to shareholders assets. However, in many cases it was not possible to determine if the exposures were presented gross or net of policyholder exposures.

4. Included are government and government agency bonds, and other state-guaranteed securities



Exposure to PIIGS sovereign debt

m

0

10000

20000

30000

40000

50000

60000

Allia

nz 2

010

Allia

nz 2

011

Aviv

a 20

10

Aviv

a 20

11

AXA

2010

AXA

2011

CNP

2010

CNP

2011

Gene

rali

2010

Gene

rali

2011

Map

fre 2

010

Map

fre 2

011

Mun

ich

Re 2

010

Mun

ich

Re 2

011

Zuric

h 20

10

Zuric

h 20

11

Spain Greece Ireland Italy Portugal

The exposures presented in the graph are the exposures disclosed by the insurers. For Allianz, AXA, Mapfre and Munich Re financial

assets classified as at fair value through profit or loss are excluded.


Although those companies with the most significant exposures all reported reductions in their exposures this year, the reductions do not necessarily reflect the extent of their de-risking activity because it also reflects falls in value due to increased credit spreads, as well as impairments recognised on Greek sovereign bonds during the year. A number of the companies with less significant exposures (Aviva, Mapfre and Zurich) reported increases in their exposures to Spain and as a result reported increases in their total exposures. Unsurprisingly, both Generali and Mapfre continued to report significant exposures to their own countries sovereign debt.

The most significant exposures to the PIIGS economies continue to be in relation to the larger economies of Italy and Spain. The impairments losses recorded on Greek sovereign debt did not have a significant impact on the total level of exposures during the year.

Many of the insurance groups provided more detailed information about their exposures in their annual reports than in the prior year. The information provided by AEGON is a good example of the more detailed disclosures provided by a number of the surveyed companies.



Exposures to European peripheral countries

Central government Banks RMBS Other corporates 2011 Total

Amortized cost

Fair value Amortized cost




Fair value

Portugal 13 7 28 22 66 48 95 80 202 157

Italy 46 38 243 206 54 50 752 654 1,095 949

Ireland 30 26 11 12 260 243 281 303 582 584

Greece 1 1 11 7 22 24 34 32

Spain 1,022 962 436 366 928 840 808 797 3,194 2,965

Total 1,112 1,034 729 613 1,308 1,181 1,958 1,858 5,107 4,687

Source: AEGON Annual Report 2011, page 213 Munich Res disclosures included a table showing the period to maturity of government bonds and government-guaranteed securities of PIIGS issuers according to their carrying amounts.

Period of maturity of government bonds and government-guaranteed securities of Greek, Irish , Italian, Portuguese and Spanish issuers according to carrying amounts

m Greece Ireland Italy Portugal Spain Total

Up to one year 36 103 154 5 140 438

Over one year and up to two years 11 60 29 56 156

Over two years and up to three years 4 39 3 127 173

Over three years and up to four years 4 38 23 32 38 135

Over four years and up to five years 71 260 59 101 491

Over five years and up to ten years 75 712 617 155 455 2,014

Over ten years 168 237 1,293 121 914 2,733

Total 369 1,410 2,214 316 1,831 6,140

Source: Munich Re Group Annual Report 2011, page 99



The sovereign debt crisis is threatening to develop into a wider banking crisis. The major European banks hold significant amounts of sovereign debt in their balance sheets. Subordinated securities have been used widely by European banks as a means of raising additional capital and the value of these securities has become more volatile following successful attempts by the European Commission to impose burden sharing on the subordinated securities of banks receiving significant state aid.

As in the prior year, only some of the surveyed insurers provided information about exposures to subordinated securities issued by banks in their 2011 annual reports and there was significant variety in the analysis provided. Some of the insurers, such as Allianz, included more detailed information in their analyst packs. AEGONs annual report included comprehensive disclosures about its credit risk exposures including a section describing its exposures to the financial sector. This included a table analysing its exposure to capital securities within the banking sector:

Americas The Netherlands United Kingdom New markets Total cost price Total fair value

Hybrid 163 26 189 157

Trust Preferred 572 17 589 466

Tier 1 311 165 393 36 905 680

Upper Tier 2 438 24 126 10 598 394

At December 31, 2011 1,484 189 562 46 2,281 1,697

Hybrid 183 38 1 222 196

Trust Preferred 566 50 616 495

Tier 1 480 195 490 48 1,213 1,038

Upper Tier 2 673 63 136 7 879 718

At December 31, 2010 1,902 258 714 56 2,930 2,447

Source: AEGON Annual Report 2011, page 210

Fair value hierarchy disclosures

IFRS 7 requires that financial instruments carried at fair value in the statement of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements5.

5. The fair value hierarchy has the following levels:

Level 1: Financial instruments for which the fair value is determined by using quoted and

unadjusted prices in active markets for an identical asset or liability;

Level 2: Financial instruments for which the fair value is determined by using valuation methods

with significant inputs other than quoted prices that are observable for the assets or liabilities,

either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: Financial instruments for which the fair value is determined by using valuation techniques

with significant inputs for the asset or liability that are not based on observable market data.



The approach to hierarchy level identification involves the assessment of whether the prices used to measure the financial assets are derived directly from quoted prices in an active market, and if not, the significance to the overall measurement of any inputs that are not based on observable market data.

On average, the surveyed insurers classified 61.8 percent of their fair valued assets in level 1 (2010: 64.7 percent), 36.0 percent in level 2 (2010: 33.0 percent), and only 2.3 percent in level 3 (2010: 2.4 percent). In 2011, most of the insurers in the surveyed group did not report any significant transfers between different levels in the hierarchy. Only AXA and Talanx reported significant changes in the percentage of assets classified to level 1 and level 2.

Fair value hierarchy %

100

80

60

40

20

0

AEGO

N 2

010

AEGO

N 2

011

Allia

nz 2

010

Allia

nz 2

011

Aviv

a 20

10

Aviv

a 20

11

AXA

2010

AXA

2011

CNP

2010

CNP

2011

Gene

rali

2010

Gene

rali

2011

ING

2010

ING

2011

Lega

l & G

ener

al 2

010

Lega

l & G

ener

al 2

011

Map

fre 2

010

Map

fre 2

011

Mun

ich

Re 2

010

Mun

ich

Re 2

011

Old

Mut

ual 2

010

Old

Mut

ual 2

011

Prud

entia

l 201

0

Prud

entia

l 201

1

Stan

dard

Life

201

0

Stan

dard

Life

201

1

Swis

s Re

201

0

Swis

s Re

201

1

Tala

nx 2

010

Tala

nx 2

011

Zuric

h 20

10

Zuric

h 20

11

Level 1 Level 2 Level 3


AXA explained that it had transferred a large portion of its corporate and government bonds from level 1 (2011: 48 percent; 2010: 71 percent) to level 2 (2011: 49 percent; 2010: 27 percent). The transferred securities included the government bonds of Italy and Belgium, adding to the government bonds of Greece, Ireland, Portugal, and Spain that had been classified in level 2 in the previous year. AXA cited the widening of yield and bid ask spreads (presumably because it believes that they are indicative of an inactive market) as the reason for the re-classification.



Talanx reported that it had re-classified securities both from level 1 to level 2 (1.0 billion) and from level 2 to level 1 (0.2 billion) in the current year. The reduced liquidity of the instruments was given as the reason for the transfers from level 1 into level 2.

Zurich reported the transfer of 1.2 billion of equity securities from level 3 to level 1. The transfer arose because its investment in New China Life Insurance Company Limited was listed on the Hong Kong Stock Exchange during the year. This reduced the percentage of its holdings in level 3 securities from 6 percent to 3 percent.

Intangible and deferred participation assets

Intangible assets The carrying value of intangible assets, including deferred acquisition costs and deferred tax assets, remained relatively stable for most of the companies over the year.

Although most of the surveyed insurers reported increases in equity, the increases were smaller than in previous years, primarily due to a higher level of unrealised losses on available-for-sale assets recognised in other comprehensive income compared to the prior years. As a consequence the ratio of intangibles to equity also generally remained relatively stable for the group as a whole, although a number of the surveyed insurers reported more significant movements on an individual basis.

Intangibles in relation to equity 2011 %

0

20

40

60

80

100

120

AEGON Allianz Aviva AXA CNP Generali ING Legal & Mapfre Munich Old Prudential Standard Swiss Talanx Zurich General Re Mutual Life Re

Goodwill Other intangibles DAC DTA




Aviva, AXA, Generali and Old Mutual all reported reductions in equity over the year. Both AXA and Generali recognised significant unrealised losses on available-for-sale financial assets, and AXA also experienced a significant reduction in the level of its minority interests due to the disposal of its majority stake in AXA APH. The reduction in Avivas equity was principally due to the deconsolidation of Delta Lloyd following a reduction in its shareholding. Old Mutual recognised a significant negative foreign exchange movement on the retranslation of its overseas operations.

Generali and Mapfre both recognised significant increases in intangible assets, albeit from a relatively low base in case the of Mapfre. Mapfres intangible assets increased by 1.9 billion (44.9 percent) primarily due to portfolio acquisition intangible assets recognised in business combinations. Generali reported an increase of 3.1 billion (19.4 percent) mainly due to an increase in deferred tax assets of 3.2 billion.

In contrast significant decreases in intangible assets were recognised by Old Mutual (2.2 billion, or 27.0 percent); Aviva (2.7 billion, or 18.9 percent); and CNP (0.2 billion, or 15.3 percent). Approximately half of the reduction in Old Mutuals intangible assets related to the transfer of the assets of its Nordic operations to non-current assets held for sale. Old Mutual also recognised a goodwill impairment of 0.3 billion in respect of its US asset management business. Avivas reduction in its intangible assets included the effect of the deconsolidation of its interest in Delta Lloyd, and the sale of its RAC business. Goodwill impairments amounted to 0.2 billion. For CNP, over half of the reduction in its intangible assets related to goodwill impairments.

Deferred participation assets In some European countries a deferred participation asset is recognised when IFRS values of financial assets are lower than the local GAAP values used to determine the participation amounts to be allocated to policyholders, and when, at the same time, local GAAP permits the inclusion of such an asset so long as it is expected to be recovered.

As in the last two previous years only AXA disclosed a (net) deferred participation asset which increased to 1.2 billion from 0.6 billion during the year.




8. Capital, Risk and Solvency

Solvency II is changing the game...

The capital and solvency disclosures included in the annual reports of the surveyed insurers have tended to conform to a fairly predictable set of data and narrative mainly relating to the insurers regulatory solvency levels.

A few companies have gone beyond presenting only their regulatory solvency ratios and also present economic solvency ratios6. As the implementation of Solvency II approaches, the challenge for insurers will be to determine when to introduce the most relevant and insightful parts of their solvency reporting into their dashboard of key performance metrics. It is interesting to note that AEGON has recently announced that it will no longer provide embedded value information but will replace its EV report with information based on Solvency II measures in the future (see chapter 5 Embedded Value).

Risk and capital disclosures

In chapter 3 Key Performance Indicators we note that two more companies included a solvency measure as one of their key financial metrics in their results presentations this year. The fact that less than half of the companies in our survey included a solvency measure in their financial highlights dashboard could be ascribed to a number of factors.

6. The term does not imply a measure of capital as required by regulators or other third-parties. It is a Groups own assessment of the amount of capital it needs to hold to meet its obligations given its risk appetite. The capital requirement is based on an internal assessment and capital management policies. Some insurers have equated it to a proxy for what their Solvency II capital requirement might be.


As the implementation of Solvency II approaches we would expect risk and capital disclosures to become more prominent

Regulatory solvency ratios were lower, but remain strong

Some of these might be entity-specific, and some might be attributed to market conditions (for instance because current capitalisation levels are strong). Sometimes a company bucking an economic trend in the current year might decide to display a measure more prominently.

With the implementation of Solvency II we would expect to see at least one key performance indicator relating to solvency being included fairly prominently in all insurers results presentations.

We would also expect to see more extensive disclosures around Solvency II measures included in annual reports.

Such disclosures might include:

Year-on-year comparisons, showing the most significant items contributing to the movement in available capital resources or the surplus over minimum capital requirements;

A break-down of capital requirements and solvency levels by product and/or line of business/operating segment (without providing commercially sensitive information);

Sensitivities of available capital resources to market movements.

Regulatory solvency ratios

Similar to the prior year, the overall solvency position of the surveyed companies remains strong. While the average regulatory solvency ratio for the 15 companies that reported this measure, or provided information that allowed us to calculate this measure, decreased from 200.9 percent to 195.8 percent, most insurers had substantial amounts of surplus capital over the current regulatory minimum requirements. As presented in the graph on the next page, for most companies, the regulatory solvency levels were very much in line with the prior year, although Prudential and Standard Life reported markedly lower levels.



Solvency ratio %

100

125

150

175

200

225

250

275

300

325

AEGON Allianz Aviva AXA CNP Generali ING Legal & Mapfre Munich Old Prudential Standard Talanx Zurich General Re Mutual Life

Regulatory solvency ratio - 2010 Regulatory solvency ratio - 2011 Regulatory solvency ratio average - (2011)

Economic solvency ratio - 2011 Economic solvency ratio average - (2011)Economic solvency ratio - 2010

Regulatory solvency ratio is the ratio of available regulatory capital resources to the regulatory required capital at group level. The economic

capital ratios are calculated using companies own internal models and direct comparison between insurers is not possible.

Swiss Re did not disclose its precise solvency ratios; as in the prior year it disclosed that its regulatory Solvency I model ratio was above 200 percent at the end of the year. The solvency ratio presented for Allianz is calculated including off-balance sheet reserves although Allianz has not requested for these to be included in its formal solvency measure. If off-balance sheet reserves are excluded, the solvency ratio would be 170 percent (2010: 164 percent). The solvency ratio of Aviva is calculated including its UK life funds. If the UK life funds are excluded (as presented by Aviva) the solvency ratio would have been 130 percent (2010: 160 percent). For Zurich, the 2011 economic solvency ratio is shown as at 1 July 2011. The ratios are calculated based on its Swiss Solvency Test ratio of 225 percent and a targeted coverage ratio of 1.8 times.


As in the prior year, AXA had the highest surplus capital in absolute terms at 21.0 billion (2010: 19.0 billion), but Mapfre (287 percent) has overtaken Prudential (275 percent) as the company with the highest regulatory solvency ratio.

Generally, the reasons provided for the lower levels of coverage related to lower available capital levels, as opposed to significant changes in the capital requirements. Capital levels were affected by lower interest rates, widening bond spreads, and in some cases significant exposure to PIIGS economies (see chapter 7 Investments and Intangible Assets), and lower equity market levels. There were exceptions: Munich Re, for example, attributed the decrease in their regulatory solvency ratio chiefly to an increase in the solvency requirement.



The adverse financial markets conditions had a greater impact on economic solvency ratios than on regulatory solvency ratios

Prudentials solvency ratio would have been closer to the prior year level had it not repaid a significant tranche of Euro denominated subordinated debt late in the year.

Standard Life attributed its decrease in its regulatory solvency level mainly to a successful tender undertaken in respect of its Euro denominated lower tier 2 subordinated debt.

Economic solvency ratios

As in the prior year, seven of the insurers included in our survey disclosed an economic solvency ratio. Aviva reported an economic solvency ratio for the first time this year (including a comparative for the prior year), but ING chose not to make this disclosure in the current year.

A number of these insurers equated their economic solvency ratios to the capital levels which might be required under Solvency II. We expect other major insurance groups to follow this trend, although those for whom key elements of Solvency II are still uncertain may wait for clarity.

With the exception of Zurich, the economic capital ratios indicated significantly lower levels of coverage (although all were in excess of 100 percent). The average economic solvency ratio, for the seven companies reporting this measure, decreased from 171.0 percent to 150.1 percent.

Where companies disclosed more than one economic capital measure we used the measure that most closely reflected the insurers expectations of its Solvency II capital requirements. For example, Munich Re indicated that its economic capital represented 1.75 times the capital that is likely to be necessary under Solvency II, and we therefore used their adjusted solvency ratio of 195 percent (2010: 238 percent) to provide a more meaningful comparison.

AXA is one of the companies tha

KPMG Insurance Reporting Roundup 2012 FINAL

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