Transcript KBC Bank & Insurance Group

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KBC Group
Life business
Embedded value as at 31 Dec. 2004
and analysis of change and sensitivity
Disclosure date: 16 June 2005
Cautionary Statements
Embedded Value is the result of cash-flow projections with underlying assumptions and expectations.
The values in this presentation are calculated on a deterministic basis.
Many assumptions such as general economic conditions, performance of financial markets, taxes,
changes in laws, frequency and severity of insured loss events, mortality and morbidity levels and
trends, and others, are beyond KBC’s control. A modification of an assumption can result in a
significantly different Embedded Value. Deviations from assumed experience are normal and are to be
expected. Even without any change in the parameters, actual results will vary from those projected due
to normal random fluctuations.
Embedded Value cannot be considered as an absolute value. This value together with a sensitivity
analysis allows the recipient to obtain an idea of the magnitude of the expected value created by their
insurance activities.
Under no circumstances should the inclusion of the projections (including the relevant underlying
assumptions and expectations) be regarded as a representation, warranty or prediction that the
business will achieve or is likely to achieve any particular results.
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Content
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
Life insurance activity & scope

Terminology

ANAV (‘Adjusted Net Asset Value’)
 Components
 Roll forward 2003-2004

VBI (‘Value of Business In Force’)
 Components
 Assumptions
 Sensitivities
 Roll forward 2003-2004

VNB (‘Value of New Business’)
Life business, overview
Growth in Life premium income 1998-2004 (in ’000 EUR)
4 000 000
2 547 557
232%
3 500 000
3 000 000
1 666 842
152%
1 867 037
170%
2 500 000
970 662
1 079 465
100%
1 000 000
170 758
500 000
926 707
1 084 810
767 402
1 341 980
122%
2 000 000
1 500 000
2 230 521
203%
3 609 717
329%
1 458 562
2 524 907
1 229 163
1 780 155
934 502
1 259 859
407 478
408 475
437 679
1999
2000
2001
0
1998
Non Linked
2002
Unit Linked
Minor changes to published figures in order to improve model accuracy
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2003
2004
Life business, overview
Growth in Technical Provisions, Life 1998-2004 (in ’000 EUR)
16 000 000
14 000 000
7 589 874
174%
12 000 000
6 000 000
4 000 000
2 000 000
3 931 147
6 783 772
155%
10 000 000
8 000 000
8 697 296
199%
5 662 602
129%
4 373 520
100%
210 779
1 195 446
13 494 338
309%
10 614 953
243%
3 263 311
2 952 108
2 285 968
2 952 108
9 563 191
7 351 642
4 162 741
4 467 156
4 497 804
4 637 766
1998
1999
2000
2001
5 745 188
0
Non Linked
Unit Linked
Minor changes to published figures in order to improve model accuracy
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2002
2003
2004
Terminology
KBC
standard
‘Embedded Value’
As
investment
for
ANAV
Embedded
Value
VBI**
(PVFP- Cost
Tied Surplus)
PVFP*
ANAV
Tied
Surplus
Life
Shareholders
Equity
=
Economic
Adjustments
Embedded
Value
PV Tied
Surplus
Life
Tied
Surplus
Life
or
Other
Allocated
Surplus
Other
Allocated
Surplus
Other
Allocated
Surplus
Free
Surplus
Free
Surplus
Free
Surplus
> Equity adjustments
> Asset adjustments
> Resilience Reserves
> Tax assets and liab.
Value
In
Force
(VIF)
Other Allocated Surplus =
Tied Surplus Non Life
+ Other Tied Surplus
*PVFP = Present Value of Future Profit
**VBI = Value of Business In Force
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Scope of current VBI figures

Scope of review:
KBC Insurance Belgium + Fidea + Vitis Life: total technical
provisions : 12 845 960 (000 euros)
Modelled:
 88% of the mathematical reserves
 96.8% of the total premium income in 2004
 99.8% of the new premium income in 2004

Group entities out of scope:
CEE subsidiaries (CSOB CR, CSOB SR, K&H Life, Warta Vita)
and Secura: total technical provisions : 648 378 (000 euros)
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Embedded Value: overview
(in ’000 EUR)
31/12/2003
31/12/2004
372 798
564 771
(191 973)
420 637
607 844
(187 207)
839 837
851 794
Value In Force
1 212 635
1 272 431
Other Surplus
922 769
1 622 660
2 135 404
2 895 091
VBI Life
PVFP
Cost of tied surplus
Tied Surplus, Life*
Embedded Value
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* Some methodological changes took place in the calculation of the ‘tied surplus, life’
Adjusted Net Asset Value
‘Adjusted Net Asset Value’ (ANAV) =
[+]
Shareholders Equity
[+]
Equity Adjustments
 ‘Minority interests’
[+]/[-] Asset Adjustments
 Unrealized capital gains on the investments,
except for bond investments in the life portfolio
(‘buy-and-hold’ philosophy)
 Goodwill is deducted
[+]
Additional Reserves
 Catastrophe and equalization reserves
 Additional reserves, life
[-]
Tax assets and liabilities on the above
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10
A
V
l ia
b.
2 474 453
46 787
AN
an
d
191 262
as
se
ts
life
li f
e
3 000 000
ta
x
es
er
ve
s
no
n
304 555
ad
di
tio
na
lr
es
er
ve
s
dj
us
tm
en
ts
2 000 000
as
se
ta
500 000
1 846 382
2 500 000
ad
di
tio
na
lr
eq
ui
ty
1 000 000
ad
ju
st
m
en
ts
rs
1 500 000
eq
ui
ty
sh
ar
eh
ol
de
ANAV as at 31/12/2004
(in ’000 EUR)
('000 EUR)
227 962
142 494
0
ANAV: Chg 31/12/2003 – 31/12/2004
(in ’000 EUR)
3 000 000
552 467
2 500 000
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Anav
31/12/2004
Other
Asset Value
Adjustments
Dividends
Paid
Anav
31/12/2003
0
Profit in 2004
500 000
156 373
1 762 606
1 000 000
2 474 453
284 315
2 000 000
1 500 000
31 439
Value of Business in Force (VBI):
non-economic assumptions
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
Expenses
 Expenses are allocated to the different products and activities in such a
way that the total expenses in the study equals the total expenses in the
statutory accounts
 Expenses increase with expected wage inflation at 2-3% per annum
 Future expense reduction programmes and synergies are not taken into
account

Mortality
 Assumptions based on most recent industry experience were used

Lapses
 Assumptions based on annual experience, investigations of surrenders
and paid-ups, with a reasonable safety margin
 Assumptions are set by product and distribution channel
VBI, RBC requirements
KBC RBC Requirements
(legal requirements)
% of the
reserves
% of sum
at risk
Unit-Linked
0.5%
(0 or 1%)
0.375%
(0.3%)
Non-Linked Pension products
Mix: 75 F.I./ 20 S./ 5 P.
8.5%
(4%)
0.375%
(0.3%)
Non-Linked Investment products
Mix: 88 F.I./11 S./ 1 P.
5.98%
(4%)
0.375%
(0.3%)
The current RBC for Life activities is 176 % of the legal required solvency
margin for the Life Activity
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VBI, economic assumptions
2003
14
2004
10-year bond yield
(Rate from 2006 on)
4.17% pa
(5.00% pa)
3.6% pa
(4.80% pa)
Risk premium on equity
2.50% pa
2.50% pa
Risk premium used for discount rate
3.50% pa
3.50% pa
Discount rate* (= Cost of Capital)
8.50% pa*
8.30% pa*
Expense (wage) inflation
(Rate from 2006 on)
2.90% pa
(3.00% pa)
2.20% pa
(2.50% pa)
•Based on the bond yield in the long run
•Weighted Average Cost of Capital, taking into account partial funding via subordinated loans
VBI, overview
PVFP
VBI
VIF
PVFP/
reserves
VBI/
res.
reserves
2003
564 771
372 798
1 212 635
6.45%
4.26%
8 756 832
2004
607 844
420 637
1 272 431
5.38%
3.72%
11 294 213
(’000 EUR, only reserves of modelled business)
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VBI, sensitivity analysis
Effect on VBI
+ 10%
- 10%
Expenses
- 3.95%
+ 3.95%
Lapses & Dormancy
- 2.70%
+ 2.93%
Mortality
- 3.12%
+ 3.12%
+ 0.5%
- 0.5%
Discount rate
- 7.43%
+ 7.89%
Investment Return*
+ 8.58%
- 9.68%
* The discount rate is changed consistently with the change in investment return.
No profit-sharing was allocated to the 4.75% guarantees in the policies.
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VBI, sensitivity analysis (2)
Changing the solvency margin
(’000 EUR)
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Current RBC KBC
Insurance
100% of the
legal SM
150% of the
legal SM
200% of the
legal SM
Embedded
Value
2 895 091
2 966 874
2 909 163
2 851 451
VIF
1 272 431
974 843
1 158 342
1 341 841
VBI
420 637
492 421
434 709
376 997
VBI, Chg 31/12/2003 – 31/12/2004
(EUR)
500 000 000
21 579 974
VB
I3
1/
12
/2
00
4
as
su
m
pt
io
ns
20
04
ov
er
ec
on
of
3
as
Va
ria
nc
es
1/
12
/2
00
4
AV
AN
VN
B
Ch
an
ge
Ch
an
ge
no
n
VB
I3
1/
12
/2
00
3
200 000 000
to
250 000 000
68 151 164
Ca
sh
f lo
w
300 000 000
ec
on
.a
ss
um
pt
io
ns
Un
wi
nd
in
g
di
sc
ou
nt
in
g
350 000 000
25 984 207
25 831 686
372 798 434
400 000 000
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60 734 816
420 636 746
33 522 165
450 000 000
Value of New Business (VNB)
New business, 2004 at date of sale
(‘000 EUR)
Total
APE *
324 170
PVFP
74 487
VNB
57 199
PVFP as % VNB as %
of APE
of APE
22.98%
17.64%
* Annualized Premium Equivalent (APE) is a measure of new business volume equal to 100% of regular premium on
new contracts and 10% of single premiums
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Review
Lane Clark & Peacock Belgium reviewed the methodology and assumptions used by
KBC Insurance in the determination of the Embedded Value at 31/12/2004, the Value of
2004 New Business and the analysis of the change in the value of in-force business for
the Life Insurance activities of KBC Insurance.
It is the view of Lane Clark & Peacock Belgium, based on the data made available, that
the assumptions used are reasonable and that the methodology used by KBC Insurance
is in line with basic principles described in appropriate literature.
Our assignment included a review of the calculations.This review was not a detailed
verification of the correctness of all calculations. This review was a limited high-level
reasonableness check on the results and included a detailed review on a limited random
sample of contracts of the insurance portfolio of KBC Insurance. No material issues have
been discovered.
Therefore, based on our work and our validation report on the work carried out by KBC
Insurance, we consider the embedded value, the value of new business and the analysis
of the change in the value of in-force for the life business to be reasonable and suitable
for inclusion as supplementary information to the Group’s consolidated accounts.
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Contact information
Investor Relations Office :
Luc Cool
Nele Kindt
Marina Kanamori
Tel. : +32 2 429 49 16
E-mail : [email protected]
Visit www.kbc.com for the latest update.
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