1. SA long-term valuation bases Presented to ASSA members 7 October 2003 – Johannesburg 9 October 2003 – Cape Town

2. Why are we here? Display the information at the FSB’s disposal. Orientate members as to the industry trends in statutory returns.

3. What will we show you? Give you brief overview of the LT Insurance market in 2002. Discuss the impact of management action to reduce the CAR of insurers. Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

4. Overview of LT Insurance market in 2002

5. FSB classification: G – General insurers (30 active in 2002) L – Linked insurers (12 active in 2002) R – Reinsurers (5 active in 2002) A – Assistance insurers (6 active in 2002) N – Niche insurers (7 active in 2002) C – Cell captive insurers (4 active in 2002)

6. Overview - some key indicators glranc Total (R'b) Number of active insurers 3012 5674 64 Net premiums received 63%34% 1%0%1% 177 Net benefits paid 84%14% 1%0%1%0% 134 Total expenses incurred 91%3% 0%2%0% 19 Investment yield -1.2%16.4% 8.3%4.3%-1.3%11.7% 0.8%

7. Overview – where are the assets invested? As % of Rows glranc Total (R'b) Cash and deposits 79%18% 1%0%1%0% 67 Fixed interest 89%8% 2%0%1%0% 168 Equities and convertible debentures 88%11% 0% 1%0% 334 Property 100%0% 34 Collective investment schemes 69%31% 0% 98 Other 53%46% -1%0% 2% 42 Total assets 84%14% 1%0%1%0% 783

8. Overview – where are the assets invested? As % of Columns glranc Cash and deposits 8%11% 15%19%17%23% Fixed interest 23%11% 66%14%24%14% Equities and convertible debentures 45%32% 13%2%48%2% Property 5%0% 2%0% Collective investment schemes 10%27% 0%47%7%2% Other 9%19% 6%16%5%59% Total assets 660111 5051

9. Overview - the liabilities and CAR… glranc Total (R'b) Linked liabilities 58%41% 0% 265 Non-linked liabilities 98%0% 1%0%1%0% 409 Total liabilities 83%16% 1%0%1%0% 706 Excess assets 97%1% 0%1%0% 77 CAR before management action 98%0% 1%0% 82 CAR after management action 97%0% 1%0%2%0% 35

10. Overview – remarks Industry funding factor of 1.11 (excluding CAR). Industry funding factor of 1.06 (including CAR). Industry CAR cover of 2.18.

11. Management action in CAR

12. For the top 10 insurers, management action was used to reduce the investment resilience risk in the CAR by 65%. We acknowledge the freedom of PGN104 in setting CAR requirements but we contrast this with the need for a prudent approach when setting statutory reserves.

13. Management action in CAR Types of management actions used by the 10 biggest general insurers: Removal of non-vested bonuses. Removal of interim bonuses. Declaration of lower future bonus rates. Reduction in surrender values. Revision of mortality and expense charges. Reduction in second tier margins.

14. Valuation assumptions in the LT2000

15. The results we are about to show represent a mix of greatly different insurers. The dangers of interpreting industry results should be kept in mind. We suggest the results to be an orientation exercise and nothing more.

16. Mortality - Assurance Most popular table is the SA85/90. SA72/77, SA56/62 and internal experience are also used. The types of adjustments vary: A form of proportional adjustment is most popular. The addition of constants and age adjustments are also used.

17. Mortality - Assurance The following is separate weighted average mortality rates for males and females as disclosed in statement G11. Used a benchmark of SA85/90 ultimate 100% heavy to place weighted rates in perspective.

18. Mortality – Assurance males (Linear scale)

19. Mortality – Assurance females (Linear scale)

20. Mortality – Assurance males (Log scale)

21. Mortality – Assurance females (Log scale)

22. Mortality - Annuities Most popular table is a(55). SA56/62, PA(90) and own experience are also used. The types of adjustments vary: A form of proportional adjustment is most popular. Improvement in mortality rates in the future and age adjustments are also used. Used a benchmark of a(55) to put weighted average rates in perspective.

23. Mortality – Annuities males (Linear scale)

24. Mortality – Annuities females (Linear scale)

25. Mortality – Annuities males (Log scale)

26. Mortality – Annuities females (Log scale)

27. Mortality – AOS results glranc Total (R‘m) Min of profit/loss -360 -16002 -36 Max of profit/loss 2000 145375 200 Total of profit/loss 1,0680 -611457 1,125 Profit/total insurance profit 7%0% -3%103%8%17% 7% Average profit/loss 400 -1293 24 Weighted average of profit/loss 1380 84294 133133

28. Morbidity – Income disability Most popular table is GLTD. SA85/90 and own experience are also used. A proportional adjustment is often used. Data for lump sum disability was fragmented. We decided to omit results for lump sum disability.

29. Morbidity – Income disability males (Linear scale)

30. Morbidity – Income disability females (Linear scale)

31. Morbidity – Income disability males (Log scale)

32. Morbidity – Income disability females (Log scale)

33. Morbidity – AOS results grnc Other Total (R‘m) Min of profit/loss -19-22 000 Max of profit/loss 21485 300 214 Total of profit/loss 58156 500 642 Profit/total insurance profit 4%32% 1%0% 4% Average profit/loss 4514 200 31 Weighted average of profit/loss 5854 300 58

34. Discount rates Observed rates from 6% to 18% between the classes of business. Observed inflation assumption between 2% and 11%. Weighted average inflation assumption of 9.6%.

35. Discount rates

36. Discount rates – AOS results Total (R‘m) Min of profit/loss-2,235 Max of profit/loss517 Total of profit/loss-1,681 Profit/total insurance profit-10% Average profit/loss-28 Weighted average of profit/loss-380

37. Expenses – Variable costs MinMax Weighted average Recurring premium: % of premium 2.75%7.00%2.90% Recurring premium: % of fund 0.40%1.90%1.07% Single premium: % of fund 0.40%1.90%1.07%

38. Expenses – Fixed costs

39. Expenses – AOS results Total (R‘m) Min of profit/loss-137 Max of profit/loss264 Total of profit/loss71 Profit/total insurance profit0.4% Average profit/loss1 Weighted average of profit/loss48

40. Lapse and surrender rates – Recurring premium

41. Lapse and surrender rates – Single premium

42. Questions? Thank you for your time Contact details: Hantie van Heerden (012) 422 2801 hantiev@fsb.co.za André Jansen van Vuuren (012) 428 8103 andrej@fsb.co.za