08 Dec Accountant Perspective On Appraisal Value Derivation Conference: Dynamic Solvency Testing & Appraisal Value Thursday, 8 December 2005 Ballroom Sahid Hotel Jaya – Jakarta Presented by : Simon Imanto – Head Finance and Accounting PT AIG Life

08 Dec 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 Topics

08 Dec Some methods are used by:  Info Bank Magazine  Investor Magazine  Bisnis Indonesia Newspaper How to Measure a Life Insurer

08 Dec 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 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 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 Statutory Reports

08 Dec Statutory Reports – cont.1

08 Dec 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 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 The difference is ….

08 Dec 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  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 Problems with Statutory Profit

08 Dec Achieved Profits

08 Dec 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 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 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 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 Achieved Profits Achieved Profits = Change in Embedded Value + current year Statutory Profit Embedded Value = Net Present Value of future expected Statutory Profits

08 Dec 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 Achieved Profits

08 Dec Achieved Profits An Example

08 Dec Achieved Profits - An Example

08 Dec Asset Valuation

08 Dec 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 Deferred Tax

08 Dec 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 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 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) 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) 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)

08 Dec 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) An increase in the tax bases of assets because of indexing for inflation 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)

08 Dec Deferred Tax – an example

08 Dec Deferred Tax – an example (2)

08 Dec Valuation of Tax Losses

08 Dec An Examples: Tax Loss Utilization

08 Dec An Examples: Tax Loss Utilization (2)

08 Dec Accountant Perspective On Appraisal Value Derivation Thank You