1. 08 Dec 20051 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

2. 08 Dec 20052 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

3. 08 Dec 20053 Some methods are used by:  Info Bank Magazine  Investor Magazine  Bisnis Indonesia Newspaper How to Measure a Life Insurer

4. 08 Dec 20054 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

5. 08 Dec 20055 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

6. 08 Dec 20056 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

7. 08 Dec 20057 Statutory Reports

8. 08 Dec 20058 Statutory Reports – cont.1

9. 08 Dec 20059 Different bases but what’s the difference? Local Statutory Income Less Expenditure Cash US GAAP Modified Statutory Basis (MSB : UK GAAP) Achieved Profits

10. 08 Dec 200510 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 ….

11. 08 Dec 200511 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

12. 08 Dec 200512  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

13. 08 Dec 200513 Achieved Profits

14. 08 Dec 200514 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

15. 08 Dec 200515 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

16. 08 Dec 200516 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

17. 08 Dec 200517 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

18. 08 Dec 200518 Achieved Profits Achieved Profits = Change in Embedded Value + current year Statutory Profit Embedded Value = Net Present Value of future expected Statutory Profits

19. 08 Dec 200519 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

20. 08 Dec 200520 Achieved Profits

21. 08 Dec 200521 Achieved Profits An Example

22. 08 Dec 200522 Achieved Profits - An Example

23. 08 Dec 200523 Asset Valuation

24. 08 Dec 200524 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

25. 08 Dec 200525 Deferred Tax

26. 08 Dec 200526 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

27. 08 Dec 200527 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

28. 08 Dec 200528 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)

29. 08 Dec 200529 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)

30. 08 Dec 200530 Deferred Tax – an example

31. 08 Dec 200531 Deferred Tax – an example (2)

32. 08 Dec 200532 Valuation of Tax Losses

33. 08 Dec 200533 An Examples: Tax Loss Utilization

34. 08 Dec 200534 An Examples: Tax Loss Utilization (2)

35. 08 Dec 200535 Accountant Perspective On Appraisal Value Derivation Thank You