1. SA long-term valuation bases Presented to ASSA members 2 November 2004 – Johannesburg 4 November 2004 – Cape Town

2. Why are we here? A repeat of sessional meeting held last year, but updated with 2003 statutory returns.

3. What will we show you? Some key risks and trends in the insurance sector Anticipated changes for the future Information on new Analysis of Surplus in LT2000 Give you brief overview of the LT Insurance market in 2003. Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

4. What will we show you?

5. Key risks and trends in the insurance sector Drivers of change: Financial Sector Charter & BEE Low interest rate environment Growing consumerism Legislative and regulatory changes (especially FAIS) LT insurers believe marketplace is overcrowded – major readjustments to marketing strategies expected Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

6. Key risks and trends in the insurance sector (Cont) Premium growth 7-14% over next 3 years expected Regulation and governance – King II won’t address concerns raised in Fedsure investigation – Governance rests on integrity of directors and management – Only minority LT insurers feel that commission should be de-regulated – Likely that regulatory pressure will increase in future Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

7. International Key risks and trends in the insurance sector Data based on 2003 reporting data in key IAIS member jurisdictions Solvency positions and profitability of life insurers healthy Concerns to supervisors: – Sustained low interest rate environments – Risk of sudden interest rate hikes Insurers are moving away from equities to debt securities Source: IAIS

8. International Key risks and trends (Cont) Supervisors use stress test methodologies to monitor sensitivity of sector’s financial strength to changes in market variables. Stress tests show that life insurance sector can withstand significant shocks in the near term. Trend to adopt are more realistic and risk- sensitive valuation and capital adequacy regimes. Source: IAIS

9. International Key risks and trends (Cont) Several supervisors reported initiatives aimed at addressing insurers’ exposure to reputation risk. EU: financial conglomerate directives – more emphasis by supervisors on group-wide supervision is expected. Source: IAIS

10. International Key risks and trends (Cont) Reinsurance: – Since Sep 11 a major hardening of market conditions – Many reinsurers showed a significant improvement in underwriting performance in 2002/3 – Lloyd’s also benefited from hardening market bouncing back to profits after the WTC-driven losses. Source: IAIS

11. What will we show you?

12. Anticipated changes Some “small” Act changes e.g. – Replace Unit Trust Control Act with CIS Control Act – Some discrepancies between ST and LT Acts Definitions of linked, market related business etc Types of assets in Schedule 1

13. Anticipated changes Hybrid capital Cell business Reinsurance Segregation between policyholders’ and shareholders’ assets Control levels

14. What will we show you?

15. Analysis of Surplus (Statement C7) Confidential statement Split between individual life, group business and shareholders Supplementary statement – Clarification of “other” (As small as possible please) – Space for significant items Info in total only – but anticipate a split in future per business class

16. Analysis of Surplus (Continued) Free-floating columns for info per business class/product. (But please – complete total column as well) Some freedom – please state all assumptions in the section at the bottom of the statement Guidance manual on FSB website – Info on what should be included in the different items Please do not change the format! – In fact, do not change the format of any of the statements in the return

17. What will we show you?

18. Overview of LT Insurance market in 2003 FSB classification: G – General insurers (27 active in 2003) e.g. Old Mutual, Liberty, Regent Life L – Linked insurers (12 active in 2003) e.g. Investment Solutions, MCubed, Citadel R – Reinsurers (6 active in 2003) e.g. Munich Re, Swiss Re

19. Overview of LT Insurance market in 2003 FSB classification: A – Assistance insurers (7 active in 2003) e.g. Safrican, Lion of Africa, HTG, KGA N – Niche insurers (11 active in 2003) e.g. Bonben, Relyant, Medscheme Life C – Cell captive insurers (4 active in 2003) e.g. Guardrisk, Nova Life

20. Overview of LT Insurance market in 2003 Distribution of insurers per year-end month

21. Overview of LT Insurance market in 2003 Who went where? Ranking according to total assets

22. Overview - some key indicators glranc Total R’b 2003 Total R’b 2002 Number of active insurers 271267114 6764 Net premiums received 68%29%1%0% 1% 165177 Net benefits paid 69%30%1%0% 157134 Total expenses incurred 93%3%2%1% 2019 Investment yield 9.7%-3.1% 11.2%3.2%16.1%5.0% 8.0%0.8%

23. Overview – where are the assets invested? As % of Rowsglranc Total (R'b) 2003 Total (R'b) 2002 Cash and deposits 75%21% 2%0% 1% 6067 Fixed interest 90%6% 3%0%1%0% 179168 Equities and convertible debentures 90%9% 0% 1%0% 348334 Property 99%1% 0% 3634 Collective investment schemes 66%34% 0% 9698 Other 77%21% 1%0% 1% 9842 Total assets 85%13% 1%0%1%0% 817783

24. Overview – where are the assets invested? As % of Columnsglranc Cash and deposits 7%12% 17%31% 5%19% Fixed interest 23%10% 67%11%32%22% Equities and convertible debentures 45%29% 5%4%61%10% Property 5%0% 3%0% Collective investment schemes 9%30% 0%33%0%2% Other 11%19% 11%19%2%46% Total assets 695108 7043

25. Distribution of assets - 2003

26. Overview - the liabilities and CAR… glranc Total (R'b) 2003 Total (R'b) 2002 Linked liabilities 57%42% 0% 1% 253265 Non-linked liabilities 98%0% 1%0%1%0% 454409 Total liabilities 84%15% 1%0%1%0% 736706 Excess assets 97%1% 0% 8177 CAR before management action 99%0% 7382 CAR after management action 98%0% 1%0% 3235

27. Overview – remarks Industry funding factor (excluding CAR) unchanged from 2002 at 1,11. Industry funding factor (including CAR) unchanged from 2002 at 1,06. Industry CAR cover slight improvement from 2,18 (2002) to 2,56 (2003).

28. What will we show you?

29. Valuation assumptions in the LT2000 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.

30. What were the hurdles? To consolidate two very different versions of the LT2000 (38 insurers on version 2.3 and 32 insurers on version 3) Valution basis (G11 – old; G10 – new) proved to be especially difficult Next year we’ll have a problem with the AOS (C7) Therefore – had to make assumptions to derive an industry representative basis

31. Discount rates (LT2000 version 2.3) Observed rates from 5% to 13% (2002: 6% to 18%) between the classes of business. Observed inflation assumption between 5% and 9% (2002: 2% and 11%). Weighted average inflation assumption of 7.2% (2002: 9.6%).

32. Discount rates – 2002 (LT2000 version 2.3)

33. Discount rates – 2003 (LT2000 version 2.3) Annuities Retirement Fund business Untaxed Business Taxed Business

34. Discount rates 2003 (LT2000 version 3) Individual business:  Around 38% of insurers entered a representative assumption  Observed rates between 9% and 12.5% between the classes of business.  Average central discount rate (CDR) 10.5%  Highest discount rates for linked and market-related classes.  Lowest discount rates for without-profit annuities.  Observed inflation assumption between 5.4% and 6.5% (Average of 6%)

35. Discount rates 2003 (LT2000 version 3) Group business:  Not a lot of data  Around 16% of insurers entered a representative assumption  Observed rates between 7.8% and 10.5% between the classes of business (lower than individual)  Average central discount rate 9.1%  Average inflation assumption of 5.8%

36. Discount rates 2003: LT2000 version 3 Individual Business - Averages VariableClass of business With- profit Bus AnnuitiesLinkedMarket Perform Other Total With- profit Without- profit CDR10.5%12.5%9.3%10.3%10.8%9.6% 10.5% IPF10.2%-9.4%10.0%10.2%9.5% 9.8% UPF10.4% 9.1%10.7%10.8%9.9% 10.2% CPF9.7%-9.4%9.9%9.8%9.5% 9.7% Corporate Fund11.0%-9.4%12.2%11.8%9.9% 10.9% Expense Inflation 5.7%5.4%6.0%6.2%6.1%6.4% 6.0% CDR – Exp Infl4.9%7.1%3.3%4.1%4.7%3.2% 4.5%

37. Discount rates 2003: LT2000 version 3 Group Business - Averages VariableClass of business With- profit Bus AnnuitiesLinkedMarket Perform Other Total With- profit Without- profit Central Discount Rate 9.5%9.1%8.4%-9.5%8.8% 9.1% IPF-7.8%---8.8% 8.3% UPF10.5% -- 8.7% 10.0% CPF-----8.4% Corporate Fund-----8.4% Expense Inflation -5.8%---

38. Discount rates – 2003 Per business class (Individual) (LT2000 version 3)

40. Spread between discount rate and inflation assumption - 2003

41. Cumulative spread between discount rate and inflation assumption (Comparison between 2002 and 2003) Moving left suggesting more valuators using lower differential.

42. Discount rates AOS Results Industry in total made investment profits, compared to losses in 2002 Per industry grouping:  In aggregate, assistance business and those in run-off made losses (few made profits)  Most profits made by general insurers Per year-end month:  In aggregate, those with March year-ends made losses (although some did make profits)  Most profits made by insurers with December year-ends

43. Discount rates – AOS results Total (R‘m) 2002 Total (R‘m) 2003 Min of profit/loss-2,235-338 Max of profit/loss5173,799 Total of profit/loss-1,6815,721 Profit/total insurance profit-10%71% Average profit/loss-2894 Weighted average of profit/loss-3801,088

44. Mortality In the graphed rates, we tried to determine representative mortality rates for males and females. Where possible, we used weighted rates, but simplifying assumptions were needed to consolidate the different versions of the LT2000. For assurance we use SA85/90 ultimate 100% heavy to place weighted rates in perspective. For annuities we use a(55) to put weighted average rates in perspective.

45. Mortality – Assurance tables Most popular tables are SA85/90 and SA56/62. Bigger insurers resort to internal tables. Specialized classes revert to special tables like A24-29 and ELT8… Encouraging to see some insurers implementing the ASSA2000 model (where products justify it). Still significant number that fail to complete G10.1 and G10.2 (usually say – refer to attached valuation report…)

46. Mortality – Assurance table adjustments Proportional adjustments with or without constant additions are popular with the level of complexity varying. Examples include: Proportion vary across age (model accident hump) Or over time (model temporary initial selection) With risk factors (popular for smoking status, sex and health?) Age adjustments used mainly for sex differential.

47. Mortality – Assurance males (Linear scale)

48. Mortality – Assurance females (Linear scale)

49. Mortality – Assurance males (Log scale)

50. Mortality – Assurance females (Log scale)

51. Mortality – Annuity tables and adjustments Most commonly used include a(55), internal table, a(90) and PA(90) Adjustments mostly combination of proportional and age adjustment. Many include improvement in mortality over time to cater for improving longevity: 0.5%, 1% and 1.5% improvement per annum seen. Also a ‘CMI Improvement’

52. Mortality – Annuities males (Linear scale)

53. Mortality – Annuities females (Linear scale)

54. Mortality – Annuities males (Log scale)

55. Mortality – Annuities females (Log scale)

56. Mortality – AOS results glranc Total (R‘m) 2003 Total (R‘m) 2002 Min of profit/loss -4-4 00-7-140 -36 Max of profit/loss 266 02421817 266200 Total of profit/loss 1,473 068-63319 1,5881,125 Profit/total insurance profit 20% 0%31%73%27% 20%7% Average profit/loss 64 011-156 3524 Weighted average of profit/loss 159 010-3176 156133

57. AIDS Encouraging to see more widespread use of ASSA2000 model. Representative idea of tables used: Pattern I: 90%+ proportions of R6B with 50%+ multiplier. Pattern II: 20% proportions of HA1 with 90% multiplier. Refer members to PGN102 and PGN105. For LT2000 version 3, please answer the AIDS question in statement G10 and attach the electronic copy requested!

58. Mortality - AIDS adjustments (Assurance products) Type of AIDS Adjustment Proportion for individual life Proportion for group life No information74%97% No adjustment disclosed5%0% Adjust for gender6%3% Adjust for gender and smoker15%0% Total100%

59. Mortality – Weighted AIDS Adjustments (Assurance)

60. Morbidity – Income disability Many use GLTD (some make no adjustments to GLTD). The bigger players resort to internal tables. CMIR12, CDT and SA85-90 used by minority. A proportional adjustment to all ages in the table is often used. The minority apply an age adjustment or set the reserve as a % of office premium. Observed rates identical for both sexes.

61. Morbidity – Income disability both sexes (Linear scale)

62. Morbidity – Income disability both sexes (Log scale)

63. Morbidity – Lump sum disability Most use internal tables or SA85-90. Some use CSI table or move to set the reserve as a % of office premium. Most apply a proportional adjustment that varies by age: x% at age 20 increasing by y% every age until termination. The minority apply an age adjustment.

64. Morbidity – Lump sum disability males (Linear scale)

65. Morbidity – Lump sum disability females (Linear scale)

66. Morbidity – Lump sum disability males (Log scale)

67. Morbidity – Lump sum disability females (Log scale)

68. Morbidity – AOS results grnc Other Total (R‘m) 2003 Total (R‘m) 2002 Min of profit/loss -10 -700 -10-22 Max of profit/loss 289 62240 289214 Total of profit/loss 615 52-540 667642 Profit/total insurance profit 8% 24%6%0% 8%4%4% Average profit/loss 44 13-3-340 3031 Weighted average of profit/loss 117 52-540 11758

69. Expenses – Fixed costs (2002)

70. Expenses – Fixed costs (Version 2.3 - 2003) Single premium Annuities in payment Paid-up policies Regular premium Disability income in payment

71. Expenses – Fixed costs (Version 3 - 2003) Very poorly completed. Understandable though - insurers differ significantly and charge differently. Where multiple product ranges exist with different expense assumptions per class, please disclose a representative expense assumption. Completed statements suggests a representative fixed cost per policy of R170 per annum with significant variation.

72. Expenses – Variable costs and inflation For regular premium policies observed insurers charging between 3% and 5% of regular premium (ignoring one reinsurer’s information…). For regular/single premium policies observed insurers charging between 0.4% and 1.5% of fund value. Observed expense inflation rates between 5% and 9% with a representative average of approximately 6%.

73. Expenses – AOS results Total (R‘m) 2003 Total (R‘m) 2002 Min of profit/loss -106-137 Max of profit/loss 123264 Total of profit/loss -6871 Profit/total insurance profit -3.4%0.4% Average profit/loss 1 Weighted average of profit/loss -1648

74. Lapse rates – Recurring premium (2002)

75. Lapse rates – Recurring premium (2003)

76. Lapse and surrender rates – comments No AOS item in “old” C7 to analyse profits from surrenders. “New” C7 should provide some insights next year… Many EV sensitivity testing indicate significant sensitivity to withdrawals. Many insurers have withdrawal assumptions that vary by months in force and between products - hard to consolidate. Data of poor quality, hope to give better summary next year.

77. 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