Embedded Value Report
2012
ACHMEA EMBEDDED
VALUE REPORT 2012
Contents
2
Management summary
3
Introduction
4
Embedded Value Results
5
Value Added by New Business
6
Analysis of Change
7
Sensitivities
9
Impact from EEV to MCEV
11
Methodology
13
Assumptions
16
Glossary of terms
18
Achmea Embedded Value Report 2012
Management summary
Before 2012, Achmea applied the European Embedded Value principles. The embedded value at 31 December 2011 was € 4,783 million.
As of 1 January 2012, Achmea reports the embedded value based on market consistent principles, thereby replacing a global
adjustment for risk (in the risk discount rate) with explicit cost of risks combined with the revaluation of the liabilities using market
values. This results in a restated embedded value at the beginning of 2012 of € 4,231 million.
The embedded value at the end of 2012 is € 4,112 million, comprising a value of in-force business of € 290 million, a required capital
of € 2,358 million and a free surplus of € 1,464 million.
In 2012, the embedded value decreased by € 119 million to € 4,112 million. Of this decrease, € 49 million can be attributed to
adjustments for capital movements, the sale of the life activities of Eureko Romania and foreign exchange movements. Eureko
Romania being Held for Sale at 31 December 2012 is valued at Net Asset Value, future expected earnings are not included in the
embedded value per end of year.
The remainder, a decrease of €70 million, the embedded value profits, can be split into operating and economic profits. Operating
profits are caused by results and changes in life insurance conditions. The operating profits increased the embedded value by € 395 million.
A positive development of the value of the unit-linked portfolio in the Netherlands and lower best-estimate cost assumptions due
to cost reduction programs are the main sources of this profit. The economic profits stem from changes in economic conditions.
The economic profits reduced embedded value by € 465 million. The main contributor to this result is a significant change in the
valuation rate used for the liabilities in 2012.
The value of new business in 2012 decreased to minus €21 million (2011: minus € 11 million). New business covers new contracts and
renewal of pensions insurance contracts. The volume of new business, measured as the value of the expected total premiums from
new business acquired in 2012, is € 1,584 million (2011: € 1,633 million). Therefore, the margin on new business is minus 1.3%
(2011: minus 0.7%).
The embedded value is sensitive to changes in assumptions. A 10% decrease in best-estimate expense assumptions for example
increases the embedded value by 4%. A shift in the market value of equity and property impacts the net asset value immediately.
A 10% decrease has a negative impact on the embedded value of 6%. For Dutch business a shock in interest rate will not have much
impact on the embedded value, because this risk is actively managed by using interest rate derivatives. Using a lower cost-of-capital,
for example 4.5% instead of 6% will increase the embedded value by 6%.
3
Embedded value
Value of New Business
€4,112 million
€-21 million
EMBEDDED VALUE PROFITS
SENSITIVITY OF EMBEDDED VALUE
In 2012 the operating profit was €395 million
and the economic profit was minus €465 million
Embedded value is relatively insensitive to changes in
interest rates. However, 10% drop in equity, property
and alternatives would reduce value by €260 million
Achmea Embedded Value Report 2012
Introduction
Embedded Value
Embedded value supports shareholders’ understanding of the value of their interests in the company. It enables them to
assess the company’s financial performance over time.
Embedded value is the economic value of a life insurance business at a certain moment, such as year-end. It is calculated
by adding together the company’s net asset value (assets minus liabilities) and the value of all future profits that a
company expects to make from current life policies. It does not take into account the value of any business that may be
generated in the future.
Before 2012, Achmea applied the European Embedded Value (EEV) principles. The CFO Forum, a group representing a
number of large European insurers, published these principles in May 2004.
As of 1 January 2012, and in accordance with our decision in 2011, Achmea moved from reporting the value of our
company based on European Embedded Value (EEV) principles to Market Consistent (MCEV) principles. MCEV
principles can be seen as the natural development of EEV principles. They increase companies’ ability to take into
account risks and to improve the consistency and transparency of calculating and reporting embedded value. Achmea
uses these principles with some adjustments made specifically to meet its situation.
Content of this report
This report presents the embedded value of the life business (specifically the ‘Covered Business’) of Achmea Group
(‘Achmea’) at 31 December 2012 and shows the development of the value of the life business during 2012.
The development of the embedded value can be considered in two steps:
1. The embedded value at 31 December 2011 based on EEV principles is restated to the embedded value on MCEV principles (see section “Impact from EEV to MCEV”)
2. The development of the embedded value during 2012 (see sections “Value added by New Business” and
“Analysis of Change”)
The embedded value at 31 December 2012 is shown in the section “Embedded Value Results”.
All amounts in this report are shown in millions of euro unless otherwise stated.
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Achmea Embedded Value Report 2012
Embedded Value Results
The embedded value by the end of 2012 is € 4,112 million. The embedded value is specified in Table 1.
Table 1 Market Consistent Embedded Value as of 31 December 2012
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
Free Surplus
1,332
132
1,464
Required Capital
2,181
177
2,358
Net Asset Value
3,513
309
3,822
202
88
290
3,715
397
4,112
NET ASSET VALUE
Value of In-Force Business
Embedded Value
Of the total net asset value of € 3,822 million, an amount of € 2,358 million is needed to protect the insurance liabilities
in case of unexpected losses (the Required Capital). The remaining net asset value of € 1,464 million (the Free Surplus)
can be considered as attributable to shareholders. The value of in-force business is € 290 million. This is the value of
future profits available to shareholders from the in-force business after deduction of taxes, expenses and costs of holding
required capital for risks which are not hedgeable in financial markets.
5
Achmea Embedded Value Report 2012
Value added by new business
The value of new business is the value of current and future profits from new business that was written in the year.
New business arises from the sale of new contracts and the renewal of pensions insurance contracts. Table 2 specifies the
value of new business of the Achmea life business.
Table 2 Market Consistent Value of New Business as of 31 December 2012
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
9
(4)
5
Pension
(28)
2
(26)
Value of New Business
(19)
(2)
(21)
VALUE OF NEW BUSINESS
Life
New business APE (Annual premiums + 10% of Single Premiums)
141
70
211
-13.1%
-3.1%
-9.8%
Present value of new business premiums
1,025
559
1,584
New business margin
-1.8%
-0.4%
-1.3%
Value added by new business as a % of APE
The value of new business in 2012 decreased to minus € 21 million (2011: minus € 11 million). A negative value of new
business indicates that the initial losses incurred to acquire the new business were higher than the value of future profits
from this business. The volume of total premiums from new business decreased by 3% to € 1,584 million (2011: € 1,633 million).
Therefore, new business margin, the ratio of the value of new business to volume of future premiums from new business,
decreased to minus 1.3% (2011: minus 0.7%).
The negative value of new business in The Netherlands was caused by the value of new business in traditional pensions
insurance contracts of minus € 28 million. The positive value from new life insurance business of € 9 million did not
compensate this.
The value of new business outside The Netherlands in 2012 was minus € 2 million, of which minus € 1.8 million relates to
InterAmerican Greece.
6
Achmea Embedded Value Report 2012
Analysis of Change
In 2012, the embedded value decreased by € 119 million, from € 4,231 million at the beginning of 2012 to € 4,112 million
by the end of 2012.
In Table 3, the development of the embedded value is shown, split into The Netherlands and international.
Table 3 Analysis of Change of MCEV in 2012 in The Netherlands and International
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
3,839
392
4,231
0
(1)
(1)
Operating profits
398
(3)
395
Economic profits
(522)
57
(465)
0
(48)
(48)
3,715
397
4,112
Embedded Value at start of the year
Opening adjustments
Closing adjustments
Embedded Value at end of year
The embedded value profits are the change in embedded value after adjusting for capital movements and foreign
exchange rates. The total profits can be split into operating and economic profits. The profits from operating the life
business are € 395 million. The economic profits stem from changes in economic conditions such as interest rate.
The economic profits caused a loss in the embedded value of € 465 million.
Opening adjustments
At the beginning of the year, € 1 million capital was transferred from the life segment of Union in Slovakia to the
non-life segment.
Operating profits
The operating profits yielded a change in the embedded value of € 395 million. Operating profits are caused by results
and changes in life insurance conditions. These consist of the elements shown in Table 4.
Table 4 Breakdown of operating profits in The Netherlands and international
Value added by new business
Expected return
7
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
(19)
(2)
(21)
53
16
69
Operating return in excess of expected (arising from experience variance)
131
(11)
120
Change in operating assumptions
233
(6)
227
Total Operating Profits 2012
398
(3)
395
Achmea Embedded Value Report 2012
analysis of change
As specified in the section “Value added by New Business”, the value added by new contracts and contract renewals
is minus € 21 million. The initial loss incurred was € 56 million. The value of future profits from new business is
€ 35 million.
The expected return has an impact of € 69 million. The deviation from expected results has a positive impact of € 120 million.
The main source is positive development of the value of the Dutch unit-linked portfolio. Results on mortality, persistency
and expenses are minimal.
The change in the assumed expected mortality, persistency and expenses causes a profit of € 227 million. This can be
mainly explained by changes in expense and required capital assumptions. The reduction of the expected future expenses,
which is reflected in best-estimate cost assumptions used, and a new cost model for dutch pensions insurance results in
a profit of € 344 million. The change in the assumptions on required capital feeds into cost of non-hedgeable risks and
causes a loss of € 105 million.
Economic profits
The economic profits are minus € 465 million, caused by changes in economic conditions.
The main cause of the loss in economic profits is the decrease of the liquidity premium which is included in the valuation
rate of the in-force business. This leads to a loss in the value of in-force business of € 515 million. Friends First in Ireland
booked a profit of € 121 million, because of a decrease in the shortfall within its with-profit liabilities.
Closing adjustments
The closing adjustments were in minus € 48 million in total. These adjustments were due to capital reinforcement of
€ 21 million of Friends First in Ireland, a result in exchange rate of the euro to the Romanian Leu of minus € 2 million
and the elimination of the value of future profits of existing business of minus € 67 million due to the life business of
Eureko Romania being Held for Sale. Proceeds of the sale will be booked outside the life segment, therefore the value of
future profits has been released from the value of the in-force business at the end of 2012. Eureko Romania is valued here
on a net asset value basis.
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Achmea Embedded Value Report 2012
Sensitivities
The embedded value will change, when the assumptions change. The sensitivities of the embedded value under different
changes in the assumptions are shown in Table 5.
Table 5 Sensitivity of embedded value for different changes of the parameters Base Scenario
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
3,715
397
4,112
SENSITIVITY TESTS
Market risks
Parellel shift yield up 100bp
3,710
395
4,105
Parellel shift yield down 100bp
3,675
402
4,077
Market Values of Equity and Property - 10%
3,459
390
3,849
Increase of 25% in market implied swaption volatility
3,699
377
4,076
3,842
421
4,263
3,673
397
4,070
Expense risks
Maintenance Expenses - 10%
Insurance risks
Lapses -10%
Mortality and Morbidity (Life insurance) - 5%
3,737
412
4,149
Mortality and Morbidity (Annuity Business) - 5%
3,590
386
3,976
3,935
414
4,349
CoC test
Set CoC rate to 4.5% instead of 6.0%
Possible changes in the assumptions reflect three types of risks: market, expense and insurance risk. These risks influence
the embedded value, through the assets and/or the liabilities.
Market risk
The embedded value is not significantly influenced by changes in interest rates. Achmea’s Dutch business actively
manages the interest rate risk using interest rate derivatives to reduce the sensitivity of the shareholder value to interest
rate movements. A change in the liabilities due to interest rate changes will be broadly compensated by an opposite
change in the assets.
For the same reasons, the embedded value is only marginally effected by an increase in the volatility of interest rates.
The embedded value will decrease in case of a loss on equity, property and alternatives, as the effect on asset values will
not be mirrored in the liabilities.
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Achmea Embedded Value Report 2012
sensitivities
Expense risk
The embedded value will increase, when the assumed unit maintenance expenses decrease.
Insurance risks
The embedded value is relatively insensitive to lower lapse frequencies. The slight decrease indicates that there is a small
net profit on lapse.
The life insurance business is based on assuming mortality risk, and a decrease in the mortality rates will decrease the
expected death benefits, and hence increase the embedded value.
The pensions and annuity business is subject to longevity risk. Here, a decrease in the mortality rates will increase the
expected pension payments, and decrease of the embedded value. This effect is substantially more significant than the
effect on the life assurance business.
Cost of Capital test
The cost of capital is set to 6% in these embedded value results, which is consistent with the proposed Solvency II
legislation. A lower rate, e.g. of 4.5%, is also often seen in MCEV reports. Using this lower rate will increase the
embedded value, because of the lower cost of residual non-hedgeable risks.
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Achmea Embedded Value Report 2012
Impact from EEV to MCEV
Embedded value
The restatement of the embedded value from EEV to MCEV-principles replaces a global adjustment for risk (in the risk
discount rate) with explicit cost of non-hedgeable risks combined with revaluation of the liabilities using market values.
The market value of the net assets in life operating companies attributable to shareholders is equal to the present value of
the net cash flows after subtraction of the costs of risks.
The embedded value on MCEV-principles by the end of 2011 is € 4.231 million. This is a decrease of € 552 million from
the embedded value on EEV-principles as published year end 2011.
Table 6 Impact on embedded value from EEV- to MCEV-principles
(€ million)
FREE SURPLUS
REQUIRED CAPITAL
VIF
EMBEDDED VALUE
Preciously published Embedded Value end of year 2011
2,231
1,616
936
4,783
Transfer from Free Surplus to Required Capital
(553)
553
0
0
Different measurement of DAC and Intangible Assets
(132)
0
89
(43)
Revaluations
(85)
0
0
(85)
Remodelling
0
0
(424)
(424)
Total impact
(770)
553
(335)
(552)
Restated Embedded Value end of year 2011
1,461
2,169
601
4,231
This restatement is due to differences in methodology between EEV and MCEV. The methodology based on
MCEV-principles is described in the section Methodology.
The impact shown in Table 6 can be further analysed.
Transfer from Free Surplus to Required Capital
The required capital increased by € 553 million, because of the change in capital requirements from Solvency I (EEV) to
Solvency II (MCEV). This increase doesn’t effect the Embedded Value in total. It just means that that more of the net
asset value is required to cover unexpected losses and leads to a negative impact on free surplus.
Different measurement of Deferred Acquisition Cost and Intangible assets
Deferred acquisition costs and intangible assets like goodwill are set to zero as their market values are zero.
These immediate revaluations and the tax adjustments relating to them are realised in the free surplus (effect minus
€ 132 million). Under EEV the deferred acquisition costs were part of the value of the in-force business with a value of
€ 89 million.
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Achmea Embedded Value Report 2012
Impact from EEV to MCEV
Revaluations
Other changes in the free surplus due to revaluations of assets of minus € 85 million consist mainly of the effect of
removing the non-life business of InterAmerican Greece from the Covered Business and revaluing the PAR Fund of
Friends First in Ireland.
Changes in economic assumptions and remodelling
The change in economic assumptions together with other modelling changes in the valuation of the in-force business
caused a decrease of € 424 million. Differences in economic assumptions between EEV and MCEV are:
• change in discounting from a fixed risk discount rate in EEV to a swap yield curve with a liquidity premium
in MCEV;
• change in return on assets from real risk premiums in EEV to risk free forward rates in MCEV.
These also affect the value of options and guarantees. In addition there are differences in modelling the cost of nonhedgeable risks and in the definition of contract boundary for Dutch pensions insurance contracts.
Value of new business
The change in methodology also affects the VNB. Under EEV the VNB in 2011 was € 11 million. Under MCEV principles
the value decreased to minus € 11 million.
Table 7 Impact on value of new business from EEV- to MCEV-principles
(€ million)
TOTAL VNB (EEV)
TOTAL VNB (MCEV)
Life
15
11
Pension
(4)
(22)
Value of New Business
11
(11)
Value of new Business
Present value of new business premiums
1,456
1,633
New business margin
0.7%
-0,7%
In general, it can be stated that under MCEV the VNB is reduced due to:
• higher cost of capital
• higher value of options and guarantees
• lower valuation rate for products with negative value (pensions insurance contracts)
• including the renewal of pensions insurance contracts as new business, with negative value
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Achmea Embedded Value Report 2012
Methodology
Covered business
The covered business in this report is all business reported as life business to the local regulators. Achmea has insurance
activities in The Netherlands (Achmea) and internationally in Greece (InterAmerican), Romania (Eureko), Ireland
(Friends First) and Slovakia (Union). For reasons of materiality, the value of in-force life business of the smaller
operation InterAmerican Bulgaria has been excluded. The net asset value is included.
Embedded value
The embedded value provides an estimate of the value of the shareholders’ interest in a life insurance operation,
excluding any value that may be generated from future new business. The embedded value is the sum of the net asset
value and the value of in-force business. Equivalently, the embedded value is the difference on a market value balance
sheet between the value of assets and the value of liabilities.
Net Asset Value
The net asset value is the value of the net assets in the life companies attributable to shareholders.
The net asset value in embedded value terms of € 3,822 million is € 224 million lower than the net asset value on the IFRS
balance sheet for the Achmea Life business. This is caused by differences in valuations and parts of the Life Segments not
being in scope for the embedded value as shown in Table 8.
Table 8 Reconciliation of IFRS with MCEV net asset value
(€ million)
NETHERLANDS
INTERNATIONAL
ACHMEA
3,641
405
4,046
IFRS Net Asset Value
Elimination of non-covered business
(60)
(7)
(67)
Elimination of DAC/Goodwill
(68)
(83)
(151)
0
(6)
(6)
3,513
309
3,822
Other revaluations
MCEV Net Asset Value
The net asset value can be split out into the required capital and the free surplus.
Required capital
The required capital at the calculation date is determined at Operating Company level as the greater of the total balance
sheet requirement under a regulatory approach or under an economic approach. The regulatory approach is equal to the
current minimum statutory solvency margin.
The economic capital calculation models the capital required to cover all risks at legal entity level at 99.5% confidence
over a period of 1 year, including an allowance for model risk. Full diversification within the legal entities is taken into
account. This approach for the determination of required capital uses a level based on risk-based solvency calculations.
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Achmea Embedded Value Report 2012
methodology
Free surplus
The free surplus is the market value of that part of the net assets attributable to shareholders, which is not required capital.
Value of in-force business
The value of in-force business is the present value of the projected stream of future profits available to shareholders
from the in-force business after deduction of taxes, expenses and costs of holding required capital for risks which are not
hedgeable on financial markets.
Calculation of Embedded Value
The embedded value is the difference on a market value balance sheet between the value of the assets and the value of
the liabilities. The value of the insurance liabilities is determined as the sum of the best estimate liabilities, including the
time value of options and guarantees, and the cost of non hedgeable risks. Allowance is made for tax. Other liabilities are
included at IFRS value. The value of in-force business is defined so that the sum of the value of in-force business and the
net asset value is equal to the embedded value. The embedded value is calculated using both the balance sheet approach
and the discounted earnings approach which give identical results.
Best estimate liabilities
The liability cashflows, that is the net cashflow of benefits and expenses (including investment expenses) less premiums
are valued deterministically using the reference rate.
Time value of options and guarantees
The time value of options and guarantees is the additional value of the liabilities arising from profit-sharing and other
options which is not captured in the deterministic valuation. The assumptions used are calibrated to financial markets,
consistent with the deterministic valuation and consistent with the profit-sharing rules applying in each portfolio.
Several of Achmea’s individual products include a profit-sharing option which has been valued explicitly using a closed form
model, calibrated to a set of economic scenario’s. Guarantees on segregated pension insurance contracts are valued with a
stochastic valuation model. The other operating companies also perform explicit valuation of the profit-sharing options.
Cost of residual non hedgeable risks
Non-financial residual risks like underwriting, operational and business risks are not hedgeable on financial markets.
These risks may influence future profits for the shareholder. In determining market value of liabilities, an allowance is
made to take these costs of residual non hedgeable risks into account.
The cost of residual non hedgeable risks is measured as follows. The economic capital needed to cover the residual non
hedgeable risks in a year is projected for the existing business. The cost of capital rate is then applied for holding these
capital levels in each year. The resulting costs are discounted to the valuation date.
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Achmea Embedded Value Report 2012
methodology
Reinsurance
Reinsured business is included in the value of the liabilities and, with a small deduction for default risk, in the value of the
assets. The net effect is immaterial.
Consolidation Adjustments
The embedded value includes the value of Holding Company expenses that are not charged to the operating companies
but are attributable to Life business.
Value of new business
New business is defined as
• New individual life contracts
• Premium increases which are not contractual, if sales effort is required
• Additional single premiums which are not contractual, if sales effort is required
• New pensions insurance contracts
• Renewals of pensions insurance contracts
The value of new business is the present value at point of sale (assumed end of month of issue) of the projected stream
of future profits available to shareholders from new business after deduction of taxes, expenses and costs of holding
required capital for risks which are not hedgeable on financial markets.
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Achmea Embedded Value Report 2012
Assumptions
Economic assumptions
The reference rates are based on the swap yield curves to which an illiquidity premium is added. The illiquidity premium
varies between 0% and 100% per product group.
Table 9 Illiquidity premium and how it is applied
End of year 2011
1.08%
End of year 2012
0.37%
Applicable for
Annuities
100%
Savings - single premium
75%
Pension insurance contracts
50%
Whole life
25%
Other
0%
For the determination of the cost of residual non hedgeable risks, the illiquidity premium is excluded.
The cost of capital rate is set to 6%. This is assumed to also cover the frictional cost of required capital (the present value
of future investment costs and future taxation on investment returns on the assets backing required capital).
Expense inflation is based on available data and forecasts for long-term price inflation. This is adjusted to reflect the
proportion of staff costs contained in expenses and the expected difference between wage and price inflation.
Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have
been announced.
Table 10 Applicable tax rates at end of 2012
16
Netherlands
25.00%
Ireland
12.50%
Greece
26.00%
Slovakia
23.00%
Achmea Embedded Value Report 2012
assumptions
Non-economic assumptions
The assumed rates of mortality, morbidity, lapse, surrender, conversion to paid-up and early retirement have been derived
from analyses of the life operations’ recent operating experience and published industry studies.
Expense assumptions are based on expenses expected for 2013, and, for Achmea pensions insurance business, expenses
expected for 2015. These are therefore updated compared to 2011. Expenses have been split between expenses relating
to the acquisition of new business and to the maintenance of business in-force. The value added by new business is
calculated using actual 2012 acquisition costs. The cost of investment in development of certain strategic systems is
charged against in-force business at the beginning of the year. Some of these expenses have been treated as non-recurring.
It has been assumed that there will be no changes to the methods and bases used to determine statutory reserves and
policy benefits.
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Achmea Embedded Value Report 2012
Glossary of terms
18
Annual premium equivalent
(APE)
The total amount of annual premium from new regular premium business plus 10% of the total amount of
single premium business written during the year and included in the new business count.
Closed forms
A method for measuring the value of options and guarantees.
Formula approaches, such as Black & Scholes, to the stochastic calculation of required values, e.g.
financial options, as an alternative to Monte Carlo simulation or direct valuation of a replicating portfolio.
In-force business
Policies or contracts that are effective at the valuation date. Paid-up policies are included.
New business margin
Indicator of the profitability of new business that is calculated as a ratio of the present value of the net-oftax profits from new business in the period and the present value of expected new business premiums.
Reference rate
The rate which is used for discounting the future cash flows back to valuation date.
Stochastic techniques
A method for measuring the value of options and guarantees
Method of estimating the range of outcomes where there is uncertainty about the future development of
one or more variables.
Achmea Embedded Value Report 2012