| Tue 8 Jun 2004, 10:45 | | Embedded Value for the year 31 March |
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African Life Assurance Company Limited - Embedded Value for the year 31 March
2004
African Life Assurance Company Limited
(Incorporated in the Republic of South Africa)
Registration number: 1911/003818/06
Share Code: AFI ISIN Code: ZAE000000246
Embedded value for the year ended 31 March 2004
DEFINITION OF EMBEDDED VALUE
This report sets out the embedded value and the value of new business of the
African Life Group of companies. The embedded value represents an estimate of
the economic value of the Group excluding the value attributable to future new
business and the value attributable to minority interests. The embedded value
comprises:
The value of the shareholders` net assets on the Financial Soundness Valuation
basis; plus
The value of the in-force business.
The value of in-force business is the present value of future after-tax profits
arising from business in force at the valuation date, discounted at the risk
discount rate, and adjusted for the cost of capital required to support the
business. The value of in-force business has been calculated for African Life
Assurance Co. Ltd, Botswana Insurance Holdings Ltd and Life Office of Namibia
Ltd. Other operations have been taken at net asset value.
2. EMBEDDED VALUE RESULTS As at 31 March
Group embedded value 2004 2003
Rm Rm
Shareholders` net assets 1,612.5 1,590.7
Value of in-force business 534.3 432.4
Value before cost of capital 622.7 545.0
Cost of capital (88.4) (112.6)
Embedded value 2,146.8 2,023.1
Group capital adequacy requirement 721.1 656.8
3.EMBEDDED VALUE EARNINGS 2004 2003
Rm Rm
The embedded value earnings are derived
as follows:
Embedded value at end of year 2,146.8 2,023.1
Embedded value at beginning of year (2,023.1) (2,022.1)
Change in embedded value 123.7 1.0
Dividends and new capital 155.4 122.9
Embedded value earnings 279.1 123.9
These earnings can be analysed as
follows:
Roll forward 171.3 24.0
Investment return on free assets 85.9 (34.9)
Expected return on life business in 85.4 58.9
force
Value of new business at end of year 113.1 137.8
Value of new business at point of sale 104.7 124.8
Expected return on new business to end 8.4 13.0
of year
Changes in assumptions and methodology 86.9 (7.2)
Lapses and surrenders (9.1) (11.7)
Mortality and morbidity 7.3 (5.5)
Data and methodology changes (14.9) (8.8)
Premium updates 13.9 (19.6)
Economic 39.4 19.1
Expenses 26.8 32.4
Risk discount rate premium 27.1 0.0
Other (3.6) (13.1)
Experience variations (30.9) (12.7)
Lapses and surrenders (39.3) 21.8
Expenses & commission (15.1) (2.6)
Mortality and morbidity 32.5 28.5
Investment returns 22.8 (65.4)
Premium collection shortfall (35.4)
Premium updates 1.3 (6.0)
Other 2.3 11.0
Additional exchange rate fluctuations (61.3) (18.0)
and changes in shareholdings
Total earnings 279.1 123.9
Note: The amount of R(14,9)m for data and methodology changes arises mainly from
changes to the methodology for calculating the value of Botswana life insurance
business within the Botswana fund manager.
VALUE OF NEW BUSINESS
The value of new business represents the value of projected after-tax profits at
the point of sale arising from new policies sold during the year to 31 March
2004, accumulated to the end of the year at the risk discount rate. The value is
adjusted for the cost of capital required to support the new business.
2004 2003
Rm Rm
Value of new business at end of year 113.1 137.8
Value at point of sale after cost of capital 104.7 124.8
Value at point of sale before cost of capital 123.5 152.9
Cost of capital at point of sale (18.8) (28.1)
8.4 13.0
Expected return 8.4 13.0
The premium income in respect of new business written over the year can be found
in section 8 below.
SENSITIVITY TO THE RISK DISCOUNT RATE
The risk discount rate appropriate to an investor will vary depending on the
investor`s own requirements, tax position and perception of the risks associated
with the realisation of the future profits of the African Life Group. The
sensitivity of the embedded value to the risk discount rate is set out below:
Risk Discount Rate 12.2% 13.2% 14.2%
Rm Rm Rm
Shareholder`s net assets 1,612.5 1,612.5 1,612.
Value of in-force business 585.7 534.3 484.8
Value before cost of capital 645.0 622.7 600.9
Cost of capital (59.3) (88.4) (116.
Embedded value 2,198.2 2,146.8 2,097.
Value of one year`s new business at valuation date 127.3 113.1 100.9
Value before cost of capital 139.5 131.9 125.9
Cost of capital (12.2) (18.8) (25.0
ASSUMPTIONS
The assumptions used in the calculation of the embedded value are the same best
estimate assumptions used for the Financial Soundness Valuation. The main
assumptions used are as follows:
Economic assumptions
Best estimate economic assumptions are the same as assumed in the Financial
Soundness Valuation. The main assumptions (%pa) used are as follows:
Risk Overall Expens
discoun investme e
t rate nt inflat
return ion
(pre rate
tax)
South Africa 13.2% 11.1% 6.7%
Botswana 13.5% 11.6% 7.0%
Namibia 13.2% 8.5% 6.7%
Mortality rates
The assumptions for future mortality rates are based on the results of recent
experience investigations conducted by the company.
Allowance has been made for expected future AIDS mortality using the ASSA2000
model table (version 1020). This is the recommendation in the proposed revision
to Guidance Note 105 (PGN105) of the Actuarial Society of South Africa.
Expenses
The maintenance expense assumption is based on the results of recently conducted
internal expense investigations.
6.4 Premium escalations
The embedded value of in-force business includes the expected value of future
premium increases resulting from premium indexation arrangements on in-force
business. The value of new business includes the expected value of future
premium increases resulting from premium indexation arrangements on new business
written during the year to 31 March 2004.
6.5 Persistency/Surrender basis
The assumptions for lapse and surrender rates are based on the results of recent
experience investigations conducted by the company.
6.6 Tax
Allowance was made for the current life office taxation basis, including
secondary tax on companies on the current dividend policy. Allowance has been
made for capital gains tax.
6.7 Other assumptions
The embedded value does not include an allowance for the cost of the share
option scheme. Where shares have not yet been issued, the number of shares used
to calculate the embedded value per share will be increased as and when these
options are granted. Granting share options will therefore influence the
embedded value per share in future.
SENSITIVITIES
This section illustrates the effect of different assumptions on the value of in-
force business net of cost of capital. The effect of assumption changes in the
Financial Soundness Valuation has been included in the value of in-force
business. For each sensitivity illustrated all other assumptions have been left
unchanged.
Value of Cost of
in force Capital Total % Cha
Rm Rm Rm over
base
Values as at 31 March 2004 622.7 (88.4) 534.3
Policy discontinuance rate increases by 568.9 (84.4) 484.5 (9.3%)
10% e.g. from 30% to 33%
Future expense increases by 10% 588.2 (88.6) 499.6 (6.5%)
Expense inflation increases by 1% e.g. 606.8 (87.8) 519.0 (2.9%)
from 6.7% to 7.7%
Mortality and morbidity experience 557.1 (88.0) 469.1 (12.2%
increases by 10%
Investment returns decrease by 1% e.g. 613.0 (116.3) 496.7 (7.0%)
from 11.14% to 10.14%
Premium increase take-up rate decreases by 601.1 (86.7) 514.4 (3.7%)
10% e.g. from 80% to 72%
The sensitivity of the value of new
business is as follows:
Value of one year`s new business as at 31 131.9 (18.8) 113.1
March 2004
Policy discontinuance rate increases by 111.9 (17.7) 94.2 (16.7%
10% e.g. from 30% to 33%
Future expense increases by 10% 118.0 (18.3) 99.7 (11.8%
Expense inflation increases by 1% e.g. 127.7 (18.5) 109.2 (3.5%)
from 6.7% to 7.7%
Mortality and morbidity experience 117.2 (18.7) 98.5 (12.9%
increases by 10%
Investment returns decrease by 1% e.g. 137.8 (26.1) 111.7 (1.2%)
from 11.14% to 10.14%
Premium increase take-up rate decreases by 124.8 (18.5) 106.3 (6.0%)
10% e.g. from 80% to 72%
Increase in non-commission acquisition 118.7 (18.8) 99.9 (11.7%
expenses by 10%
Assumed management action
Mortality charges have been assumed to change in line with the costs of
providing benefits. For group business a one year delay is assumed.
RECONCILIATION OF NEW BUSINESS PREMIUMS TO THE INCOME STATEMENT
Reconciliation of new business premiums to the Single Annual
Income Statement
Premiums Premiums
(API)
31 March 31 March
2004 2004
Per income statement (Insurance contracts only) 481.9
Holdings adjustment (133.0)
Unmodelled insurance contract business (10.4)
Insurance contract new business premium 338.5 396.4
Investment contract new business premium 979.6 39.6
Total 1,318.1 436.0
MIX OF ASSETS BACKING THE CAPITAL ADEQUACY REQUIREMENT
31 March 2004
South
Asset Class Africa Botswana Namibia
Fixed interest 9.6% 40.7% 92.0%
Property 0.0% 1.7% 0.0%
Equities 81.3% 57.6% 0.0%
Cash 9.1% 0.0% 8.0%
Total 100.0% 100.0% 100.0%
GT Waugh
Statutory Actuary
FIA FASSA
Johannesburg
8 June 2004
Date: 08/06/2004 09:53:54 AM Produced by the JSE SENS Department
