Accountant Perspective

1. 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. Topics • 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

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

4. Info Bank Magazine

5. Investor Magazine

6. Bisnis Indonesia Newspaper

7. Statutory Reports

8. Statutory Reports – cont.1

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

10. The difference is …. • 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

11. 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. Problems with Statutory Profit • 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

13. Achieved Profits

14. 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. 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. 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. 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. Achieved Profits • Achieved Profits = Change in Embedded Value + current year Statutory Profit • Embedded Value = Net Present Value of future expected Statutory Profits

19. 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. Achieved Profits

21. Achieved Profits An Example

22. Achieved Profits - An Example

23. Asset Valuation

24. 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. Deferred Tax

26. 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. 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. 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) • 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) • 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)

29. 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) • 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) • An increase in the tax bases of assets because of indexing for inflation

30. Deferred Tax – an example

31. Deferred Tax – an example (2)

32. Valuation of Tax Losses

33. An Examples: Tax Loss Utilization

34. An Examples: Tax Loss Utilization (2)

35. Accountant Perspective On Appraisal Value Derivation Thank You