analyst reporting perspectives
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Insurance
Making sense o the numbersAnalysts perspectives on current and uturereporting in the insurance industry
November 2009
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ContentsContents
01Foreword
02Executive summary
03About this survey
04Adequacy o current insurance reporting
06Future direction o nancial reporting or insurance contracts
10Future direction o the measurement and classication onancial instruments
12
Contacts
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A nancial reporting ramework that enables the
investment community to make inormed judgements is
critical to insurers ability to attract capital and ensure their
share prices refect the true level o value being created
within their businesses. However, our 2007 survey o
insurance analysts revealed strong dissatisaction with the
adequacy (level o quality, clarity and granularity) o
nancial reporting within the insurance industry.1 In turn,
some o the proposals or change being discussed at the
time were seen by many analysts as creating what one
described as a bigger, blacker box.
With the nancial crisis having intensied the competition
or capital and heightened the critical glare o market
scrutiny, we elt that it would be useul to nd out whether
investment proessionals believe that the adequacy gap
between their expectations and current practice has
widened or narrowed since 2007. As the International
Accounting Standards Board (IASB) and Financial
Accounting Standards Board (FASB) reach a decisive
stage in their planned overhaul o insurance contract
reporting, we also elt that this would be an opportune
moment to ask analysts how the eventual ramework could
best meet their needs.
Several important messages came through loud and clear
rom the more than 40 interviews we carried out as part othis survey. Many o the participants believe that a lack o
transparency is increasingly leading to the under-valuation
o a number o the worlds leading insurance companies.
To overcome these deciencies, they would like the IASB
and FASB to come up with a new and improved reporting
ramework as quickly as possible, encouraging the
standard setters to put pragmatism beore theoretical
precision. The desire or a swit solution was especially
strong among lie insurance analysts using IFRS.
Perhaps more o a surprise to us was the degree to which
a consensus is emerging among the analysts interviewed
on the undamentals that they believe should orm the
bedrock o the new reporting ramework. This consensus
is rooted in a desire or reporting to refect the economic
reality o an insurers business model. Moreover, it has
been interesting to note the areas where the analysts
view o reporting coincides with and diers rom
that o the IASB and FASB.
We recognise the scale o the challenge acing the
standard setters as they try to nd a single solution
that meets the needs o disparate stakeholder groups in
dierent territories. The eedback rom analysts is, however,
clear. The current situation is harming the industry and so
the Boards eorts must come to a conclusion, and quickly.
It is inevitable that some analysts and, indeed, insurers
will be disappointed by the Boards proposals. It is
thereore essential that all sides engage in the debate and
play an active part in achieving a workable compromise.
We would like to thank all the investment proessionals
who kindly gave their valuable time and insights to thissurvey. We hope that the ndings will provide a useul
contribution to the continuing debate over the uture
o reporting in the insurance industry.
Ian Dilks
PricewaterhouseCoopers (UK)
Global Insurance Leader
Foreword
The quality o reporting in the insurance industry certainly has an
impact on valuations and also aects the amount o money going
into the industry.
Analyst survey participant
1 Insurance reporting at the crossroads: What do analysts think?, published by PricewaterhouseCoopers in November 2007.
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Key fndings on the current state o insurance reporting
IFRS and US GAAP nancial statements (GAAP reporting):
Overall, the gap between participants expectations and
current practice was still considerable in our current survey.
Cash fow data was perceived as potentially more useul than
in 2007 a refection o the current market environment.
Supplementary non-GAAP reporting:
Potentially highly useul, but currently largely inadequate.
While many held Market Consistent Embedded Value (MCEV)
to be theoretically more appealing than its predecessors,there was rustration with its implementation.
Key fndings on the uture direction o the accounting
or insurance contracts
As the IASB and FASB reach a decisive stage in their plannedoverhaul o insurance contract reporting, the survey ndings
oer the standard setters some clear messages:
Reporting should refect the undamental economic realities
and underlying business model o insurance companies.
Underpinning these responses was strong support or the
concept o matching (e.g. matching the recognition o
acquisition costs and prot).
Most participants elt that insurance is distinctive enough
to deserve its own reporting model.
Very ew respondents would wish to see prot rom an
insurance contract recognised at its inception.
Most participants would like to see an explicit risk margin,
primarily because more inormation is better than less.However, very ew have experience o how the concept might
work in practice.
Key fndings on the uture direction o the measurement
and classifcation o fnancial instruments
Most participants would support the continued use o multiple
valuation bases.
The quality o the associated disclosures o both cost and airvalues was critical to many participants, as this would enable
them to make their own adjustments.
Timing o implementation
Most participants avoured adopting the undamental changesbeing proposed on nancial instruments and insurance liabilities
at the same time to avoid accounting mismatches.
Theres huge room or
improvement in reporting
in the industry.
Analyst survey participant
Executive summary
Interviews with more than 40 investment proessionals revealed widespread dissatisaction with the current
state o nancial reporting. Many participants, especially lie insurance analysts using IFRS, would like the
IASB to move to a revised reporting ramework as quickly as possible. While recognising the diculties o
developing solutions or such a diverse and complex industry, many would encourage standard setters to put
pragmatism beore theoretical precision.
Its very dicult to gain a clear economic
view o where protability comes rom.
Analyst survey participant
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2 PricewaterhouseCoopers reers to the network o member rms o PricewaterhouseCoopers International Ltd, each o which is a separate and independent legal entity.
3 Insurance reporting at the crossroads: What do analysts think?, published by PricewaterhouseCoopers in November 2007.
About this survey
In the autumn o 2009, PricewaterhouseCoopers2 conducted
in-depth interviews with more than 40 insurance analysts rom
the US, Europe, Asia and Australia to gain their perspectives on
the current state and uture direction o nancial reporting. The
survey ollows on rom a similar study carried out in 2007.3
The survey respondents were chosen to provide coverageacross all the major nancial centres and include a broad mix o
lie/non-lie, buy-side/sell-side and equity/xed income analysts.
The interviews were conducted ace-to-ace, allowing
interviewers to explore the rationale or any given reply.
In this report, we have noted areas where there was signicant
variance between the ndings or particular types o analysts
generally lie or non-lie. We have also noted distinctions
between the perceptions o US analysts and those in the rest
o the world.
What we want is an IFRS
presentation that explains the
proper drivers o the business.
Analyst survey participant
Figure 1: Breakdown o survey participants
Buy-side
Sell-side
Ratings agencies
Life
Non-life
Life and non-life
Equity
Fixed income
79
21
44
41
15
21
10
69
% of participants
Source: PricewaterhouseCoopers
Figure 2: Geographical split o survey participants
12%
48%
40% Europe
US
Asia-Pacific
% of participants
Source: PricewaterhouseCoopers
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Dissatisaction with reported inormation remains
Our 2007 survey identied a substantial gap between analysts
perceptions o the useulness and adequacy o insurers
primary nancial disclosure (balance sheet, income statement,
cash fow and segmental inormation). While most participants
cited examples o a ew companies that had gone the extra
mile with their corporate reporting, overall the gap betweenpractice and expectations was as wide in our latest study. One
participant described the income statement as a complete
disaster, while segmental reporting was regarded by many
respondents as insuciently detailed or their analysis.
The only area where the perceived potential useulness
had signicantly increased since 2007 is the cash fow
statement, refecting the importance o cash in the current
economic environment. However, dissatisaction with
this statement was high one participant describing it as
pretty much gobbledegook. As the ocus shited towards
cash, interest in non-nancial inormation such as strategy
and market position had marginally declined.
The proo o the pudding is inthe eating we disregard the
cash fow statement.
Analyst survey participant
Adequacy o current insurance reporting
The income statement does not
refect the reality o the business.
Analyst survey participant
Figure 3: How potentially useul are the ollowing elements o nancial and non-nancial inormation? Are they adequate or your needs?
Usefulness 2009
Adequacy 2009
Usefulness 2007
Adequacy 2007
100
%
90
80
7060
50
40
30
20
10
0
Incomestatement
Balancesheet
Cashflow
Segmental
Insu
ranceriskexposures
Risk-basedcapital
Manage
mentcommunication
onstrategy
Resultspresentedon
non-GAAPbasis
Marketposition
Valuecreatinginformation
(e.g.
distributionchannels)
Go
vernanceinformation
Co
rporateresponsibility
reporting
Regulatoryforms
Usefulness 2009
Adequacy 2009
Usefulness 2007
Adequacy 2007
Source: PricewaterhouseCoopers
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I nd that non-GAAP inormation
provides the only reasonable
basis to judge management.
Analyst survey participant
Non-GAAP inormation alls short o expectations
Overall, participants in the survey rated non-GAAP
disclosures as extremely useul. Many commented that
management had improved their asset disclosures over
the past year. However, despite the insurance industrys
increased ocus on non-GAAP reporting since our last
survey in 2007, disclosure in many areas still ell some way
short o expectations. For example, many participants
elt that sensitivity analyses should be based on morerealistic assumptions, recognising the interdependence
o certain scenarios. They also elt that operating prot is
inconsistently dened and would like more inormation on
the inputs supporting the calculation o combined ratios.
Embedded value (EV) and Market Consistent Embedded
Value (MCEV) generated an interesting debate among the
European lie analysts we interviewed. While many held
MCEV to be theoretically more appealing than its
predecessors, certain concerns were raised about its
implementation. A number o participants complained that
current practice lacks sucient transparency and ails to
refect the economic reality o some products. MCEV is airly
useless as it is inconsistently applied, said a participant.
Non-GAAP numbers always
seem to get better over time.
Its a little suspicious.
Analyst survey participant
Figure 4: How potentially useul are the ollowing elements o nancial and non-nancial inormation? Are they adequate or your needs?
100
%
90
80
7060
50
40
30
20
10
0
Em
be
dde
dva
lue
Ma
ke
tcons
isten
t
em
be
dde
dva
lue
Asse
tdisc
losures
Sens
itivityana
lys
is
Regu
latorycap
ita
l
Opera
ting
income
Freecas
hflow
Marg
inana
lys
is
Com
bine
dra
tios
Usefulness
Adequacy
Source: PricewaterhouseCoopers
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Future direction o fnancial reporting or insurance contracts
Insurance has its own characteristics.
Thats why we have specialists to analyse it.
Analyst survey participant
Distinct accounting model
Nearly 90% o participants elt that insurance should have
its own accounting model (this view was unanimous in the
US). O those supporting a distinct model, 56% would
avour a separate approach or lie and non-lie business.
Nearly 70% would like aspects o a particular contract that
have dierent risk and earnings proles, such as savings
and investment management services, to be accounted or
separately (unbundled). It would be useul to distinguish
between risk and investment businessIts currently
dicult to see exactly where the prots come rom, said
a participant.
Day one proft
More than three-quarters o participants were opposed to
recording a prot at the inception o the contract. Support
or the concept o a day one gain was marginally stronger
in parts o the world that are more amiliar with embeddedvalue. To the extent that theyre writing protable contracts,
Id like to see it, said a participant.
I dont think that there should be
a day one prot. Management
expectations do not add up
to value.
Analyst survey participant
I come rom the old school. You
earn it beore you recognise it.
Analyst survey participant
Figure 5: Does insurance require its own accounting model?
%
Total
US
87
13
100
19
Rest of the world 77
23
0
Yes
No
Source: PricewaterhouseCoopers
Figure 6: Should an insurance company recognise a prot on day one?
Yes
No
US 12
88
Rest of the world 22
78
%
Source: PricewaterhouseCoopers
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I think there should be some deerral o acquisition
costs because youre buying a stream o premiums
rather than tossing money out o the door.
Analyst survey participant
Acquisition costs
Most participants elt that acquisition costs should be
deerred. Your day one acquisition costs do not represent
the economics on day one, said a participant. However,
many would like more control and consistency in how costsare deerred. Deerred acquisition costs are too variable
and too open to manipulation at present, said a participant.
No day one loss on proftable contracts
Participants who avoured recording acquisition costs
as an expense at the inception o the contract were then
asked i revenue should be recognised to oset the
resulting loss. When the results o these questions arecombined, it is clear that, as long as the contract is
expected to be protable, ew would avour the recognition
o a day one loss.
While I dont care i you
expense up ront or not, I dont
think there should be a day
one loss unless there is someindication that you are using
the product as a loss leader.
Analyst survey participant
Figure 7: Should acquisition costs be expensed on day one?
Deferred on day one
Expensed on day one
US 82
18
Rest of the world 61
39
%
Source: PricewaterhouseCoopers
Figure 8: Should insurance companies recognise a day one loss?
No day one loss
Day one loss
US 88
12
Rest of the world 86
14
%
Source: PricewaterhouseCoopers
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While there should be a risk margin,
what really matters is the disclosure
around that risk margin.
Analyst survey participant
Risk margin
A majority o participants would like insurers to report a
risk margin, with some arguing that it might provide greater
insight into the inormation that they believe some companies
use when pricing their products. However, as insurers do
not typically report risk margins at present, ew participants
had rst-hand knowledge o how such margins would work.
This doesnt mean anything to me, said a participant.
Those against the inclusion o a risk margin elt thatit would be too subjective. Youll get a snowball o
assumptions, said a participant. Another participant
said that this was a urther sign that insurance contract
accounting is becoming too complicated.
Proft recognition over the lie o the contract
Most participants would like to see prots realised overthe lietime o the contract in line with the unwinding
o the associated risks. Recognising prot in line with
the unwinding o risk gives me a better indication o how
management judges the contracts current protability,
said a participant.
More inormation is better
than less, I guess.
Analyst survey participant
Figure 9: Should an insurance contract liability include an explicit
risk margin?
0
0
Rest of the world
US
Only to assess ifloss making
5
Not yet considered
4
Always 72
58
Never 23
38
%
Source: PricewaterhouseCoopers
Figure 10: How should prot be recognised over the lie o the contract?
In line with claimspayments
In line with premiums less claims(reflecting net cash flows)
Other
Straight line over theperiod of coverage
In line with unwind ofrisk (reflecting risk profile)
%
11
72
12
2
3
Source: PricewaterhouseCoopers
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I nd it dicult to put economic assumptions through
the P&L on a reporting period basis. Youre just going
to end up with wacky P&L numbers.
Analyst survey participant
Changes in assumptions
There was a clear geographical split to this question.
Around 60% o US participants wanted changes inassumptions to be immediately recognised in the income
statement, typically arguing that they would like the impact
o management adjustments to be as visible as possible.
I management has got it wrong, you want to know
theyve got it wrong, said a US participant. In contrast,
there was no strong consensus in the responses rom their
counterparts in other parts o the world.
Only around 15% o total survey participants elt that
companies should treat changes in economic
assumptions (e.g. interest rates) and non-economic
assumptions (e.g. mortality) in dierent ways.
Figure 11: How should changes in economic and non-economic
assumptions be accounted or?
As if identified at inception
Over the remaining contractual life
In the income statement when identified
US 28
59
13
27
33
40
Rest of the world
%
Source: PricewaterhouseCoopers
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Future direction o the measurement and classifcation
o fnancial instruments
You need the book value and the market value o
all the instruments they have. As long as I have all
o this, I can judge whether the unrealised gain or
loss is real or not.
Analyst survey participant
Financial instrument classifcation
Most respondents support the continued use o amortised
cost and air value through prot and loss (FVTPL) or debt
instruments. However, there was less o a consensus
on the continued use o the available or sale (AFS)
designation, with US participants more likely to be in
avour than their counterparts in the rest o the world.
While marking-to-market might increase earnings
volatility, some elt this was preerable to a potentially
less transparent approach. Volatility is OK because we
can analyse it. To articially suppress it is something
we are less comortable with, said a participant. Many
participants would like both a cost and a air value basis
o measurement to be clearly disclosed in either the
primary statements or the notes.
Driver or classifcation
There were mixed views on what should drive the
classication o nancial instruments. Nearly hal o US
participants avoured an approach based on the nature
o the nancial instrument. In contrast, their counterparts
in other parts o the world were more likely to express
indierence, provided that assets and liabilities are treated
consistently.
I believe in classication by
the nature o the instrument
because a company can hide
behind a business model.
Analyst survey participant
Figure 12: Which o the ollowing classications should be permitted
under the IASBs and FASBs reorms or nancial instruments?
n/a
n/a
Amortised cost
Available for sale
Fair value through profit and loss
Debt instruments Rest of the world
70
75
45
76
88
65
Debt instruments US
Equity securities Rest of the world
75
43
76
80
Equity securities US
%
Source: PricewaterhouseCoopers
Figure 13: What should be the primary driver or the classication o
nancial instruments?
0
Driven by business model
By nature of financial instrument
I am indifferent provided consistenttreatment for assets and liabilities
Not yet considered
US
19
6
3144
48
29
23
Rest of the world
%
Source: PricewaterhouseCoopers
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Contacts
I you would like to discuss any o the issues raised in this paper, please speak to your usual contact at
PricewaterhouseCoopers or one o the ollowing:
Ian DilksGlobal Insurance Leader
PricewaterhouseCoopers (UK)
44 20 7212 4658
Caroline Foulger
PricewaterhouseCoopers (Bermuda)
1 441 299 [email protected]
Werner Hlzl
PricewaterhouseCoopers (Germany)
49 89 5790 5248
Paul Horgan
PricewaterhouseCoopers (US)
1 646 471 8880
Bryan Joseph
PricewaterhouseCoopers (UK)44 20 7213 2008
Andrew Kail
PricewaterhouseCoopers (UK)
44 20 7212 5193
Ray Kunz
PricewaterhouseCoopers (Switzerland)
41 58 792 2380
David Newton
PricewaterhouseCoopers (UK)
44 20 7804 2039
Dominic Nixon
PricewaterhouseCoopers (Singapore)
65 6236 3188
James Scanlan
PricewaterhouseCoopers (US)
1 267 330 2110
John Scheid
PricewaterhouseCoopers (US)
1 646 471 5350
Jonathan Simmons
PricewaterhouseCoopers (Canada)
1 416 869 2460
Kim Smith
PricewaterhouseCoopers (Australia)
61 2 8266 1100
Global Insurance Leadership Team
Donald Doran
Partner
PricewaterhouseCoopers (US)
1 646 471 [email protected]
Stephen OHearn
Partner
PricewaterhouseCoopers (US)
1 646 471 [email protected]
Alison Thomas
Director
PricewaterhouseCoopers (UK)
44 20 7212 [email protected]
Gail Tucker
Partner
PricewaterhouseCoopers (UK)
44 117 923 [email protected]
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PricewaterhouseCoopers provides industry-ocused assurance, tax, and advisory services to build public trust and enhance value or its clients and
their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop reshperspectives and practical advice.
For more inormation about developments in IFRS, please visit www.pwc.com/insurance
This publication has been prepared or general guidance on matters o interest only, and does not constitute proessional advice. You should not act
upon the inormation contained in this publication without obtaining specic proessional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness o the inormation contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers
does not accept or assume any liability, responsibility or duty o care or any consequences o you or anyone else acting, or reraining to act, in relianceon the inormation contained in this publication or or any decision based on it.
For more inormation about Making sense o the numbers: Analysts perspectives on nancial reporting in the insurance industry, please contact
Rebecca Pratley, Marketing Leader, Global Insurance, PricewaterhouseCoopers (UK) on 44 20 7804 3749 or at [email protected].
For copies, please contact Alpa Patel, PricewaterhouseCoopers (UK) at [email protected].
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pwc.com/insurance 2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers reers to the network o member rms o PricewaterhouseCoopers
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