Insurance Company Analysis & Valuation For Equity & Credit Investors

Day One

Business Model, IFRS Financial Statements & Solvency 2 / UK Foundations

Products – Life Insurance

• Products – protection vs savings

• Protection products – term life, whole life, income protection, critical illness

• Savings products – individual annuities, bulk annuities, pensions, wraps, endowment, investment bonds

• Contract design – conventional (non-profit vs with-profits); unit-linked

• With-profits funds – historic appeal; mechanics – reversionary bonuses, terminal bonus, market value reduction

• Return guarantees and principal guarantees vs unit-linked vs hybrids

• Why investors historically purchased savings products from life insurance companies rather than investing directly in funds via non-insurer platforms?

• Do life insurance savings products still have relevance today in a marketplace where they compete more directly with funds available via non-insurer platforms?

• Market size and composition

Products – Property & Casualty (P&C) Insurance

• Products – property vs casualty / liability vs specialty

• Property products – motor, home, commercial property, travel, pet

• Casualty / liability products – general liability, professional indemnity, Directors & Officers (D&O) liability, workers’ compensation / employer liability

• Specialty lines – marine, aviation, energy, trade credit, surety, payment protection insurance (PPI)

• Market size and composition

Products – Reinsurance

• Motivation for insurers to buy reinsurance

• Proportional vs non-proportional reinsurance

• Facultative vs treaty reinsurance

• Proportional reinsurance – quota share vs surplus reinsurance

• Non-proportional reinsurance – risk excess of loss (XoL), aggregate excess of loss, catastrophe excess of loss

• Reinsurance capacity from alternative capital – catastrophe bonds, 3rd party collateralised reinsurance, sidecar, industry loss warranty

• P&C, life & health and financial reinsurance

• Market size and composition

Business Model – Life

• Protection economics – underwriting vs experience variances

• Annuity economics – underwriting vs experience variances

• Savings and unit-linked economics

• Spread-based versus fee-based earnings

• Policyholder optionality

• Guarantees

• Value of new business

• In-force vs new-business economics

Insurance Business Model

• Premiums, investment assets and fees vs claims and benefits

• Lifetime cash flows and present values

• Comparison of nature of asset and liability interconnectedness – insurers vs banks

• Key risks – sources of variability in lifetime cash flows and in their present value. Actuarial risks – longevity, mortality, inflation, morbidity, lapse rates, surrender rates, catastrophe risk. Market risks – interest rates, credit spreads and credit downgrades / defaults, equity, property (including through no negative equity guarantees on equity release mortgages), FX, market concentration. Other risks – counterparty credit, operational

• Short tail vs long tail

• Customers – personal vs commercial / Group

• Distribution

Business Model – P&C / Reinsurance

• Underwriting economics. Gross vs net premium. Written vs earned premium. Transition from earned premium to IFRS 17 insurance revenue. Loss ratio. Expense ratio. Combined ratio. Current-year versus prior-year underwriting. Accident year versus calendar year. Pricing versus claims inflation. Rate adequacy. Exposure growth versus genuine rate increases. Social inflation

• Underwriting cycle. Hard and soft markets. Capacity entering and leaving industry. Why high ROE can precede a deterioration in pricing

• Catastrophe pricing

• Reinsurance pricing and retrocession

• Reserve analysis. Case reserves and IBNR. Ultimate loss estimates. Paid and incurred development triangles. Development factors. Accident-year development. Prior-year development. Reserve releases vs strengthening. Impact on loss ratio, combined ratio and earnings. IFRS 17: mapping traditional reserves into Liability for Incurred Claims (LIC), discounting and risk adjustment

• Detecting reserve problems. Persistent favourable development: strength or earnings management? Changes in reserving assumptions. Deteriorating development patterns. Long-tail versus short-tail business. Casualty and latent-claim risk. Inflation sensitivity

• Case Study 1 – Analyse loss-development triangles, calculate reserve development and determine whether reported underwriting profitability is improving or being supported by prior-year releases

IFRS Financial Statements

• Balance sheet (major assets and liabilities), income statement and cash flow statement structures. What are most useful investor take-away from each?

• Other comprehensive income and what flows through here

• IFRS 17 insurance contract accounting (General Measurement Model). Fulfilment Cash Flows (FCF), discount curves, Risk Adjustment (RA), Contractual Service Margin (CSM), Liability for Remaining Coverage (LRC)

• Why CSM is recognised as a liability even though it represents future unearned profit and how investors should interpret it

• Initial insurance contract balance sheet recognition and subsequent remeasurement

• P&L emergence from insurance contracts. Insurance revenue (expected claims, RA release, CSM release). Insurance service expenses (expected claims, experience variance). Insurance service result & finance expense

• Reinsurance accounting

• Case Study 2 – Numerical example of insurance contract accounting under IFRS 17 with and without experience variances – balance sheet and P&L

• IFRS 17 & IFRS 9 interaction. Asset and liability measurement mismatches. Why economic hedging can create accounting volatility

Solvency 2 / UK

• Solvency 2 / UK (“S2”) balance sheet and eligible own funds (EOF) – present value of asset and liability cash flows. Best Estimate of Liabilities (BEL), Risk Margin (RM), EOF (excess of assets over liabilities, Restricted Tier 1, Tier 2 and Tier 3 bonds), transitional measures on technical provisions (TMTP)

• S2 discount curve – swap rate, last liquid point, Ultimate Forward Rate (UFR), credit risk adjustment, matching adjustment, volatility adjustment

• Case Study 3 – Illustrative calculation of S2 balance sheet including BEL and EOF resulting from in-force term life, annuity (nominal and inflation-linked) and motor policies

• Understanding BEL. If BEL can be negative for a profitable insurance contract, how can total BEL across a life insurer's portfolio of insurance contracts be positive unless it is writing loss making business?

• Solvency Capital Requirement (SCR), Minimum Capital Requirement (MCR) and their calibration. S2 ratio. Consequences of S2 ratio declining towards SCR

• Case Study 4 – S2 ratios of major European insurance companies

• Overview of key SCR risk modules (market risks, life / non-life / health underwriting risks, counterparty default risk, operational risk)

• Case Study 5 – SCR composition by risk module of major European insurance companies

• Standard formula v internal models (full and partial)

• Case Study 6 – Illustrative SCR calculation using standard formula for insurer balance sheet in Case Study 3

• Case Study 7 – Sensitivity to market and underwriting variables of S2 BEL and EOF and of S2 ratio in Case Study 3. Sensitivities shown for interest rates, longevity, inflation and credit spreads, incorporating matching adjustment

• Case Study 8 – Key S2 ratio sensitivities to market and underwriting variables of major European insurance companies

• S2 EOF – eligibility criteria, components and limits. Restricted Tier 1, Tier 2 and Tier 3

• Case Study 9 – How to read a Solvency & Financial Condition Report (SFCR)

• Own Risk and Solvency Assessment (ORSA)

• Changes in latest Solvency 2 Review

Key Differences Between Solvency 2 / UK & IFRS Balance Sheets

• Why S2 EOF is greater than IFRS shareholders equity

• Comparing S2 BEL with IFRS 17 insurance contract liability measurement

• Case Study 10 – Reconciling IFRS shareholders equity with S2 EOF for an insurer

Day 2

Equity & Credit Analysis And Valuation

How Insurers Manage Their Balance Sheets For Shareholder Value

• Objective – Manage balance sheet to support dividend capacity through: (a) strong solvency ratios, both at Group consolidated and at key cash-remitting solo opcos; (b) solvency ratios that are market-resilient / actuarially-resilient

• Example management actions to strengthen solvency ratios and reduce their sensitivity to changes in market and actuarial variables

• Case Study 11 – Using interest rate swaps and inflation-linked bonds to improve solvency ratio and its sensitivities to changes in interest rates and inflation for insurer balance sheet in Case Study 3

Why S2 Ratio Alone Does Not Capture Insurer Financial Strength

• Quality of EOF. Value-in-force (VIF) is effectively embedded within S2 EOF (subsumed across BEL and investment portfolio), eligible as Unrestricted Tier 1 Own Funds. How robust a form of own funds is this?

• Sensitivity of EOF, SCR and S2 ratio to shocks

• Internal-model assumptions

• Matching Adjustment sensitivity

• Transitional benefits

• Diversification

• Loss-absorbency capacity of deferred taxes (LACDT)

• Own funds trapped in opcos / flow of cash remittances from opcos to parent holdco

Importance Of S2 Operating Capital Generation To Dividend Capacity

• S2 operating capital generation (OCG) – key components and importance of OCG in dividend capacity

• Case Study 12 – Calculating S2 OCG for in-force business in Case Study 3 combined with new business

• Case Study 13 – How much S2 capital is organically generated per annum by major European insurance companies? Analysis of components of insurers’ OCG

Cash Generation, Debt Service & Dividend Capacity

• Mapping out Group structure. At each key opco: S2 ratios, S2 ratio sensitivities, OCG and cash remittances from each key opco to parent holdco. S2 ratio and sensitivities and OCG at Group consolidated level

• Case Study 14 – Group structure analysis with key opco and Group consolidated metrics – Generali

• Risk appetite / management actions ladder at different S2 ratio levels

• Interest cover at parent holdco and at any other debt-issuing entities within Group

• Dividend capacity and sustainability analysis

• Case Study 15 – Debt service and dividend capacity analysis – Generali

Equity Valuation

• Dividend Discount Model (DDM), dividend yield and total cash capital return

• Understanding how CSM, RA release and S2 OCG underpin DDM valuation

• Forward P/E multiples

• Sum-of-the-parts (SOTP) – for more diverse groups

• Case Study 16 – DDM valuation and forward P/E multiples – Generali

Insurance Company Bonds & Credit Default Swaps (CDS)

• Key features of Tier 3, Tier 2 and Restricted Tier 1 (RT1) subordinated bonds. Investor risks

• Senior unsecured bonds – why do insurers issue them and ranking vs policyholders

• Case Study 17 – Relative yields and spreads on insurance bonds across capital structure

• Case Study 18 – Review of language in insurance bonds across capital structure

• Credit default swaps (CDS) on insurance companies. CDS basics overview. Deliverables into senior and subordinated CDS. Governmental Intervention credit event and Succession dynamics

Full Analysis & Valuations

• For each of Case Studies 19 & 20: Business analysis; IFRS financials analysis; analysis of Solvency 2 / UK position and sensitivities; analysis of S2 / UK operating capital generation; Group structure analysis with key opco and Group consolidated metrics; debt service & dividend capacity analysis; DDM equity valuation; bond language analysis

• Case Study 19 – Allianz

• Case Study 20 – Aviva