Embedded Value as

1

• Embedded Value as
• a management tool
• Sylvaine Salahub
• CNP Assurances
• 16 June 2003

2
Embedded Value as a management tool

• Historic of Embedded Value in CNP
• The methodology retained
• The impact on big deals
• The day to day basis

3
Historic of Embedded Value in CNP

• 1991 calculated for the 1st time
• 1998 EV was used to assess share price
• Since communication of EV each 1/2 year to the
  market
• 2000 CNP was the 1st French insurer to include
  EV NB value in its annual report

4
CNP Embedded Value figures disclosed
40,4
44,5
43,5
44,9
per share
5
CNP Value of New Business disclosed
per share
6
CNP Economic Assumptions 2002 -France

• Bond yield 4.3 OAT
• Equities yield OAT 2 points 6.3(net
  dividends and realised gains)
• Discount rate 7.8
• 25 of solvency margin covered by subordinated
  debt
• Treatment of top-up premiums mainly included in
  New Business
• Administrative expenses standard
  assumptionincrease in unit costs in line with
  inflation (1.5/year)
• Corporate tax rate 35.4
• Dividend tax credit 10

7
CNP Sensitivities 2002 - France
/share

• NAV1 point increase in bond yields ? -0.710
  increase in CAC 40 ? 1.0

• IN FORCE1 point increase in bond and equities
  yield ? 2.61 point increase in discount
  rate ? -2.1

• EMBEDDED VALUE (NAV IN FORCE)1 point increase
  in bond and equities yield ? 1.91 point
  increase in discount rate ? -2.1

Sensitivity of Embedded Value to a moderate
increase in interest rates is low
8
CNP was the 1st French insurer to publish
Embedded Value

• Therefore
• Need to answer multiples methodology questions
  relating to French specificity
• Choice was made by the Board to articulate
  published figure with "real life"
• In particular, reconcile analysis with Asset
  Liability Model Accounting Analysis already
  developed

9
Overview of some French specificity

• Capitalisation Reserve
• Profit sharing
• Top up premiums
• Group business

10
CNP methodology NAV In Force

• NAV coherent with accounting principle
• Included Capitalisation Reserve
• Less goodwill
• Plus value of unrealised gains net of tax in
  proportion of shareholders' right on
  shareholders' fund
• In Force on continuing realistic basis
• Profit sharing in line with past actual Company
  policy
• Financial rate of return modelled based on long
  term projection including future premiums
• "Free reserves" locked-in

11
CNP methodology Top Up Premiums

• A French characteristic of savings contracts
• Impact of 8 years' tax inheritance tax
  incentives
• Profitability of top up premiums
• Product loading at the same level than new
  premium
• With reduced cost
• Assimilated to single premium included as New
  Business rather than In Force in Embedded Value
  calculations

12
CNP methodology Group Business

• A part from Credit Insurance, all premium are
  assimilated to single premium
• Profit sharing is modelled
• Statutory cost of locking-in is modelled
• Surplus reserve are locked in

13
CNP methodology Cost of Locking-in

• Full cost of statutory solvency margin net of
  subordinated debts
• Based on new money rate assumptions
• Based on actual assets allocation
• Deducted from In Force New Business Value

14
CNP Assurances Characteristics

• Dominant position in the French Market
• Savings
• Group Business
• Pensions
• International development Brazil, China
• Main partners are also shareholders

15
Embedded Value a dissuasive weapon

• Embedded Value is a reference for
• Negotiation with partners (Launch of Assurposte
  agreement with Caisses d'Epargne summer 2000)
• International development bought of 50,75 of
  Caixa Seguros in 2002
• Future developments...

16
Use of EV negotiation with partners

• Principle of no value destruction - materialised
  by Embedded Value NB Value
• Financial assumptions have been disclosed
• Impact of future agreement can be measured for
  partner insurer

17
Use of EV bought of Caixa Seguros

• Acquisition price build on a operational plan
  including the value of a detailed Business Plan
• Volume versus value by product are monitored
  monthly

18
The day to day EV value of new business

• For operational team new product must "increase
  value of new business"
• Sensitivities are measured
• Value of new business is used to monitor future
  development

19
The day to day EV a shared tool

• Internal analysis feeds EV
• lt-gt EV feeds internal analysis
• Embedded Value forces to split profit between
  operational non recurring
• Profit projection are in phase with accounting
  analysis
• Policy on profit sharing can be illustrated
  monitored using the same model as ALM

20
The day to day EV a shared tool

• Shareholders' interest has been identified and
  therefore can be monitored
• Accounting rules reinforced the use of EV NB
  Value approach ( impairment test)
• Models in force could be used as a base of other
  developments such as IFRS

21
Embedded Value Future challenges

• French market more comparable actors to
  published value (Bank insurers)
• CNP Assurances reinforce the use of EV NB in
  line with strategic plan e.g. target value added