A First in Canada for a Life and Health Insurance Company
Industrial Alliance Discloses its Embedded Value
Industrial-Alliance Life Insurance Company established a Canadian first for a life and health insurance company by disclosing its embedded value today. This disclosure was made in Toronto, during a presentation to the financial analysts of various securities brokerage firms.
Embedded value is a new concept in America. It measures, on the valuation date, the value of a life and health insurance company´s in-force business, excluding the value of the new sales occurring after that date. Hence, this value reached $1,170 million as at December 31, 1999, the initial valuation date. The Company also estimated the embedded value as at September 30, 2000, the publication date of its most recent quarterly results. According to the methodology used, the Company’s embedded value would have reached $1,288 million as at September 30, 2000, which is equal to $34.28 per common share.
In general, in Europe, where the concept is increasing in popularity, the shares of insurance companies are traded at a multiple of their embedded value to take into consideration the value of future new business. This is known as the appraisal value. This value gives a more comprehensive evaluation of life insurance companies. For example, Industrial Alliance has estimated the value of its new business for the 12-month period ending September 30, 2000, at $57 million, or $1.52 per common share.
Embedded value, as with the appraisal value, completes the more traditional methods for evaluating companies, such as the market to book value ratio, earnings per share and return on equity, to name the most well known.
"Today we are taking one step further in terms of disclosure," declared Yvon Charest, President and Chief Executive Officer. "By publishing the Company´s embedded value – before the end of the year, as promised –, we are aiming to be as transparent as possible with investors and we are offering them an additional tool so that they can more accurately assess the value of the Company."
The concept of embedded value
Widely used in England for more than ten years, and increasing in popularity in Europe, the concept of embedded value provides an estimate of the economic worth of a life insurance company, excluding the value of new sales. This value represents all the amounts, expressed in today´s dollars, that a life insurance company could eventually return to the shareholders by allowing its current portfolio to evolve until maturity.
Embedded value is a concept unique to life insurance companies. Life insurance companies establish actuarial reserves with respect to their commitments to policyholders. These reserves contain provisions for adverse deviations. These provisions are essentially a safety cushion that the companies maintain to deal with the unexpected; they are incorporated into the actuarial reserves due to the very long-term duration of companies´ commitments – a characteristic peculiar to life insurance companies – and the uncertainty inherent in estimating these commitments.
These provisions are then "released" in the form of profits, each year, as the companies’ experience demonstrates that these provisions are no longer needed to satisfy their commitments to their policyholders. That is why provisions for adverse deviations are comparable to latent profits. Generally accepted accounting principles do not allow this value contained in the actuarial reserves to be measured, thus the need for a new concept to assess the value of life insurance companies.
Sensitivity of the results
Industrial Alliance used a 9% discount rate to make its calculations. This rate is made up of the return of long-term risk-free bonds (estimated at 6% at the time of the evaluation) and a risk premium (estimated at 3%). This latter corresponds to the average premium generally expected by investors who invest in a company.
To show the sensitivity of the results, calculations were made according to two additional scenarios, one with a 2% risk premium and another with a 4% risk premium. These calculations were made as at December 31, 1999. Hence, Industrial Alliance´s embedded value would have reached $1,269 million if the calculations had been made with a 2% risk premium (108.5% of the value of the basic scenario as at December 31, 1999) and $1,088 million if they had been made with a 4% risk premium (93.0% of the value of the basic scenario as at December 31, 1999).
Methodology and warning
There are no professional standards surrounding the establishment of a life insurance company’s embedded value. However, from a methodological standpoint, Industrial Alliance based its calculations on a draft paper on the determination of embedded value published in September 2000 by the Canadian Institute of Actuaries´ Committee on the Role of the Appointed/Valuation Actuary. The embedded value was obtained from the results of Industrial Alliance´s consolidated financial projections. These projections are based on economic assumptions deemed to be the most realistic when the evaluation was made. The assumptions related to mortality, morbidity, persistency, operating expenses, the tax rate and other assumptions reflect the Company´s experience. The published value is subject to the risks and uncertainties inherent in this type of evaluation and is not a measure of the actual or future value of common shares of Industrial Alliance.
About Industrial Alliance
The seventh largest life and health insurance company in Canada, Industrial Alliance offers a wide range of insurance products and financial services. It markets its products under the name Industrial Alliance Insurance and Financial Services. Industrial Alliance has operations throughout Canada, either directly or through its subsidiaries, including IA Pacific Life (Vancouver) and National Life of Canada (Toronto). Industrial Alliance also owns a general insurance company, Industrial Alliance Auto and Home Insurance. Industrial Alliance has over $13 billion in assets under management and its share is listed on the Toronto Stock Exchange under the ticker symbol IAG. Its share is included in the TSE 300 index.
- 30 -
Source and information:
Tel. office: (418) 684-5275