Market Consistent Embedded Value Principles April 2016

CFO Forum
Market Consistent Embedded Value
Principles

April 2016
 Market Consistent Embedded Value Principles October 2009

Contents
Introduction. 2
Coverage. 2
MCEV Definitions... 3
Free Surplus 3
Required Capital 3
Value of in-force Covered Business 4
Financial Options and Guarantees 4
Frictional Costs of Required Capital 5
Cost of Residual Non Hedgeable Risks 5
New Business and Renewals.. 7
Assessment of Appropriate Non Economic Projection Assumptions 9
Demographic Assumptions 9
Expenses 9
Taxation and Legislation 10
Economic Assumptions 11
Inflation 11
Smoothing 11
Investment Returns and Discount Rates 11
Reference Rates 12
Stochastic Models 12
Participating Business 13
Disclosure 14
Glossary...15
Abbreviations .. 20
Appendix A Examples of possible disclosures.. 21
Assumptions 21
Methodology 21
Analysis of MCEV earnings; Reconciliation of opening and closing values 23
Implied Discount Rates and New Business Internal Rate of Return 23
Group MCEV 23
Reconciliation to IFRS Net Asset Value 24
Segmentation 24
Statement by Directors 24
Sensitivities 24
Interest Rates and Assets 25
Expenses and Persistency 25
Insurance Risk 25
Required Capital 26
Appendix B Presentation of analysis of earnings.. 27
Appendix C Group MCEV analysis of earnings . 29

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 Market Consistent Embedded Value Principles April 2016

Introduction
Principle 1: Market Consistent Embedded Value (MCEV) is a measure of the consolidated
value of shareholders interests in the covered business. Group Market Consistent
Embedded Value (Group MCEV) is a measure of the consolidated value of shareholders
interests in covered and non-covered business.

G1.1 The MCEV Methodology (MCEVM) described here is applied to the calculation and reporting
of the MCEV of the covered business.

G1.2 Adjustments must be made to ensure all covered business has been included appropriately.
An example of such an adjustment might be in respect of a reinsurance or loan arrangement within
the group to avoid distorting the MCEV.

G1.3 Principles 1 to 17 relate only to covered business.

G1.4 Except where they are not considered material, compliance with Principles (shown in bold) is
compulsory and any non-compliance with underlying Guidance should be explicitly disclosed.

G1.5 There are similarities between the methodology and assumptions used to determine the
Solvency II balance sheet and the MCEVM. Alignment of methodology and assumptions between
Solvency II and MCEV may be beneficial for companies reporting under both approaches.
Consequently, where Solvency II is adopted for solvency reporting, certain components of the
MCEVM may be aligned to Solvency II methodology and assumptions as described in Principles 3,
5, 6, 8, 10, 11, 14 and 16. Alignment of MCEV to Solvency II methodology and assumptions in other
areas is permitted provided that the nature of such alignment is disclosed.

G1.5 A statement should be included to confirm that the methodology, assumptions and results
have been subject to external review, stating the basis of the external review and by whom it has
been performed.

Coverage
Principle 2: The business covered by the MCEVM should be clearly identified and disclosed.

G2.1 The MCEVM should, where material, include, as a minimum, any contracts that are regarded
by local insurance supervisors as long-term life insurance business.

G2.2 The MCEVM may cover short-term life insurance such as group risk business and long-term
accident and health insurance business. Where mutual funds and short-term healthcare are
regarded as part of or ancillary to a companys long-term life insurance business, then it may be
regarded as covered business.

G2.3 The MCEVM may be applied by group companies that are not predominantly long term
insurance companies. For example the MCEVM may be applied to covered business provided by
non-insurance groups and operations such as banking groups and pension funds.

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 Market Consistent Embedded Value Principles April 2016

MCEV Definitions
Principle 3: MCEV represents the present value of shareholders interests in the earnings
distributable from assets allocated to the covered business after sufficient allowance for the
aggregate risks in the covered business. The allowance for risk should be calibrated to
match the market price for risk where reliably observable. The MCEV consists of the
following components:

Free surplus allocated to the covered business

Required capital; and
Value of in-force covered business (VIF).

The value of future new business is excluded from the MCEV.

G3.1 MCEV represents the sum of the values of components defined in Principles 4, 5 and 6.

G3.2 The value of future new business should be excluded from the MCEV. Principle 10 defines
new business and, by implication, existing business.

G3.3 The concept of mark to market is to value insurance liabilities and therefore the shareholders
interest in the earnings distributable from assets allocated to the covered business as if they are
traded assets with equivalent cash flows. However, most insurance liabilities are not traded. As
assets are generally traded with an observable market price, asset cash flows that most closely
resemble the insurance cash flows (from the shareholders perspective) are used.

G3.4 Financing types of reinsurance and debt, including subordinated and contingent debt can
create a leveraging effect. Such debt should normally be deducted from the MCEV at a value
consistent with that which markets would place on debt with similar characteristics. The deduction
can be made to either the free surplus or the VIF and where material should be disclosed.

G3.5 Liabilities of the in-force covered business are dictated by local regulatory requirements.

G3.6 Where the MCEVM is aligned to Solvency II methodology and assumptions (as set out in
G1.5) and a balance sheet presentation is adopted for MCEV, the VIF may be implicitly included
within other components of the MCEV.

FREE SURPLUS

Principle 4: The free surplus is the market value of any assets allocated to, but not required
to support, the in-force covered business at the valuation date.

G4.1 Free surplus is determined as the market value of any excess of all assets attributed to the
covered business but not backing liabilities over the required capital to support the covered
business.

G4.2 Free surplus not formally allocated to covered business should not be included in the MCEV.

REQUIRED CAPITAL

Principle 5: Required capital is the market value of assets, attributed to the covered
business over and above that required to back liabilities for covered business, whose
distribution to shareholders is restricted.

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G5.1 The amount of required capital should be presented from a shareholders perspective and so
should be net of funding sources other than shareholder resources, for example subordinated debt
or policyholder funds.

G5.2 The level of required capital allocated to each regulated entity should meet at least the
shareholders portion of the level of solvency capital in respect of covered business at which the
supervisor is empowered to take any action. It would also include any amount encumbered by
local supervisory or legal restrictions that prevents its distribution or removal from supporting the
covered business.

G5.3 The required capital should include amounts required to meet internal objectives. The internal
objectives could be based on an internal risk assessment or that capital required to obtain a
targeted credit rating.

G5.4 Where Solvency II is adopted for solvency reporting (as set out in G1.5), the Required Capital
may be aligned to the Solvency II Solvency Capital Requirement.

VALUE OF IN-FORCE COVERED BUSINESS

Principle 6: The value of in-force covered business (VIF) consists of the following
components:

Present value of future profits (where profits are post taxation shareholder cash flows
from the in-force covered business and the assets backing the associated liabilities)
(PVFP)
Time value of financial options and guarantees as defined in Principle 7
Frictional costs of required capital as defined in Principle 8
Cost of residual non hedgeable risks as defined in Principle 9.

G6.1 Projected liabilities and cash flows should be net of outward risk reinsurance.

G6.2 The PVFP should include the value of renewals of in-force business. Where Solvency II is
adopted for solvency reporting (as set out in G1.5), the level of renewals may be aligned to the
Solvency II contract boundary requirements.

G6.3 The PVFP before allowance for the time value of financial options and guarantees should
reflect the intrinsic value of financial options and guarantees on in-force covered business. The time
value of financial options and guarantees is discussed under Principle 7. If the split of the VIF into
PVFP and time value of financial options and guarantees is disclosed then consistent assumptions
should be used for the time value of financial options and guarantees and the basic projection of
PVFP.

FINANCIAL OPTIONS AND GUARANTEES

Principle 7: Allowance must be made in the MCEV for the potential impact on future
shareholder cash flows of all financial options and guarantees within the in-force covered
business. The allowance for the time value of financial options and guarantees must be
based on stochastic techniques using methods and assumptions consistent with the
underlying embedded value. All projected cash flows should be valued using economic
assumptions such that they are valued in line with the price of similar cash flows that are
traded in the capital markets.

G7.1 The valuation of financial options and guarantees should take as a starting assumption the
actual asset mix at the valuation date.

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G7.2 Where management discretion exists, has passed through an appropriate approval process
and would be applied in ways that impact the time value of financial options and guarantees, the
impact of such management discretion may be anticipated in the allowance for financial options and
guarantees but should allow for market and policyholders reaction to such action. The management
discretion should assume that the shareholders pay out all claims even if the assets of the company
are exhausted. Management discretion is subject to any contractual guarantees and regulatory or
legal constraints. The application of such discretion must consider the environment arising in the
future projection which will likely be different from the current environment, but any changes from
current decision rules (for example regarding flexible crediting rates or policyholder bonuses) must
be supported by appropriate approvals.

G7.3 Dynamic policyholder behaviour should, where material, be in the allowance for the time value
of financial options and guarantees.

G7.4 The techniques used to calculate the allowance for the time value of financial options and
guarantees should incorporate an allowance for stochastic variation in future economic conditions
consistent with Principle 15. The economic projection assumptions should be consistent with how
the capital markets would value such cash flows and Principles 12, 13 and 14.

FRICTIONAL COSTS OF REQUIRED CAPITAL

Principle 8: An allowance should be made for the frictional costs of required capital for
covered business. Where Solvency II is adopted for solvency reporting, and the Solvency II
risk margin contains sufficient allowance for the frictional costs of required capital, no
further allowance for frictional costs of required capital is required.

G8.1 Frictional costs should be applied to the required capital as defined in Principle 5.

G8.2 Frictional costs should reflect the taxation and investment costs on the assets backing
required capital. The allowance for taxation should be based on the taxation rate(s) applicable to
investment earnings on assets backing the required capital.

G8.3 The required capital should be projected appropriately over the lifetime of the underlying risks.
Approximate projection methods such as the use of key capital drivers to determine the run off
pattern of the required capital may be used.

COST OF RESIDUAL NON HEDGEABLE RISKS

Principle 9: An allowance should be made for the cost of non hedgeable risks not already
allowed for in the time value of options and guarantees or the PVFP. This allowance should
include the impact of non hedgeable non financial risks and non hedgeable financial risks.
An appropriate method of determining the allowance for the cost of residual non hedgeable
risks should be applied and sufficient disclosures provided to enable a comparison to a cost
of capital methodology.

G9.1 The best estimate assumptions for non hedgeable risks used in the calculation of the time
value of options and guarantees and the PVFP should reflect at least the mean expectation of
outcomes of that risk variable. The total MCEV should allow for the mean impact of all non
hedgeable risks on shareholder value. The additional cost of residual non hedgeable risks as
defined in Principle 9, should therefore take account of any additional cost that arises due to the
difference between these two measures. This difference will result because of:

Asymmetries in the impact of the risks on shareholder value; and

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Risks that are not allowed for in the time value of options and guarantees or the PVFP (e.g.
operational risk).

G9.2 An allowance for uncertainty in the best estimate of shareholder cash flows as a result of the
non hedgeable risks (both symmetric and asymmetric risks) should be considered.

G9.3 The cost of non hedgeable financial risks should allow for any areas where the calibration of
the model to the market does not fully mitigate the market risk. This may occur when market
assumptions are required where there is no market or where the market is not sufficiently deep and
liquid.
G9.4 Regardless of the methodology used to determine the allowance for the cost of residual non
hedgeable risks, it should be presented as an equivalent average cost of capital charge. A single
average charge should be calculated across all residual non hedgeable risks, such that the present
value of charges levied on the projected residual non hedgeable risk based capital equates to the
cost of residual non hedgeable risks.

G9.5 The residual non hedgeable risk based capital should be determined using an internal
economic capital model. The assessment of the economic capital can be performed using a variety
of methods such as:

The use of a model to project the distribution of profits and losses arising from the residual non
hedgeable risks
The use of reasonable approximations such as an approach of aggregation of standard capital
charges for each residual non hedgeable risk based on appropriate shock scenarios.

The capital determined should be consistent with a 99.5% confidence level over a one year time
horizon, to meet the associated risks. Allowance for management actions can be made where
appropriate.

G9.6 The residual non hedgeable risk based capital should be projected appropriately over the
lifetime of the underlying risks. Approximate projection methods such as the use of key capital
drivers to determine the run off pattern of the residual non hedgeable risk based capital may be
used.

G9.7 An allowance should be made for diversification in the cost of residual non hedgeable risks
and in determining the equivalent average charge on the cost of capital methodology:

Diversification benefits within the non hedgeable risks of the covered business should be
allowed for provided the benefit is identifiable and quantifiable
Diversification benefits between hedgeable and non hedgeable risks of the covered business
should not be allowed for
Diversification benefits should not be allowed for between covered and non-covered business.

The allowance should reflect managements internal view of diversification benefits within portfolios
of business and between portfolios and businesses at a group level. Management should monitor
industry practice and ensure that the internal view is in line with the industry view.

G9.8 The method and basis on which allowance has been made for the cost of residual non
hedgeable risk should be disclosed. The equivalent cost of capital charge, the definition, method of
determining and amount of the associated capital on which the residual non hedgeable risk costs
are applied should also be disclosed.

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 Market Consistent Embedded Value Principles April 2016

New Business and Renewals

Principle 10: New business is defined as that arising from the sale of new contracts and in
some cases increases to existing contracts during the reporting period. The value of new
business includes the value of expected renewals on those new contracts and expected
future contractual alterations to those new contracts. The MCEV should only reflect in-force
business, which excludes future new business. The value of new business should reflect the
additional value to shareholders created through the activity of writing new business.

G10.1 New business is defined as covered business arising from the sale of new contracts (and, as
noted in G10.2, certain increases to existing contracts) during the reporting period, including cash
flows arising from the projected renewal of those new contracts.

G10.2 The VIF valued under Principle 6 should anticipate renewal of in-force business, including
any foreseeable variations in the level of renewal premiums but excluding any value relating to
future new business. New business should include recurring single premiums and changes to
existing contracts where these are not variations in the VIF. To distinguish between new business
and existing business, the following are examples of indications that premium represents new
business:

A new contract has been signed

Underwriting has been performed
A new policy or new policyholder details have been entered on administration systems
Incremental remuneration has become due to the distributor/salesperson
The pricing basis for the premium allows for the full cost of their marketing and distribution.

G10.3 The presence of renewal premiums in pricing assumptions is an example of evidence that
renewals would be included in the value of new business. Renewals should include expected levels
of:

Contractual renewal of premiums in accordance with the policy conditions at the valuation date,
including any contractual variation in premiums
Non-contractual variations in premiums where these are foreseeable ; for example, premiums
expected to increase in line with salary or price inflation
Recurrent single premiums where the level of premium is pre-defined and foreseeable.

Where Solvency II is adopted for solvency reporting (as set out in G1.5), the level of renewals may
be aligned to the Solvency II contract boundary requirements.

G10.4 Any variation in premium on renewal of in-force business from that anticipated, including
deviations in non-contractual increases, deviations in recurrent single premiums and re-pricing of
premiums for in-force business, should be treated as an experience variance on in-force business
and not as new business.

G10.5 The projection assumptions used to value new business should be consistent with those
used to value in force business.

G10.6 The contribution from new business ideally would be valued using point of sale assumptions.
However, this is not practical in all cases and notably non economic assumptions tend to be
updated less frequently than daily. Therefore assumptions can be chosen as of different dates with
clear disclosure of the timing required.

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G10.7 The value of new business should be calculated on a post tax basis, after time value of
financial options and guarantees, frictional costs of capital, costs of non hedgeable risks and net of
minority interests.

G10.8 Where new business margins are disclosed, these should be calculated as the ratio of the
value of new business (VNB) to the present value of new business premiums (PVNBP). Alternative
calculations of new business margins may be disclosed as further information.

PVNBP should be calculated:

By projecting the premiums expected in each future year, using assumptions and projection
periods that are consistent with those used to calculate the VNB. The PVNBP may be calculated
on a deterministic basis.
Using premiums before reinsurance, unless there are specific situations where this approach
would be misleading.
Using the same definition of new business as is used in the calculation of VNB and, where
appropriate, other reported sales figures.
By discounting the projected premiums using the reference yield curve as defined in Principle
14. Where the premium projection period is longer than the period for which reliable reference
rates are available, adjustments should be made that are consistent with the equivalent
adjustments used in calculating the VNB.
At the point of sale. This does not require assumptions to be at the point of sale; rather these
should be treated consistently with the timing used in the VNB.

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Assessment of Appropriate Non Economic Projection

Assumptions
Principle 11: The assessment of appropriate assumptions for future experience should have
regard to past, current and expected future experience and to any other relevant data. The
assumptions should be best estimate and entity specific rather than being based on the
assumptions a market participant would use. Changes in future experience should be
allowed for in the VIF when sufficient evidence exists. The assumptions should be actively
reviewed.

G11.1 The projection assumptions should be best estimate assumptions of each component of
future cash flow for each policy group. Relevant data can be internal to the company or external, for
example from experience analyses or inputs to pricing bases.

G11.2 Best estimate assumptions should be internally consistent. They should, where appropriate,
be based on the covered business being part of a going concern.

G11.3 The assumptions should be actively reviewed, and updated as appropriate, at least annually.

G11.4 Projection assumptions should be considered separately for each product group.

DEMOGRAPHIC ASSUMPTIONS
G11.5 Appropriate allowance should be made in the VIF for demographic assumptions such as
mortality, morbidity, renewals and future levels of withdrawals of in-force business. Such allowance
should be based on past evidence and expected future experience consistent with the assessment
of other projection assumptions.

G11.6 Dynamic policyholder behaviour should be considered in the allowance for the time value of
financial options and guarantees.

EXPENSES
G11.7 Future expenses such as renewal and other maintenance expenses should reflect the
expected ongoing expense levels required to manage the in-force business, including investment in
systems required to support that business and allowing for future inflation.

G11.8 Favourable changes in unit costs such as productivity gains should not normally be included
beyond what has been achieved by the end of the reporting period, unless Solvency II is adopted
for solvency reporting (as set out in G1.5) and such favourable changes are permitted under
Solvency II. In certain circumstances such as start-up operations, it may be appropriate to assume
that unit costs will reach their expected long-term levels within a defined period. For clarity, the
additional expenses before the long term level should be included in the VIF. The extent to which
such changes in unit costs have been anticipated should be separately disclosed.

G11.9 The nature and impact on shareholder value of any exceptional development and one-off
costs excluded from the unit cost base should be separately disclosed.

G11.10 Overheads should be allocated between new business, existing business and development
projects in an appropriate way consistent with past allocation, current business plans and future
expectations.

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G11.11 Holding companies operating expenses (including allocation of overhead expenses)

relating to the operation of the existing covered business should be allocated to the expense
assumptions.

G11.12 All expected expense overruns affecting existing covered business, including holding
company operating expenses, overhead costs and development costs such as those incurred in
start-up operations, in the current year must be allowed for.

G11.13 Where costs of managing the covered business are incurred within service companies,
profits or losses to the service companies are to be valued on a look through basis so as to give a
best estimate of the impact on future shareholder cash flows of the expenses to the group of
running the covered business. Actual and expected profit or loss to an internal group company on
services provided to the covered business should be included in allowances for expenses in the
MCEV. Where an external service company is used, the actual and future expected fees or charges
should be allowed for in calculating the MCEV. Where Solvency II is adopted for solvency reporting
(as set out in G1.5) the approach to allowing for the costs of managing the covered business may
be aligned to Solvency II methodology.

G11.14. Company pension scheme deficits should be allocated to the covered business expense
assumptions in an appropriate way.

TAXATION AND LEGISLATION

G11.15 Allowance in the projection must be made for all taxes and regulations in the relevant
jurisdiction affecting the covered business. These should follow the local treatment and be based on
best estimate assumptions, applying current legislation and practice together with known future
changes.

G11.16 The tax rates should consider the cash flows and tax position of the company.

G11.17 Where Solvency II is adopted for solvency reporting (as set out in G1.5) the approach to
allowing for tax may be aligned to Solvency II methodology.

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Economic Assumptions
Principle 12: Economic assumptions must be internally consistent and should be
determined such that projected cash flows are valued in line with the prices of similar cash
flows that are traded on the capital market. No smoothing of market or account balance
values or unrealised gains is permitted.

G12.1 Economic assumptions should be updated for each reported calculation of MCEV.

INFLATION
G12.2 Where appropriate market instruments are available price inflation assumptions should be
derived from them. In other markets, the price inflation assumption should be modelled considering
a reasonable spread compared to the reference rates. Other types of inflation should be derived on
a consistent basis.

SMOOTHING
G12.3 Asset values on which to base MCEV calculations must be consistent with values observable
in investment markets and not be smoothed. Unrealised gains should be allowed for in the
projections used to determine the projected shareholder cash flows. For the avoidance of doubt,
this does not preclude the projection of book values according to local regulations if following a
distributable earnings approach, in which case a portion of the unrealised gains are reflected in VIF
rather than free surplus.

G12.4 Investment returns must be those actually earned on a market basis over the period.

INVESTMENT RETURNS AND DISCOUNT RATES

Principle 13: VIF should be discounted using discount rates consistent with those that
would be used to value such cash flows in the capital markets.

G13.1 Where cash flows do not depend on, or vary linearly with market movements, an alternative
method can be used which assumes that assets earn, before tax and investment management
expenses, reference rates as defined in Principle 14 and all the cash flows are discounted using
reference rates which are gross of tax and investment management expenses.

G13.2 Where cash flows contain financial options and guarantees such that they do not move
linearly with market movements, asset cash flows can be projected and all cash flows discounted
using risk-neutral stochastic models. Alternative approaches, for example using deflators, may also
be used. In either method, the reference rates should be used as risk free rates.

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REFERENCE RATES

Principle 14: The reference rate is a proxy for a risk free rate appropriate to the currency,
term and liquidity of the liability cash flows.

Where the liabilities are liquid the reference rate should, wherever possible, be the swap
yield curve appropriate to the currency of the cash flows.
Where the liabilities are not liquid the reference rate should be the swap yield curve with
the inclusion of a liquidity premium, where appropriate.

The basic risk-free interest rate term structure, credit risk adjustment, Matching Adjustment
and Volatility Adjustment as calibrated and applied in Solvency II is a possible application of
this Principle.

G14.1 In evaluating the appropriateness of the inclusion of a liquidity premium (where liabilities are
not liquid) consideration may be given to regulatory restrictions, internal constraints or investment
policies which may limit the ability of a company to access the liquidity premium.

G14.2 Where the available financial market data used to set the reference rate is shorter than the
projected liability cash flows or Solvency II is adopted for solvency reporting and requires the
extrapolation of the reference rate, the data should be extended using an appropriate methodology,
for example:
Assuming that either spot or forward rates remain level at the longest available term;
If there exists a relevant government bond yield curve which is longer than the financial market
data used to set the reference rate, this could be used to extend the data by maintaining a
constant margin from the end of the available data and assuming it remains level thereafter; or
Forward rates may be assumed to converge to an ultimate forward rate as prescribed under
Solvency II.

G14.3 Where the financial market data used to set the reference rate is not available at all durations
between the longest and shortest, the intermediate data points can be calculated by interpolation
using an appropriate methodology. If the financial market data used to set the reference rate is not
available at the very short end, other appropriate market information should be used instead.

G14.4 Where a company invests in fixed-income assets which have a yield different to the
reference rates, the company should make appropriate adjustments to the projected asset cash
flows to ensure that the asset cash flows, discounted at the reference rates, equal the market value
of the assets.

G14.5 Where companies have businesses in territories and or currencies where swap curves do not
exist or do not provide a robust basis for producing reference rates then a more appropriate
alternative, such as the government bond yield curve, may be used.

STOCHASTIC MODELS
Principle 15: Stochastic models and the associated parameters should be appropriate for the
covered business being valued, internally consistent and, where appropriate, based on the
most recent market data. Volatility assumptions should, wherever possible, be based on
those implied from derivative prices rather than the historical observed volatilities of the
underlying instruments.

G15.1 Stochastic models should cover all material asset classes.

G15.2 The calibration of the model should be based on market values such as equity option implied
volatilities, swaption implied volatilities and the initial swap rate curve for market-traded contracts

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that are as similar as possible in nature to the option and guarantees contained within the liabilities.
The model should reproduce these values to a high degree of accuracy.

G15.3 Volatility assumptions should be based on the most recently available information as at the
valuation date. Where there are concerns over the depth or liquidity of the market or if the market
displayed unusual characteristics as at the valuation date then less recently observed measures
and expert opinion should be considered.

G15.4 The duration to maturity and the moneyness effect on the market implied volatilities should
be taken into account where material and practical.
G15.5 Correlations of asset returns and yields should be based on an analysis of data covering a
sufficient number of years which is considered to be relevant for setting current expectations. The
methodology used to derive the correlations should not normally change from year to year.
Companies should, where possible, check the reasonableness of their correlations against
externally available correlations.
G15.6 Closed form solutions can be used where such methods are sufficiently accurate.

PARTICIPATING BUSINESS
Principle 16: For participating business the method must make assumptions about future
bonus rates and the determination of profit allocation between policyholders and
shareholders. These assumptions should be made on a basis consistent with the projection
assumptions, established company practice and local market practice.

G16.1 Where regulatory/contractual restrictions or bonus participation rules are clear they should be
applied to projections of participating business.

G16.2 Projected bonus rates should be consistent with the projected future investment returns
used.

G16.3 Where the company has an established bonus philosophy, this should be applied to
projections of participating business.

G16.4 Where management has discretion over allocation of bonuses, including the realisation of
unrealised gains, projection assumptions should have regard to the past application of discretion,
past external communication, the influence of market practice regarding that discretion, any payout
smoothing strategy in place and any guidance from the local supervisory.

G16.5 It is possible that some of the assets (residual assets) allocated to the participating business
would remain at the end of the projection (after all bonuses have been allocated) as unallocated
surplus. This surplus should not be negative. Acceptable valuation treatments are to assume that
such unallocated surplus would be distributed over time via final bonus to existing business, or as
bonuses to both existing and future new business, and to value any shareholders participation in its
distribution at discounted value. All assets backing participating business should be assumed to be
realised within the projection period. Where Solvency II is adopted for solvency reporting (as set out
in G1.5), surplus funds as defined in Solvency II may be treated as a component of free surplus and
required capital rather than VIF.

G16.6 Where investment income on assets backing required capital is subject to profit participation
with policyholders, this may lead to an additional source of frictional cost of required capital, in
addition to those mentioned in Guidance 8.2.

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Disclosure
Principle 17: The scope of disclosures should be commensurate with the MCEV results
presented. The level of disclosures should be sufficient to enable users to understand the
methodology and assumptions, key judgements and sensitivities of the MCEV results being
presented to key assumptions. As a minimum the following should be disclosed:
Assumptions, methodology and key judgements underlying the MCEV results shown;
Sensitivities of results shown to changes in key assumptions1;
An explanation of results compared to the prior period; and
Any areas of non-compliance with the MCEV Principles and Guidance.

G17.1 Compliance with the MCEV Principles is compulsory and should be explicitly disclosed.
When the MCEV is referred to and Principles have been complied with but underlying Guidance has
not been complied with in its entirety, the areas of material non-compliance and reasons for non-
compliance should be specifically and separately disclosed.

G17.2 Examples of possible disclosures are shown in Appendix A.

1 For example, this might include the value of new business on alternative assumptions, such as with regard to contract
renewals.

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Glossary
Active review (of assumptions)
A review involving assessment of the existence and application of new evidence as to the
appropriateness of an assumption. The finding and conclusions of such a review should be
documented.

Appraisal value
The appraisal value is the value of the company based on a projection of future cash flows that
shareholders will receive from the company's assets as well as from its current and future
operations. The appraisal value is commonly defined as the MCEV plus the value of future new
business.

Asymmetric risk
A risk where equal and opposite movements upwards and downwards result in financial outcomes
that are not of equal magnitude.

Best estimate assumption

A best estimate assumption should be equal to the mean estimate (probability weighted average) of
outcomes of that risk variable.

Closed form solutions

An analytical solution to determine the value of financial options and guarantees. An example of a
closed form solution is the Black-Scholes formula.

Cost of capital methodology

An approach through which the cost of risk is determined, by taking the present value of the cost of
capital charges for all future risk based capital requirements until run-off

Covered business
The contracts to which the MCEVM has, in line with the Principles, been applied.

Distributable earning
The distributable earning for each territory is defined as the profit arising under the local statutory
basis and in addition the required capital flows.

Encumbered
Amounts of capital whose distribution to shareholders or removal from supporting the covered
business is restricted. Such restrictions should include requirements to maintain sufficient capital to
avoid intervention in management of the business by the regulator.

Entity specific assumptions

Assumptions that reflect managements estimate of the future allowing for the nature and
experience of the business.

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Financial options and guarantees

Features of the covered business whose behaviour is asymmetric in relation to observable capital
market variables. The following features are examples of financial options and guarantees:

Policyholder related guarantees, or options to change, the level or nature of benefits which may
or may not be exercisable at the discretion of the policyholder. Examples of such features may
include: guaranteed minimum maturity benefits and inflation linked retirement annuity options
Fund or company related guarantees or options. Examples of such features may include:
shareholder burn through cost for participating business and injection or withdrawal of capital
from funds that are subject to court or regulators schemes.

Foreseeable
Variations in future non-contractual premiums relating to an existing contract or recurrent single
premiums creating contracts are foreseeable when assumptions regarding their amount and timing
can be made that are consistent with other projection assumptions and based on reliable evidence.
Where such predictions are made, any future variation in premium levels relating to such contracts
should be treated as variance in experience of in-force business rather than as new business.

Free surplus
The market value of any assets allocated to, but not required to support, the in-force business
covered by the MCEVM as defined in Principle 4.

Frictional costs
The additional taxation and investment costs incurred by shareholders through investing the
required capital in the company rather than directly. Further, frictional cost may be due to any
sharing of investment income on required capital with policyholders.

GAAP equity
Under the accounting standard applied for reporting the groups primary financial statements
(GAAP), the amount reported as consolidated equity or net assets for the group.

Group MCEV Group Market Consistent Embedded Value

A measure of the consolidated value of shareholders interests in covered and non-covered
business.

Guidance
Guidance providing preferred interpretation is set out under each Principle. Compliance with
guidance is preferred but not compulsory, but the nature of, and reason for, any non-compliance
with guidance must be explicitly disclosed.

Holding company
A legal entity with a function of being a consolidating entity for primary financial reporting of covered
business.

Internal rate of return

Internal rate of return is the discount rate that would produce a value of new business equal to zero.

Implied discount rate

In the valuation of a block of business, the implied discount rate is the rate of discount such that a
traditional embedded value for the business equates to the MCEV.

Liquid
A liability is liquid if the liability cash flows are not reasonably predictable.

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Look through basis

A basis via which the impact of an action on the whole group, rather than on a particular part of the
group, is measured.

MCEV earnings
the change in MCEV over a period
plus the value of distributions from the assets backing the covered business (including disposals
of covered business)
minus the value of capital contributions to the covered business (including acquisitions of
covered business)
adjusted to remove the impact of foreign currency exchange rate changes between the main
reporting currency and those of the covered business.

MCEVM Market Consistent Embedded Value Methodology

The methodology for calculating and reporting Embedded Value, as set out by the Market
Consistent Embedded Value Principles.

Non hedgeable risk

Non hedgeable risk is defined to equal non hedgeable financial risk plus non hedgeable non
financial risk.

Non hedgeable non financial risk

Non hedgeable non financial risk is non financial risk where deep and liquid capital markets do not
exist to hedge such risk.

Non financial risk

Non financial risk is risk that is non financial in nature, such risk includes mortality, longevity,
morbidity, expense, persistency and operational.

Non hedgeable financial risk

Non hedgeable financial risk is financial risk where deep and liquid capital markets do not exist to
hedge such risk. For example, in developing markets or long dated equity options in developed
markets (e.g. US or Europe).

Non hedgeable risk based capital

The level of capital required to support the non hedgeable risks. Guidance on the calculation of the
capital is provided in Guidance 9.5.

Participating Business
Covered business in which policyholders have the right to participate (receive additional benefits) in
the performance of a specified pool of assets or contracts, fund or company within the group.

Present Value
The value of a future cash flow at the valuation date, discounted at a rate applicable to that cash
flow.

Present value of new business premium

The value of future premiums on new business written during the year discounted at a rate applied
to that cash flow.

Principle
Compliance with each of the 17 Principles is required.

Product Group
A product group is a set of contracts with similar risk characteristics.

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Recurrent single premium

A contract where premiums can be paid on a regular basis, but there is no contractual obligation as
to the frequency and level of the payments.

Reference rates
The reference rates are defined in Principle 14.

Renewal
A contract is renewed when a policyholder takes whatever action is required, typically payment of a
premium, in order to maintain their benefits under the contract. Where Solvency II is adopted for
solvency reporting, renewals beyond the Solvency II contract boundary may be excluded.

Required capital
The market value of assets attributed to the covered business over and above that required to back
liabilities for covered business whose distribution to shareholders is restricted as defined in Principle
5.

Residual assets
That part of the free assets allocated to the participating business which would remain at the end of
the projection (after all future bonuses have been allocated).

Service companies
Service companies are companies providing services to the covered business, or operations within
the covered business providing services outside the covered business. Service companies and their
clients can be internal or external to the group.

Shareholder net worth

Shareholder net worth is defined to equal the free surplus plus the required capital.

Solvency II
For the purpose of these MCEV Principles, Solvency II is defined to include equivalent market
consistent solvency regimes, for example, the Swiss Solvency Test.

Statutory basis
The valuation basis and approach used for reporting financial statements to local solvency
regulators.

Stochastic techniques
Techniques that incorporate the potential future variability in assumptions affecting their outcome.

Supplementary reporting
Reporting within financial statements that is:

Not covered by audit opinion; or

Produced using a methodology other than that on which the primary financial statements are
based.

Symmetric risk
A risk where equal and opposite movements upwards and downwards result in financial outcomes
that are of equal magnitude.

Time value and Intrinsic value

An option feature has two elements of value, the time value and intrinsic value. Intrinsic value is that
of the most valuable benefit under the option under conditions at the valuation date. Time value is
the additional value ascribable to the potential for benefits under the option to
increase in value prior to expiry.

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Value of new business

The additional value to shareholders created through the activity of writing new business.

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Abbreviations
The following abbreviations are used in this document:

Abbreviation Full term Defined

MCEV Market Consistent Embedded Value Principle 1
MCEVM MCEV Methodology Guidance 1.1
Group MCEV Group Market Consistent Embedded Value Guidance 1.3
VIF Value of in-force covered business Principle 3
PVFP Present value of future profits Principle 6
VNB Value of new business Guidance 10.8
PVNBP Present value of new business premium Guidance 10.8

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Appendix A Examples of possible disclosures

ASSUMPTIONS
A1.1 How economic and other business assumptions (e.g. mortality, persistency, expenses and
future asset allocation) are determined for each significant territory.

A1.2 Reference rates:

The market reference rates (for example rates at five year intervals) for each of the significant
territories
The methods used to extend the curves where a sufficiently deep market does not exist
Whether short duration rates are based on other market information
Alternative methods used where the reference rates are not based on the swap curves (as they
do not exist or do not provide a robust basis)
If the reference rates include a liquidity premium, the size of the liquidity premium along with, as
appropriate, the method to derive the premium and the liability classes where allowance is made

A1.3 The methods used to derive volatilities and correlations. Changes in the methods used since
the last reporting period.

A1.4 Where relevant, the foreign exchange rates used.

METHODOLOGY
A1.5 A clear, brief description of the covered business. Where covered business includes business
in several IFRS segments or where covered business does not constitute a full IFRS segment
sufficient qualitative and quantitative disclosure to ensure that a full understanding of:

The IFRS value of the business included in covered business; and

The MCEV value of the business

by IFRS segment is available.

A1.6 Treatment of consolidation adjustments, including inter-company arrangements such as

reinsurance or loans associated with covered business and allocation of holding company and
overhead expenses to covered business.

A1.7 For companies writing participating business, the approach used to determine future bonuses
and the treatment of any residual assets.

A1.8 The method used to determine the level of required capital. For each significant geographical
segment disclosed, the level of required capital expressed as a percentage of the level of solvency
capital at which the supervisor is empowered to take action.

A1.9 Where material, the management actions included in determining the time value of financial
options and guarantees.

A1.10 Frictional costs:

The basis on which allowance has been made for frictional costs.
The allowance for costs of investment expenses and taxation.
Any caps applied to the costs incurred.

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Where approximate methods have been used to project the required capital, a brief
description of the basis of projection.

A1.11 Non-hedgeable risks:

The method and basis on which allowance has been made for residual non hedgeable risks.
The risks allowed for including the nature of the risk and whether the impact on shareholder
value is symmetric or asymmetric.
The explicit description of non hedgeable risks for which there is sufficient allowance in the
time value of options and guarantees or the PVFP.
For the implied cost of capital charge, the definition, method of determining and amount of
associated capital on which the residual non hedgeable risk costs are applied, including the
allowance for management actions.
A description of the allowance for diversification.

A1.12 The method used to determine the value of new business including:

The definition of new business

Any changes in the definition of new business and the impact of such changes on the value of
new business
The basis of the new business calculation with regard to timing of assumptions and valuation;
Any changes in the timing of assumptions and valuation and impact of such changes on the
value of new business; and
Where there are material impacts on value related to interactions between new business and
existing business, the basis for presenting impacts.

A1.13 New business volumes:

The published new business premium volume and whether it is consistent with the definition
of new business.
Where PVNBP values are disclosed, a description of how the underlying assumptions have
been set including details of where premiums before reinsurance have not been used.
Where PVNBP is being used to compare new business volumes from one period to another:
The total amount of single premiums
The total annualised amount of annual premiums; and
The average annual premium multiplier, being (PVNBP total amount of single
premiums) / total annualised amount of regular premiums.

A1.14 The basis on which any disclosure of prior year comparatives on current assumptions has
been made.

A1.15 The nature, amount and impact on shareholder value of any exceptional development and
one-off costs excluded from the unit cost base for each significant territory, where material.

A1.16 The extent to which future productivity gains are anticipated including the impact on
shareholder value.

A1.17 The approach used to allow for tax.

A1.18 Financial options and guarantees:

The nature of, and techniques used to value, financial options and guarantees.
The amount of, and reason for, any alteration to the allowance for financial options and
guarantees made under Principle 7.

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A summary of the characteristics of the models used such as the calibration and
convergence.

A1.19 The basis of translation used for foreign exchange.

A1.20 Where material, the treatment and deduction to MCEV for financial types of reinsurance and
debt as required by Guidance 3.4.

Analysis of MCEV earnings; Reconciliation of opening and closing values

A1.21 The opening and closing MCEV, together with a breakdown of the change in the MCEV over
the period. An example of how the presentation can be broken down is included in Appendix B.

IMPLIED DISCOUNT RATES AND NEW BUSINESS INTERNAL RATE OF

RETURN

A1.22 Where implied discount rates (IDR) are disclosed, a clear, brief description of the IDR and
the traditional embedded value calculations underlying its calculation is typically disclosed. The IDR
is based on distributable earnings and will therefore be net of the required capital flows. Companies
typically disclose the real world assumptions used in calculating the IDR.

A1.23 Where internal rates of return (IRR) for new business are disclosed, they are calculated using
distributable earnings cash flows and equate to the rate that would result if the value of new
business is equal to zero. If companies disclose an IDR then the IRR are calculated using methods
and assumptions consistent with the IDR calculation. If IDR is not disclosed but an IRR is, then
companies typically disclose the real world assumptions used in calculating the IRR.

GROUP MCEV

A1.24 Where disclosed, a Group MCEV is presented in a suitable format including the covered
business under the MCEVM and the non-covered business valued as the unadjusted IFRS net
asset value. A mark to market adjustment is therefore not performed for external borrowings and
other items not on a mark to market basis under IFRS relating to non covered business. . However
adjustments may be required to ensure consistency between the value allocated to covered and
non covered business for example:

Where the IFRS treatment of pension scheme deficits does not bring in the full mark to market
value,
Where IFRS earnings are before tax; or
Where IFRS is gross of minority interests.

A1.25 An example of how an analysis of Group MCEV earnings could be presented is set out in the
template shown in Appendix C.

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RECONCILIATION TO IFRS NET ASSET VALUE

A1.26 A reconciliation of the MCEV shareholder net worth to the IFRS net asset value for the
closing position performed at the same level as the main MCEV result and analysis.

SEGMENTATION
A1.27 For companies with more than one business or geographical area of operation, the business
classifications disclosed should be consistent with those used for primary statements.

STATEMENT BY DIRECTORS
A1.28 The supplementary information typically includes a statement from the directors that the
MCEV accounts have been prepared in accordance with the MCEV Principles. Where reference is
made to the MCEV Principles in financial statements, but the guidance has not been materially
complied with, the areas of non-compliance and reasons for non-compliance are typically explicitly
disclosed in a separate section.

SENSITIVITIES
A2.1 Sensitivities:

For total MCEV results including consideration of the impact on shareholder net worth and
VIF
For new business values except where a particular sensitivity is not meaningful to the
assessment of new business values. New business sensitivities should assume that the
scenario arises after point of sale of the contract.

A2.2 Disclosure of sensitivities is intended to allow an informed analyst to make valid comparisons
on different assumption sets. Sensitivity scenarios should include consistent changes in cash flows
directly affected by the changed assumption(s), for example future bonus participation in changed
economic scenarios. The nature of management actions and policyholder behaviour assumed in the
sensitivities should be disclosed.

A2.3 Sensitivities do not apply to non covered business. In some jurisdictions the reserving basis
that underlies shareholder distributable cash flows is dynamic, and in theory some or all sensitivities
could change not only future experience but also reserving levels. Because modelling dynamic
reserves is extremely complex and the effect on value is second-order, it is recommended that in
performing sensitivities companies keep reserving bases constant and only vary future experience
assumptions, unless it is misleading to do so. In any case, the choice of methodology should be
clearly disclosed.

The following are examples of sensitivities that could be disclosed.

INTEREST RATES AND ASSETS

A2.4 100 basis point pa change in the interest rate environment
This sensitivity is designed to indicate the impact of a sudden parallel shift in the reference rates.
The sensitivity should be performed for both a 100 basis point pa increase and decrease in the
interest rate environment. It is not performed in isolation from other assumptions. Rather, there are
associated impacts on most other economic assumptions. Where possible, when calculating this
sensitivity, companies should allow for all consequent movements. However, the level of capital
assigned to the business should not be changed in this sensitivity. For some territories with low
interest rates, a 100 basis point reduction could lead to negative interest rates. Reference rates

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should not fall below 0% in this sensitivity, even if it creates a variation from the standard of having
a parallel shift.

A2.5 10% decrease in equity/property capital values at the valuation date, without a
corresponding fall/rise in dividend rental/yield
This sensitivity is designed to indicate the impact of a sudden change in the market-values of
assets. The situation being reflected is the equivalent of a fall of 10% of the absolute amount of the
future dividends or rental yields. Separate disclosure of equity and property movements is not
mandatory. However, an insurer may chose to disclose separately if the results were significantly
different for these asset classes.

A2.6 25% increase in equity/property implied volatilities at the valuation date

This sensitivity is designed to indicate the impact of an increase in market implied equity/property
volatilities on the cost of options and guarantees. The insurer may chose to disclose separately if
the cost of options and guarantees is sensitive to one particular asset category. The 25% increase
is a multiplicative increase in volatilities.

A2.7 25% increase in swaption implied volatilities at the valuation date

This sensitivity is designed to indicate the impact of an increase in market implied swaption
volatilities on the cost of options and guarantees. The 25% increase is a multiplicative increase in
volatilities.

EXPENSES AND PERSISTENCY

A2.8 10% decrease in maintenance expenses (i.e. the ongoing cost of administering
contracts)
This sensitivity is applied to the projected level of expenses. A sensitivity to changes in expense
inflation is not required.

A2.9 10% proportionate decrease in lapse rates (multiplicative, i.e. a base lapse rate of 5% pa
becomes 0.9 x 5% = 4.5% pa)
This sensitivity should reflect a single, downwards movement in lapse rates. Separate analysis of
contracts that are either positively or adversely affected by reduced lapse rates is not required.

INSURANCE RISK
A2.10 5% proportionate decrease in base mortality and morbidity rates (disclosed separately
for life assurance and annuity business)
It is useful information for companies to disclose separately the effect of mortality on life assurance
and annuity business, as the future experience for these different insured populations might vary
significantly. However, there are likely to be some contracts whose classification in one category or
the other is somewhat arbitrary (due to the availability of different types of benefit within a single
contract). The basis for classification should be disclosed where the effect on the sensitivity results
is material.

The disclosure should also include a description of whether any future management actions (such
as changes to pricing or valuation bases) are modelled in reaction to the changing
mortality/morbidity rates. No sensitivity to different trends in increasing longevity is required. An
insurer may choose to disclose such a sensitivity providing the basis for the sensitivity calculation is
disclosed.

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REQUIRED CAPITAL

A2.11 Required capital to be equal to the level of solvency capital

Guidance 5.3 allows required capital to be based on economic measures other than solvency
capital. In this sensitivity, the amount of required capital should be set equal to the level of solvency
capital at which the supervisor is empowered to take any action. The level of solvency capital
should be disclosed.

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Appendix B Presentation of analysis of earnings

The following template (including the line item label descriptors) is an illustrative example of primary
movement analysis disclosure.

The analysis only includes covered business.

Earnings on MCEV analysis

Free Required VIF MCEV
Surplus Capital
Opening MCEV
Opening adjustments
Adjusted opening MCEV

New business value

Expected existing business contribution (reference
rate) (1) (2)
Expected existing business contribution (in excess of
reference rate) (1) (3)
Transfers from VIF and required capital to free surplus

Experience variances
Assumption changes

Other operating variance

Operating MCEV earnings

Economic variances
Other non operating variance

Total MCEV earnings

Closing adjustments

Closing MCEV
(1)
This represents the following two components:
Expected earnings on free surplus and required capital; and
Expected change in VIF.
(2)
The earnings assuming assets earn the beginning of period reference rate.
(3)
The earnings is the component in excess of the reference rate reflecting the additional return consistent with the
expectation of management for the business.

B1 The analysis is on a net of taxation basis with movements disclosed on a line- by-line basis.

B2 The analysis is presented separately between free surplus, required capital and VIF, to better
explain the movement in capital flows.

B3 The expected existing business contribution to MCEV earnings is determined at a rate

representing managements expectation of the business. Such an expectation considers real world
earned rates of return, the projected change in the cost of financial options and guarantees and the
release of the residual non-hedgeable risk allowance. The methodology and assumptions in
determining the rate is disclosed.

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B4 The expected existing business contribution to MCEV earnings is presented in two components:

The earnings assuming assets earn the beginning of period reference rates; plus
The additional earnings consistent with managements expectation for the business.

B5 Any significant variance between the actual experience and that anticipated in the projection
assumptions is identified and explained (variance analysis). The effect of any significant change to
the method or approach for reassessing expected experience is also quantified and disclosed
(model changes). Similarly, any significant impact resulting from changes in experience
assumptions is disclosed and explained (assumption changes).

B6 Economic experience variances and changes in economic assumptions are not separately
disclosed. The MCEVM implicitly includes allowance for changes in economic assumptions over
time (as market consistent) and an explicit split is not a natural subdivision. The presentation of
economic variances includes the impacts of financial market conditions being different at the end of
the reporting period than those included in the expected existing business contribution and new
business value, net of the impacts of the expected management actions in response to those
changes. If management has made changes to crediting strategies they are included in the Other
operating variances.

B7 Movement items not part of total MCEV earnings are shown as either opening or closing or if
merited both opening and closing adjustments in a manner designed to best reflect the economic
return the company has achieved in the period. Opening and closing adjustments may be further
subdivided as Capital & Dividend flows, Foreign Exchange variance and Acquired/Divested
Business where appropriate. No other items are included in opening or closing adjustments.
Changes to models to reflect improvements or rectify errors (where no restatement is made) are
included in the Other operating variance line.

B8 The primary drivers of the Other operating variance and Other non operating variance lines
are disclosed where material. Mandatory local regulatory changes including taxation, as well as
fundamental business reorganisations such as in a court-approved scheme of reorganisation, would
in normal circumstances be shown in Other non operating variance. The impact of management
actions in these areas including taxation planning actions could be reflected in Other operating
variance.

B9 The amount of any positive or negative earnings in respect of services provided to the covered
business by another part of the Group that is not reflected in the reported MCEV or value of new
business is disclosed.

B10 Supplementary disclosures show the total MCEV movement by geographic segment used for
IFRS segmental reporting purposes.

B11 Companies may as a supplementary measure present the movement in MCEV as part of pre-
tax profits, by grossing up the after-tax movement by attributable shareholder tax, and adding this
attributable tax to other tax in the income statement. The approach applied for determining the
attributable tax for individual territories, type of business, or other relevant groupings is applied
consistently from period to period unless a change in approach can be justified. The approach
applied, distinguishing between the territories, type of business or other relevant groupings is
disclosed.

B12 Where a percentage return on MCEV is disclosed this is calculated on the Adjusted opening
MCEV unless it is materially misleading to calculate the return without including the specific timing
of non-return items.

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Appendix C Group MCEV analysis of earnings

The following template (including the line item label descriptors) is an illustrative example of Group
MCEV disclosure. An example footnote disclosure has been included that may not apply to all
companies.

Covered Non covered Total Group

business MCEV business IFRS MCEV
Opening Group MCEV
Opening adjustments
Adjusted opening Group MCEV

Operating MCEV earnings

Non-operating MCEV earnings
Total MCEV earnings

Other movements in IFRS net

equity

Closing adjustments

Closing Group MCEV

Example footnote: Non covered business reflects CU Xm less profit than IFRS reporting
representing asset management profits for managing covered business assets that has been
modelled with the covered business MCEV.

The line items in the tables in Appendix B & C above are fixed. Additional lines are only included
where these are subdivisions of existing lines. If companies wish to disclose other lines this is done
in supplementary tables and not in these analyses.

C1 Movement items not part of total Group MCEV earnings are shown as either opening or closing
or if merited both opening and closing adjustments in a manner designed to best reflect the
economic return the company has achieved in the period. Opening and closing adjustments may be
further subdivided as Capital & Dividend flows, Foreign Exchange variance and
Acquired/Divested Business where appropriate. No other items are included in opening or closing
adjustments.

C2 The analysis presents the movement of covered and non-covered business. Where financial
service groups show a primary IFRS segmentation that includes all covered business within the one
segment the standard template is still presented and additional information disclosed to enable an
understanding of the interactions between covered and non-covered business within the long term
business segment.

C3 The analysis is shown on a net of tax basis with the option for companies to show additional
disclosures showing the pre tax analysis.

C4 The total earnings for non-covered business equals the IFRS Net Income plus the relevant
constituents of Other Comprehensive Income.

C5 The operating earnings for non-covered business starts from the IFRS operating profit with any
adjustments made to align more closely with the MCEV operating earnings quantitatively disclosed.

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Sufficient disclosure is made to provide an understanding of the basis used and to provide a bridge
to the companys IFRS disclosures.

C6 Sufficient note disclosures are shown to enable an understanding of movements and cross
subsidies such as adjustments to non covered business earnings to allow for look-through profits
counted in covered business.

C7 Where a percentage return on Group MCEV is disclosed this should be calculated on the
Adjusted opening Group MCEV unless it is materially misleading to calculate the return without
including the specific timing of non-return items.

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