International Insurance Foundation

International FinancialReporting StandardsNovember 7, 2008 | Washington DC

*connectedthinking

Slide 2PricewaterhouseCoopers

International Financial Reporting Standards (IFRS)

Agenda

•The migration towards IFRS in the US and abroad

•IFRS accounting and reporting for insurers

•Interaction of accounting rules with capital and regulatoryframeworks

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The migration towards IFRS in the US and abroad

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A Global Revolution for Listed Companies

Countries converging to IFRS with the goal of adoptionCountries that require or permit IFRSCountries with no current plan to adopt

Source: Economist Intelligence Unit

0.8IFRSAustralia

0.9IFRS or US GAAPSwitzerland

1.0IFRSSpain

1.0IFRSHong Kong

1.2IFRSGermany

1.5Converging to IFRSCanada

1.7IFRSFrance

3.1IFRSUK

4.7Converging to IFRSJapan

17.0US GAAPUS

MarketCap ($T)

StandardCountryTop 10 Global Capital Markets

More than 100 countries require, permit or are converging to IFRS.

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Some Insurers reporting with IFRS

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Local GAAP/Statutory accounting also converging towards IFRS

Full implementation by 2011 for listedcompanies and certain other entities

KoreaLocal GAAP has incorporated IFRS forboth listed and non-public companies withfew modifications

Australia

No definite planMexicoFull implementation by 2010 for listedcompanies and certain financial institutions

Brazil

SEC announced proposal for mandatoryadoption 2014-2016. No current plansfor non-listed or statutory change.

Fully implemented in 2005 for listedcompanies; Considering incorporatingIFRS into UK GAAP by 2011.

Partial now, working towardsconvergence

Full implementation by 2011

Status of IFRS

US

UK

Thailand

India

Country

Local GAAP has incorporated IFRS withfew modifications

Hong Kong

New standards in 2007 are similar to IFRSChina

Full implementation by 2011 for listedcompanies and financial institutions

Canada

Expected full implementation by 2011 forlisted companies

Argentina

Status of IFRSCountry

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Transition to IFRS in the US appears inevitable, but withchallenges

• Globalization will drive a change to IFRS in the US

• Current US GAAP / IFRS convergence project has certain limitations

• Domestic issuers should be allowed to use IFRS as Foreign PrivateIssuers are currently

• IFRS provides opportunities to:

- Increase comparability of financial information around the world

- Broaden access to capital markets

- Reduce complexity and simplify financial reporting

- Implement a principles-based framework in the US

- Save costs from harmonized global reporting systems

- Alignment of accounting for both capital markets and regulatorypurposes

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Expected timeline for US transition

IFRS accounting and reporting for insurers

Slide 10PricewaterhouseCoopers10

Principles vs. Rules - A simpler set of accounting guidanceIFRS

• Standards─ IFRS: 8─ IAS: 29

• Interpretations─ IFRIC: 8─ SIC: 11

• Framework

US GAAP• Standards:

─ SFAS: 106─ APB: 16─ ARB: 4

• Interpretations─ FSP: 49─ EITF: 108─ FIN: 27

• Concepts Statements: 6• Other

─ FTB: 32─ AICPA Interpretations: 6─ SOP: 51─ AICPA Industry Audit and

Accounting Guides, SABs, DIGs…

2,500 pages 25,000 pages

• Less rules result in moreconsideration of a transaction’seconomics

• Allows for more use of reasonablejudgment

• Footnote disclosures increase inimportance to allow comparabilitybetween companies

Slide 11PricewaterhouseCoopersPutting IFRS in Motion 10

Current Insurance IFRS - Summary

IFRS Insurance

IFRS

Investment

USGAAPInsurance

USGAAPInvestment

• Current IFRS requires the classification ofcontracts as insurance, deposit or servicecontracts

• For insurance contracts, existing accountingpolicies for may continue (exemption fromIFRS Hierarchy)

• This exemption is subject to certain keyrequirements:

• Liability adequacy test• Reinsurance impairment test• No liability for future claims on future

contracts (like equalization)• No offset of reinsurance against

insurance• De-recognition criteria for insurance

liabilities• Extensive disclosure requirements and

guidance

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Current Insurance IFRS – Disclosures are the primary focusPrinciple 1: Identify and explain amounts in financial statements arising from insurancecontractsAccounting policies and significant assumptionsHistorical loss development tables and portfolio detailsChanges in amounts and assumptions, including reconciliations of changes in liabilities,reinsurance assets and DAC

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Current Insurance IFRS – Disclosures are the primary focusPrinciple 2: Help users evaluate the nature and extent of risks arising from insurancecontractsObjectives, policies and processes for managing & mitigating risksTerms and conditions and affect on cash flowsSensitivity of financial results for changes in all variables that have a material impact onassets, liabilities, income and expenses (e.g. interest rates, inflation rates, equity markets,mortality, persistency, frequency and severity)

Source: Legal and General, 2007 Annual Report

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Interaction of future accounting rules with capital and regulatory

frameworks

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Future Insurance IFRS – “Phase II” insurance contract valuation

• Current IFRS for accounting for insurance contracts is a mixed model whichmaintains existing statutory practices.

• Results in inconsistency between companies, less relevance and reliability.

• The IASB started with a clean slate to develop Phase II.

• Key provisions of Phase II Discussion Paper- Single accounting model- Discounting of non-life business liabilities (and life)- Current exit value to a hypothetical market participant- Preference for prospective cash flows

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Timetable for IFRS Phase II and Solvency II

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Synergies from a common model

IFRS Phase II Solvency II MCEV

Information used invaluation models

Phase II

MCEV

Solvency II

EconomicCapital

Inputs &Assumptions

Reporting

Data underpinning theaccounting models willbe common, but

Need to understand thedifferent outputs thatdata will need topopulate

Economiccapital

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Similarities and differences

Solvency IIIASB

Liabilities

FreeSurplus

MCEV

Solvency CapitalRequirement

Minimum CapitalRequirement

BestEstimate

fornon

hedgeablerisks

RiskMargin

MarketConsistentvaluation

forhedgeable

risks

Market Valueof Assets

Expected PVfuture cash flows

Risk Margin

Service Margin

Equity

Assets

Required Capital

EmbeddedValue

PVFP

VIF

FrictionalCosts

TVFOGCRNHR

Tot

alM

CE

V

EconomicLiability

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Similarities with Solvency II

• Market consistent

• Best estimate

• Discounted

• Risk Margin

• Transparency

• Qualitative as well asquantitative

• Risk management focus

• Sensitivity testing

Differences from Solvency II

• Definition of insurance

• Risk margin – method

• Service margin

• Diversification

• Guaranteed insurability

• Credit standing of liabilities

• Categories of assets and liabilities

• Audit materiality versus relevance tosupervisor

• Segmentation analysis

TechnicalProvisions

Disclosure

Synergies between Solvency II and IFRS Phase II

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What some companies are doing now to prepare?

• General education and awareness raising• IFRS impact assessments, in US and abroad

- Technical accounting differences- Business implications (eg. products, people, process,

systems)- Worldwide accounting and reporting structures

• Assessments of economic capital, IFRS, MCEV• Participating in the debate on the development of standards

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James L. Svab, CPA

Partner – Financial Services

(312) 298-2304

James.L.Svab@us.pwc.com