Update on the Embedded Value of the Life insurance business

Regulated information* - 31 March 2010 (08.00 a.m. CEST)
 
Highlights
 
  * The embedded value of KBC's life insurance business came to 3.5 billion
    euros (10.3 euros per share) at 31 December 2009
  * The value of new business for 2009 totalled 53 million euros (0.16 euros per
    share), and the new business margin amounted to 19% (measured on an
    Annualised Premium Equivalent (APE) basis) and 2.3% (measured on a Present
    Value of New Business Premiums (PVNBP) basis)
  * The scope of the model was reduced to exclude Fidea and Vitis, due to the
    divestment program.
  * Market Consistent methodology used
  * Explanatory memo available on www.kbc.com <http://www.kbc.com/>
 
Market Consistent Embedded Value, update as at 31 December 2009
 
The Market Consistent Embedded Value (MCEV) reflects the economic value of the
life insurance portfolio by projecting anticipated future cashflows and using
market consistent assumptions, among other factors.
 
At year-end 2009, the MCEV of the group's life insurance activities stood at
3 503 million euros (10.3 euros per share).
 
To calculate the MCEV, the Value of Business In Force (VBI) is added to the
Adjusted Net Asset Value (ANAV). The ANAV of the life insurance business,
amounted to 2 558 million euros, while the VBI came to 945 million euros.
 
The total MCEV increased 29% yoy as the total 2008 MCEV was adversely impacted
by prevailing financial market conditions. The Value of Business In force (VBI)
even doubled, largely the result of the increase of unrealised capital gains and
the lower risk profile (decrease in implied volatilities). The ANAV (+14% yoy)
benefited from a capital increase of 250 million euros.
 
The value added by new policies written in 2009 (Value of New Business) amounted
to 53 million euros. The yoy decrease can mainly be explained by low interest
rates. The new business margin on an Annualised Premium Equivalent basis came to
19%, or 2.3% when compared with the present value of new business premiums.
 
The economic sensitivities on MCEV have been sharply reduced. If equity markets
had been 10% lower at the start of the cashflow projection, the resulting MCEV
would not have been materially lower. Also, if the interest yield curve had
shifted up by 100 basis points at the start of the cashflow projection, the
resulting MCEV would not have been materially impacted.
 
Methodology and scope
 
KBC applies a Market Consistent Embedded Value (MCEV) framework.
 
The scope of KBC's MCEV model is the life insurance business in Belgium, the
Czech Republic and Poland. This scope corresponds to 98% of the life insurance
reserves and 95% of the life insurance premium inflow in 2009. The book value of
the corresponding shareholders' equity amounts to 2.8 billion euros. In our
disclosures in previous years, the business of Fidea and Vitis was taken into
account. For comparison purposes, the 2008 figures have been restated
retroactively.
 
The model's scope covers the entire in-house value chain from origination to
distribution of life insurance policies. Some 6% of the MCEV and around 10% of
the Value of New Business was generated by the Asset Management division through
managing investment units linked to insurance policies.
 
To calculate the MCEV, the Value of Business In Force (VBI) is added to the
Adjusted Net Asset Value (ANAV, adjusted shareholders equity allocated to the
life insurance business). The VBI equals the sum of the discounted values of all
future profits of the life portfolio. It explicitly takes the cost of written
guarantees and embedded options into account, as well as a capital charge for
non-hedgeable risks (such as longevity, operational risks, etc.).
 
The Value of New Business (VNB) includes the value of new policies written in
2009 and is calculated in the same way as the VBI.
 
The published figures do not include:
 
·       the value of the non-life insurance business;
 
·       the value of the life business in Slovakia, Bulgaria, Hungary and
Slovenia;
 
·       the value of the expected future life insurance business.
 
Valuing both the non-life insurance business and the value of the life business
in Slovakia, Bulgaria, Hungary and Slovenia (out of scope of the MCEV
calculation) at 1.0 times book value, implies another EUR 1.7 per share (besides
the EUR 10.3 MCEV per share for the life business).
 
Towers Watson, the actuarial consultancy, carried out an independent review of
the disclosures and concluded that the methodology and assumptions used comply
with the European Embedded Value Principles and European guidance on embedded
value.
 
Documentation
 
An in-depth explanatory memo is available on www.kbc.com <http://www.kbc.com/>.
 
* This news item contains information that is subject to the transparency
regulations for listed companies.
 
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