Life business, embedded value and analysis of change

Johan DaemenGeneral Manager, Life insurance

Foto gebouw

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2

Agenda

Life insurance activity & scope

Terminology

ANAV (“Adjusted Net Asset Value”) Components Roll forward 2002-2003

VBI (“Value of Business In Force”) Components Assumptions Sensitivities Roll forward 2002-2003

VNB at date of sale (“Value of New Business”)

3

Life business, overview

Growth in Total Life Premium Income 1998-2003 (‘000 EUR)

1 079 465100%

1 341 980122%

1 867 037170% 1 666 842

152%

2 230 521203%

2 547 557232%

926 707 407 478 408 475 437 679

1 259 8591 780 155

170 758 934 502

1 458 562 1 229 163

970 662

767 402

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

1998 1999 2000 2001 2002 2003

Non Linked Unit LinkedMinor changes to published figures in order to improve model accuracy

4

Life business, overview

Growth in Technical Provisions Life 1998-2003 (‘000 EUR)

4 373 520100%

5 662 602129%

6 783 772155%

7 589 874174%

8 697 296199%

10 614 953243%

4 162 741 4 467 156 4 497 804 4 637 7665 745 188

7 351 642

1 195 4462 285 968

2 952 1082 952 108

3 263 311

210 779

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

1998 1999 2000 2001 2002 2003

Non Linked Unit Linked

Minor changes to published figures in order to improve model accuracy

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Scope

Subsidiaries under review :

KBC Insurance Belgium + Fidea + Vitis Life

total technical provisions : 9 987 948

Modelled: 88 % of the mathematical reserves 94.7 % of the total premium income in 2003 99.8 % of the new premium income in 2003

Subsidiaries not under review :

Central European Subsidiaries + Secura(CSOB, K&H Life, Warta Vita, Ergo)

total technical provisions : 627 0052

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PV TiedSurplus

Life

Value In

Force

Terminology

“Embedded Value”

ShareholdersEquity

EconomicAdjustments

ANAV

=

FreeSurplus

Asinvestment

for

Embedded Value

> Equity adjustments> Asset adjustments

> Resilience Reserves > Tax assets and liab.

TiedSurplus

Life

ANAV

Other Allocated Surplus

PVFP*VBI**

(PVFP- CostTied Surplus)

TiedSurplus

Lifeor

KBC standard

Embedded Value

FreeSurplus

FreeSurplus

Other Allocated Surplus

Other Allocated Surplus

Other Allocated Surplus = Tied Surplus Non Life + Other Tied Surplus *PVFP = Present Value of Future Profit

**VBI = Value of Business In Force

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Embedded Value : total figures

(‘000 EUR)

31/12/2002 31/12/2003

VBI LifePVFP

Cost of tied surplus

365 919511 060

(145 141)

372 798564 771

(191 973)

Tied Surplus Life* 588 026 839 837

Value In Force 953 945 1 212 635

Other Surplus 828 716 922 769

Embedded Value 1 782 661 2 135 404

* Some methodological changes took place in the calculation of the tied surplus life

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Adjusted Net Asset Value (ANAV): composition

“Adjusted Net Asset Value” (ANAV) =

[+] Shareholders Equity

[+] Equity Adjustments “Provision for financial risks”

[+]/[-] Asset Adjustments Unrealised capital gains on the investments,

except for the bond investments in the life portfolio (“buy-and-hold”-philosophy)

Goodwill is deducted

[+] Additional Reserves Catastrophe and equalisation reserves Additional reserves life

[-] Tax assets and liabilities on the above

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Adjusted Net Asset Value (ANAV): as at 31/12/2003

('000 EUR)

+103 105

-247 912

+127 832

+227 048

-152 379

1 7

04 9

12

1 7

62 6

06

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

shareholdersequity

equityadjustments

assetadjustments

additionalreservesNon life

additionalreserves life

tax assetsand liab.

ANAV

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Adjusted Net Asset Value (ANAV):Change 31/12/2002 – 31/12/2003

+ 274 705

- 134 853

+ 228 980

- 23 008 1

416

782

1 7

62 6

06

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

1 800 000

2 000 000

Anav31/12/2002

Profit in 2003 DividendsPaid

Asset ValueAdjustments

Other Anav31/12/2003

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ANAV: KBC RBC requirementsfor Life business

KBC RBC Requirements(legal requirements)

% of the reserves

% of sumat risk

Unit Linked with legal SM > 0 1.25%(1%)

0.375%(0.3%)

Unit Linked with legal SM = 0 0.5%(0%)

0.375%(0.3%)

Non Linked Pension products75 F.I./ 20 S./ 5 P. mix

10.2%(4%)

0.375%(0.3%)

Non Linked Investment products 87 F.I./11 S./ 2 P.mix

7.97%(4%)

0.375%(0.3%)

The current RBC for Life activities is 215 % of the legal required solvency margin for the Life Activity

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Value of Business in Force (VBI): Economic Assumptions

2002 2003

10 year bond yield

(Rate from 2006 on)

4.40% pa

(5.00% pa)

4.17% pa

(5.00% pa)

Risk Prem. on equity 2.50% pa 2.50% pa

Risk Premium used for discount rate 3.50% pa 3.50% pa

Discount rate* (= Cost of Capital) 8.50% pa* 8.50% pa*

Wage inflation

(Rate from 2006 on)

2.80% pa

(3.00% pa)

2.90% pa

(3.00% pa)

* Based on the bond yield in the long run

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Value of Business in Force (VBI): Non Econonomic Assumptions

Expenses Expenses are allocated to the different products and activities in

such a way that the total expenses in the study equal the total expenses in the statutory accounts

Expenses increase with expected wage inflation 2-3% per annum Future expense reductions programs and synergies are not taken

into account

Mortality Assumptions based on most recent industry experience were used

Lapses Assumptions based on annual experience, investigations of

surrenders and paid-ups, with a reasonable safety margin Assumptions are set on by product and distribution

channel

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Value of Business in Force (VBI): Overview

(‘000 EUR, only reserves of modelled business)

PVFP VBI VIF PVFP/reserves

VBI/res.

reserves

2002 511 060 365 919 953 945 7.19% 5.15% 7 104 098

2003 564 771 372 798 1 212 635 6.45% 4.26% 8 756 832

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+ 10% - 10%

Expenses - 4.77% + 4.77%

Lapses - 2.18% + 2.35%

Mortality - 3.35% + 3.36%

+ 0.5% - 0.5%

Discount rate - 7.59% + 8.09%

Investment Return* + 8.49% - 9.34%

Value of Business in Force (VBI): Sensitivity Analysis

Effect on VBI

* The discount rate is changed consistently with the change in investment return. No profit sharing was given to the 4.75% guarantees in the policies.

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Value of Business in Force (VBI): Sensitivity Analysis

Current RBC KBC Insurance

100% of the legal

SM

150% of the legal

SM

200% of the legal

SM

Embedded Value 2 135 404 2 238 180 2 193 649 2 149 118

VIF 1 212 635 866 743 1 017 797 1 168 851

VBI 372 798 475 574 431 043 386 512

Changing the solvency margin

(‘000 EUR)

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Value of Business in Force (VBI):Change 31/12/2002 – 31/12/2003

(EUR)

-36 357 152

+14 416 570 +53 016 901

-61 265 326

+31 570 445

+3 159 540 +2 338 592

365

918

865

372

798

434

200 000 000

250 000 000

300 000 000

350 000 000

400 000 000

450 000 000

VBI 31/

12/2

002

mod

el Cha

nges

Chang

e no

n ec

on. a

ssum

ption

s

Unwin

ding

disco

untin

gCas

hflow

to A

NAV

VNB as o

f 31/

12/2

003

Varian

ces o

ver 2

003

Chang

e ec

on.a

ssum

ption

sVBI 3

1/12

/200

3

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Value of Business in Force (VBI): Change 31/12/2002 – 31/12/2003

Effect of ‘new business’ sold in 2003 (as at 31/12/2003): EUR

APE (Annualised Premium Equivalent)

PVFP of new business at 31/12

VNB of new business at 31/12

PVFP as % of APE

VNB as % of APE

2003 210 834 91 087 53 017 43.20% 25.15%

(‘000 EUR)

Non-Linked83%

Unit Linked17%

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Value of New Business (VNB): New business 2003 at date of sale

APE (Annualised Premium Equivalent)

PVFP VNB PVFP as % of APE

VNB as % of APE

Total 210 834 76 804 38 649 36.43% 18.33%

(‘000 EUR)

Non-Linked70%

Unit Linked30%

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Review

Lane Clark & Peacock Belgium reviewed the methodology and assumptions used by KBC Insurance in the determination of the Embedded Value at 31/12/2003, the Value of 2003 New Business and the analysis of the change in the value of in-force business for the Life Insurance activities of KBC Insurance.

It is the view of Lane Clark & Peacock Belgium, based on the data made available, that the assumptions used are reasonable and that the methodology used by KBC Insurance is in line with basic principles described in appropriate literature.

Our assignment included a review of the calculations.This review was not a detailed verification of the correctness of all calculations. This review was a limited high-level reasonableness checks on the results and included a detailed review on a limited part of the insurance portfolio of KBC Insurance. No material issues have been discovered.

Therefore, based on our work and our validation report on the work carried out by KBC Insurance, we consider the embedded value, the value of new business and the analysis of the change in the value of in-force for the life business to be reasonable and suitable for inclusion as supplementary information to the Group’s consolidated accounts.

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Cautionary Statements

Embedded Value is the result of cash-flow projections with underlying assumptions and expectations. The values in this presentation are calculated on a deterministic basis.

Many assumptions like general economic conditions, performance of financial markets, taxes, changes in laws, frequency and severity of insured loss events, mortality and morbidity levels and trends, and others are beyond KBC’s control. A modification of assumption can result in a significantly different Embedded Value. Deviations from assumed experience are normal and are to be expected. Even without any change in the parameters, actual results will vary from those projected due to normal random fluctuations.

Embedded Value cannot be considered as an absolute value. This value together with a sensitivity analysis allows the recipient to obtain an idea of the magnitude of the expected value created by their insurance activities.

Under no circumstances should the inclusion of the projections (including the relevant underlying assumptions and expectations) be regarded as a representation, warranty or prediction that the business will achieve or is likely to achieve any particular results.