By Myles Neligan
LONDON, Aug 3 (Reuters) - British life insurers reporting
half-year results this month plan to simplify their notoriously
complex financial statements in a move that could lift their
Standard Life, Britain's fourth-biggest life insurer, two
weeks ago became the latest to say it would prioritise
International Financial Reporting Standards (IFRS) in its
earnings statements, relegating the more complex Embedded Value
(EV) approach to the margins.
Standard Life's embrace of IFRS follows similar moves by
rivals Aviva and Legal & General, and comes in response to
growing investor distaste for EV, once touted by the industry as
its preferred performance measure, but now seen as opaque,
inconsistent, and downright confusing.
"People are explicitly saying we like your story, we like
your strategy, but until we understand some of the numbers more
clearly, it's very difficult for us to invest," Standard Life
finance director Jackie Hunt told Reuters.
The shift away from EV is likely to be accelerated by a
proposed new IFRS insurance accounting standard, published last
week, which aims to harmonise inconsistent practices currently
tolerated under both IFRS and EV.
This would make it easier for shareholders to compare
insurers' financial performance, and to assess the sector's
prospects relative to other industries, greatly increasing its
appeal to investors, according to Francesco Nagari, a partner at
audit firm Deloitte.
"Insurance will no longer be the ugly duckling of the
capital markets because you can't understand how they make money
unless you have a degree in actuarial science," Nagari said.
Life insurers' shares could certainly do with a lift. The
British life insurance index is down 40 percent since the onset
of the credit crunch in the autumn of 2007, against a fall of
just 20 percent for the wider FTSE 100.
DIVIDENDS ARE KEY
EV profits include the present value of future earnings from
existing policies, a calculation that critics say relies on
variable and sometimes questionable assumptions about future
customer behaviour and interest rates.
IFRS, in contrast, takes only current year income into
account, avoiding the inherent uncertainty of present value
Analysts say IFRS also better illustrates the company's cash
postition and therefore its ability to pay dividends -- a
consideration that has become especially important to investors
since Aviva and L&G cut their payouts last year.
"Life insurance has always fundamentally been a yield-driven
sector, so you want to know what the level of the dividend will
be, how much it's going to grow, and what the risk there is of
it being cut," said analyst Tim Young at Euler Securities.
"EV doesn't really give you that."
The International Accouting Standards Board, which oversees
IFRS accounting rules, plans to publish a final draft of the
proposed new insurance standard by the middle of next year.
If the new standard is adopted, IFRS will have suceeded where
EV failed. In 2005, insurers enthusiastically adopted a revised
version of EV, known as European Embedded Value, which also
aimed to iron out inconsistent accounting practices.
But five years on, analysts and industry executives
acknowledge that EV reporting remains as variable as ever.
However, EV -- developed in the mid-1990s amid concerns that
without some recognition of future earnings, high sales costs
such as broker commissions were distorting profits when sales
were strong -- will continue to feature in insurers' financial
As the best measure of the value built up by an insurance
company over time, EV will continue to be useful for long-term
investors, and will also remain the touchstone for M&A bankers
as they scour the sector for takeover targets.
"It's what people look at when they think about buying
businesses. I don't think it's going to go away," said Bill
Cooper, a managing director at Lloyds TSB Corporate Markets'
financial institutions group.
(Editing by Sitaraman Shankar)