Agesa Hayat ve Emeklilik : MCEV FY21 Report

AGESA HAYAT VE EMEKLİLİK A.Ş.

MARKET CONSISTENT EMBEDDED VALUE

REPORT

FULL - YEAR 2021

Actuary & Business Risk

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Market Consistent Embedded Value Report

1.	Introduction	2
2.	Definition of Embedded Value	2
3.	Covered Business	3
4.	Methodology and Components of MCEV	3
a.	Shareholders' Net Worth	3
b. Value of In-force Covered Business	4
5.	Value of New Business	5
6.	Additional Matters Relating to the MCEV Methodology	6
7.	Assumptions	6
a.	Economic Assumptions	7
b.	Non-Economic Assumptions	8
8.	Market Consistent Embedded Value Results	11

9. Reconciliation from IFRS Shareholders' Equity to MCEV Shareholders' Net

Worth	12
10.	Analysis of MCEV Earnings	13
11.	New Business Results	15
a.	New Business Bridging	16
12.	Maturity Profile of Business	18
13.	Sensitivity Analysis	19

14. Statement of Directors' Responsibilities in respect of the MCEV Basis 22

15. Independent Opinion

23

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1. Introduction

Embedded value is a financial reporting metric specifically developed for long-term life insurance and pension business over the years. It aims to overcome the known shortcomings of accounting metrics by taking into account the projected cash flows throughout the lifetime of the products using best estimate assumptions. This is necessary to give a more economic and transparent picture of the profitability of the long-term life insurance products since writing new business typically leads to a financial loss on day one in the financial statements. The projected expected profits arising out of the cash flows are adjusted by a risk allowance to reflect the inherent uncertainties of such projections. Additionally, there is an allowance for cost of capital, to reflect the cost of holding capital. This report should be considered as an addition to and not as a substitute for AgeSA's primary financial statements.

This report provides the Market Consistent Embedded Value (MCEV) results of AgeSA on a 100% ownership basis as of December 31, 2021 and the value of new business and related metrics for the full year ended December 31, 2021.

2. Definition of Embedded Value

MCEV is the sum total of the estimated value of the inforce portfolio (VIF) plus the shareholders' net worth. The VIF represents the present value of shareholders' interests in the earnings distributable from assets allocated to the covered business after making sufficient allowance for the aggregate risks in the covered business. The allowance for risk is calibrated to match the market price for risk where reliably observable.

The value of future new business is excluded from the MCEV. New business is defined as business arising from the sale of new contracts and includes expected renewals on those contracts (noting the exception for yearly renewable life insurance term business, which is detailed below in section 6) and expected future contractual alterations to those contracts. Non-contractual increases in premiums, such as additional contributions to the pensions business, is included within new business. For group pension and auto-enrolment pension business, new business is defined as newly obtained schemes or additional members within existing schemes.

The results have been prepared under the European Insurance CFO Forum Market Consistent Embedded Value Principles (''MCEV Principles'', copyright Stichting CFO Forum Foundation 2008) which were first published October 2009.

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Calculations are performed after allowing for reinsurance and on an after-tax basis taking into account current legislation and practice, together with future known and certain changes.

The methodology, assumptions and results have been reviewed by PwC. Their opinion is included in section 15.

3. Covered Business

The MCEV Principles draw a distinction between "covered business" to which the MCEV methodology is applied, and "non-covered business" which is reported on an unadjusted IFRS net asset value basis. All of AgeSA's business is regarded as covered business for purposes of MCEV reporting as all of the company's business is related to insurance business and the assets backing that business. As such, no non-covered business or Group MCEV are presented.

4. Methodology and Components of MCEV

The methodology used in calculating each of the components of the Company's MCEV is provided below:

1. Shareholders' Net Worth

Shareholders' net worth is defined as the market value of assets allocated to the covered business not required to back the in-force regulatory liabilities at the valuation date. The shareholders' net worth is calculated on the basis of the local regulatory surplus.

The shareholders' net worth is comprised of required capital and free surplus. The required capital is the market value of assets allocated to the covered business over and above that required to back liabilities for the covered business, whose distribution to shareholders is restricted. The required capital is defined as 150% of the Turkish regulatory capital requirements, in-line with management's target capital ratio.

The free surplus is the market value of any assets allocated to, but not required to back liabilities or support required capital of the in-force covered business at the valuation date. The free surplus excludes any DAC asset. A reconciliation of the shareholders' net worth and the IFRS shareholders' equity (referred to as "IFRS net asset value" in the MCEV Principles) is provided under section 9.

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b. Value of In-force Covered Business

The in-force portfolio consists of policies underwritten up to the valuation date and excluding future new business.

The value of in-force (VIF) of covered business is the value arising from the in-force portfolio, and consists of the following components:

the present value of future profits (PVFP), where profits are taken as post taxation shareholder cash flows from the in-force covered business and the assets backing the associated liabilities;

the time value of financial options and guarantees (TVOG); the frictional costs of required capital (FC); and

the costs of residual non-hedgeable risks (CNHR).

The methodology used to calculate each of these components is set out below.

Present value of future profits (PVFP)

The PVFP is the present value of the profits distributable to shareholders arising from the in- force covered business projected on a best estimate basis. Distributable profits generally arise when they are released following valuations carried out in accordance with Turkish regulatory requirements, which are designed to demonstrate and ensure solvency.

Future distributable profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. The PVFP is calculated using the certainty equivalent approach, consistent with MCEV Principles, under which the same reference rate is used for both the projected investment return and the discount rate.

Time value of financial options and guarantees (TVOG)

An allowance for TVOG must be required with respect to Principle 7 where policyholders are provided with financial options and guarantees. Guarantees are present for certain unit-linked life savings run-off portfolios which are closed to new business. For certain unit-linked life savings contracts, the policyholder has been provided with financial guarantees around the level of financial return on its investment. The analysis carried out to determine the TVOG indicates that the financial guarantees is immaterial due to the size of the unit-linked life savings portfolio and the high interest rate environment in Turkey relative to the guaranteed level of financial return on the contracts. Therefore, the TVOG for all covered business has been approximated to be immaterial.

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