The insurance group is preparing investors for the introduction of new accounting rules.
(Photo: dpa)
Frankfurt After a long period of preparation, new accounting standards for insurers will come into force next year. This will lead to some changes in the balance sheets of the affected groups. “The change initially means more complexity,” said Allianz CFO Giulio Terzariol on Wednesday. In the long run, however, one promises significantly more transparency, especially in the life insurance business.
“Investors and analysts will probably be uncertain for a while when they look at our figures,” said Talanx CFO Jan Wicke recently. However, one believes that the figures will become easier to understand for investors. “This will reverse the undervaluation of insurer shares,” Wicke is convinced.
The new accounting standard IFRS 17 regulates the accounting of insurance contracts, i.e. their recording, measurement and disclosure in the annual report. The design of the standard was discussed for years, and its introduction was finally postponed.
The set of rules replaces the previous standard IFRS 4 and is scheduled to come into force on January 1, 2023 together with the standard IFRS 9 for financial assets, for which there was a temporary exemption. The new rules have to be implemented by the IFRS balancers among the insurers. In this country, listed companies such as Allianz, Talanx and Munich Re are primarily affected, as well as some European competitors such as Axa and Zurich.
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The insurers will still prepare the 2022 annual report according to the old rules. However, there will be information about the changeover, including an opening balance sheet as of January 1, 2023. IFRS 17 will then be officially applied for the first time in the first quarter.
Consistent rules for assets and liabilities
The insurers see the most important improvement in the more consistent preparation of the assets and liabilities side of the balance sheet. Insurers have to use lower values for a number of financial investments that have lost value as a result of the rise in interest rates.
In future, insurers will also have to adjust claims provisions to market conditions. It is taken into account when an insurer will probably have to take responsibility for the damage. This will make equity significantly less volatile, Terzariol emphasized on Wednesday. In principle, the new rules are also more comparable with the regulatory requirements under Solvency II.
According to IFRS 17, insurers must also spread expected profits in life insurance more widely over the term of the contract. A part may then no longer be held in equity, but must be placed in a new position – the so-called profit storage (Contractual Service Margin, CSM). Terzariol described the profit storage as a “strong pool for future profits”. However, most insurers’ equity is likely to decline at the time of the changeover.
According to the current rules, the Allianz Group has equity on the balance sheet of around 80 billion euros. With the application of IFRS 9 and 17, this falls to 60 billion euros, the CSM amounts to around 35 billion euros. It is primarily an illustrative representation and not a specific forecast. According to Terzariol, the return on equity should increase by a good one percentage point in the future, and a target return of 15 percent is realistic.
Investors also have to change when looking at the profit and loss account. According to IFRS 17, gross premiums are no longer reported, but insurance sales. This means, for example, that the savings portion contained in life insurance contracts is deducted. Turnover will therefore be lower than previous gross premiums.
On the profit side, however, little will be done. Allianz does not expect any significant change at the level of operating profit – this should initially be slightly higher at group level.
In the property and casualty insurance segment, the operating result from the insurance business is likely to rise from the previous three billion to between EUR 3.6 and 3.9 billion, while the investment result will decline from three billion to between EUR 2.4 and 2.6 billion – a key reason are the changes in the valuation of claims provisions. The bottom line is that consolidated earnings remain at a similar level, but are becoming somewhat more susceptible to fluctuations.
No impact on the dividend
Terzariol also emphasized that the changeover would have no impact on cash flow, dividends or the solvency ratio – which should reassure investors. Analyst Alan Devlin from the US investment bank Goldman Sachs emphasized in a study that there should only be a modest impact on operating results and that this should make it easier for Allianz investors to accompany the changeover.
Other insurers had recently reported on the effects of the IFRS changes. The Swiss insurance group Zurich emphasized that nothing will change in the group’s business and dividend policy under IFRS 17.
French insurer Axa said profitability and equity remained broadly unchanged following the application of the new rules. In addition, all targets of the strategy for 2023 would be retained under IFRS 17.
The world’s largest reinsurer, Munich Re, wants to talk about the changeover to IFRS at the Capital Markets Day on December 15, and Talanx on December 6. “It is important for investors that our profitability or our financial strength does not change, only the presentation,” said Wicke.
More: New accounting rules: insurers hope for higher valuations on the stock market