Shaping a Constructive Regulatory Environment

Greg Carter

9th June 2010

Agenda

How does Regulation impact ratings?

5 Key areas of analysis

Conclusion

Agenda

How does Regulation impact ratings?

5 Key areas of analysis

Conclusion

44

Analytical MethodologyFinancial Review Industry Review Operational

ReviewOrganisational Review

Management Review

Profitability Competitive landscape

Underwriting expertise

Parent financial strength

Strategic vision

Investments and liquidity

Pricing trends Distribution capabilities

Dividend requirements

Management quality

Loss reserve adequacy

Competitive advantage

Business mix Financial flexibility Depth & breadth of experience

Reinsurance utilisation

Barriers to entry Market share Strength of affiliates

Risk appetite

Catastrophe risk Bargaining power Operational scale Strength of subsidiaries

Successful plan execution

Capital adequacy Tail of losses Expense efficiencies

Group synergies Organisational structure

Financial flexibility Regulatory environment

Brand recognition Explicit support agreements

Corporate Governance

Peer analysis Accounting framework

IT capabilities History of support Financial projections

Source: Fitch

55

Methodology – Where does Regulation sit?Financial Review Industry Review Operational

ReviewOrganisational Review

Management Review

Profitability Competitive landscape

Underwriting expertise

Parent financial strength

Strategic vision

Investments and liquidity

Pricing trends Distribution capabilities

Dividend requirements

Management quality

Loss reserve adequacy

Competitive advantage

Business mix Financial flexibility Depth & breadth of experience

Reinsurance utilisation

Barriers to entry Market share Strength of affiliates

Risk appetite

Catastrophe risk Bargaining power Operational scale Strength of subsidiaries

Successful plan execution

Capital adequacy Tail of losses Expense efficiencies

Group synergies Organisational structure

Financial flexibility Regulatory environment

Brand recognition Explicit support agreements

Corporate Governance

Peer analysis Accounting framework

IT capabilities History of support Financial projections

Source: Fitch

66

Methodology – What does Regulation influence?Financial Review Industry Review Operational

ReviewOrganisational Review

Management Review

Profitability Competitive landscape

Underwriting expertise

Parent financial strength

Strategic vision

Investments and liquidity

Pricing trends Distribution capabilities

Dividend requirements

Management quality

Loss reserve adequacy

Competitive advantage

Business mix Financial flexibility Depth & breadth of experience

Reinsurance utilisation

Barriers to entry Market share Strength of affiliates

Risk appetite

Catastrophe risk Bargaining power Operational scale Strength of subsidiaries

Successful plan execution

Capital adequacy Tail of losses Expense efficiencies

Group synergies Organisational structure

Financial flexibility Regulatory environment

Brand recognition Explicit support agreements

Corporate Governance

Peer analysis Accounting framework

IT capabilities History of support Financial projections

Source: Fitch

Agenda

How does Regulation impact ratings?

5 Key areas of analysis

Conclusion

8

Median solvency ratio (%) Solvency 1 QIS4

Captive 331 167

Reinsurance 366 221

Non-life 277 193

Composite 267 230

Life 200 230

1) Expected Regulatory Solvency Position

Source: CEIOPS QIS4 final report

Solvency Ratios From QIS4 Compared With Solvency I

9

Number of firms that would not meet

Firms participating who would not meet (%)

MCR SCR MCR SCR

France 0 14 0 6

Germany 0 8 0 4

Italy 1 17 1 19

Netherlands 0 22 0 22

Spain 0 11 0 10

UK 5 26 4 20

2) Sources of Additional Capital

Source: CEIOPS QIS4 final report

Capital Shortfalls in QIS4, Selected Countries

10

(%) Non-life Life Composites

Market risk 41 72 69

Counterparty risk 7 4 3

Life risk 1 44 19

Health u/w risk 20 1 15

Non-life u/w risk (premium, reserve, nat cat risk)

55 0 20

Total 124 121 126

Less diversification -24 -21 -26

3) Options for Reducing Capital Requirements

Source: CEIOPS QIS4 final report

QIS4 Solvency Capital Requirement (SCR) Composition

11

3) Options for Reducing Capital Requirements (cont)

Source: CEIOPS QIS4 final report

-60

-40

-20

0

20

40

60

80

100

120

140

160

Non-life Life Composites

(%)

Interest rate risk Equity risk Property riskSpread risk Concentration risk Currency riskLess diversification

QIS4 Composition of Required Capital for Market Risk

12

4) Own Funds composition & Allowance for Hybrids

> Tier 1 or Tier 2?

> Grandfathering?

> Longer term impact on Financial Flexibility

13

5) Internal Model Use

> “Solvency II compliance”

> The Use Test

> Partial model

> Comparability and Transparency

Agenda

How does Regulation impact ratings?

5 Key areas of analysis

Conclusion

15

Conclusion

> QIS 5 brings some clarity, but the picture is still not clear

> QIS 5 results will bring the capital landscape into focus

> Regulatory capital is one part of our Capital Adequacy analysis

> Capital Adequacy is one part of our Credit Rating

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