Reinsurance Opportunities for Banks ABIA 2003 Annual Conference

Reinsurance Opportunities for BanksABIA 2003 Annual Conference

October 9, 2003

!@Quality In Everything We Do

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Panelists

Steven Lash, Ernst &Young

Ken Baldes, HSBC Insurance

Joe Picarello, Chase Insurance

Jay Votta, Ernst &Young

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What is Reinsurance?

“The process whereby one insurance company, referred to as the reinsurer, for a consideration, agrees to indemnify another insurance company, referred to as the ceding company or the reinsured, against all or part of a loss which the ceding company may incur under certain

policies of insurance which it has issued”

Sharing of the profits and risks of the underlying insurance product.


Source: Life, Health, & Annuity Reinsurance, John E. TillerSource: Life, Health, & Annuity Reinsurance, John E. Tiller

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Why Reinsure?

Substantial increase in long term revenue and income for the bank

Further increase in partnership for bank and insurer

Increased shelf space for the reinsurer

Better persistency for bank and the insurer

Quality In Everything We Do


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What is Reinsured?

Credit Life

Fixed Annuities

Variable Annuities

Term Life

Lender Placed Hazard

AD&D

Mortgage Insurance

Vendors Single Interest

Universal Life

Title



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Who Reinsures?

73

36 32 2511

11

11 1312

7

0

10

20

30

40

50

60

70

80

90

Credit Annuities L/H P/C Title

Planning

Current

Source: ABIA Study of Leading Banks in Insurance 2002Source: ABIA Study of Leading Banks in Insurance 2002



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Who Reinsures?1Q ’03 Revenue



Insurance Bank Holding Insurance Insurance U/W % of Revenues Company Underwriting Brokerage Total

1 $5,478.3 Metlife, Inc. $4,837.5 $640.8 88.3%2 $855.0 Citigroup Inc. $494.0 $361.0 57.8%3 $184.9 Countrywide Financial Corp. $171.1 $13.7 92.5%4 $107.0 Bank One Corp. $31.0 $76.0 29.0%5 $30.0 Bank of America Corp. $29.0 $1.0 96.7%6 $266.0 Wells Fargo and Co. $28.0 $238.0 10.5%7 $54.0 J.P. Morgan Chase $17.0 $37.0 31.5%8 $16.0 Commerce Bancorp, Inc. $16.0 $0.0 100.0%9 $27.3 Abn Amro North America $13.5 $13.8 49.5%

10 $26.5 National City Corp. $11.0 $15.5 41.5%11 $16.0 HSBC USA Inc. $10.5 $5.6 65.6%12 $74.0 Wachovia Corp. $10.0 $64.0 13.5%13 $22.5 U.S. Bancorp $8.6 $13.9 38.2%14 $8.5 F.N.B. Corp. $8.5 $0.0 100.0%15 $8.3 Old National Bancorp $7.5 $0.8 90.4%16 $4.7 Huntington Bancshares $4.7 $0.0 100.0%17 $4.0 Fifth Third Bancorp $4.0 $0.0 100.0%18 $88.7 BB&T Corp. $3.3 $85.3 3.7%19 $16.4 PNC Financial Services $2.8 $13.6 17.1%20 $3.1 Sunflower Banks, Inc. $2.2 $0.9 71.0%

Source: Singer Annuity and Funds Report, Aug/Sept 2003Source: Singer Annuity and Funds Report, Aug/Sept 2003

October, 2003

Reinsurance Opportunities for BanksKen Baldes

ABIA 2003 Annual ConferenceOctober 9, 2003

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HSBC Group

Who We Are

The HSBC Group is one of the world’s largest banking and financial services organizations, with major personal, commercial, corporate and investment banking and insurance business operating in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa.

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HSBC Insurance (USA)

Wealth Management

Commercial Banking

Small BusinessPrivate Banking

Personal Banking

Mortgage

Credit Card

Bancassurance Opportunities

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Bancassurance Model

Middle Market Has Been Abandoned

Trusted Advisor

Ease of Purchase

Convenience

Multiple Channels to meet Customer Needs (Face to Face, Phone, Mail, Internet, etc)

Deepen Customer Relationships

Reinsurance Opportunities

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Revenue Stream Expansion

Private Mortgage Insurance

Vendors Single Interest

HSBC Reinsurance (USA) Inc.

Credit Insurance (USA, Canada, Panama)

Life Insurance

Marmid Life Insurance Co.

Annuity Reinsurance

HSBC Life Insurance (Cayman) Ltd.

HSBC Insurance (USA)

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Overriding Considerations with Reinsurance

Scale of Business

Business Unit Rapport

Risk Transfer

Carrier Reinsurance Expertise

Reconciliation of data

Monitoring Controls

Actuarial Support

Captive Management Support

Annual Stress Testing

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Private Mortgage Insurance

Arrangements

Quota Share

Excess of Loss

Additional Considerations

Capital Requirements for cedes over 25%

Domicile Flexibility

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Traditional Insurance & Annuities

Arrangements

Quota Share

Modified Co-insurance

Additional Considerations

Investment Policy

Credit Losses

Interest Rate Risk/Spreads

ABIA Annual Conference October 8-10, 2003

Joe PicarelloChase Insurance Group

Building Income – Reinsurance of Bank Sold Insurance Products

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The Line of Business is the Customer

CRB Small Business Financial Services

Chase InsuranceGroup

Product DevelopmentCarrier ManagementProduct Management

Reinsurance / UnderwritingData-miningTechnologyCompliance

Legal

Private Bank

Middle Market Financial Services

Chase HomeFinance

Chase CardServices

Chase Auto Finance

CRB Personal Financial Services

CRB Retail Financial Services

Licensing

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Business Model

Design, source, deliver and service superior insurance and financial security solutions

Integrated cross-sell model

Alignment with LOB strategies

Strategic Partnering

Reinsure to capture incremental SVA

“Thin” insurance agency model

“Open architecture” business system

Manufacturing, only very selectively

Centralized expertise

Centralized utilities

Card services Home finance Auto finance CFS

PFS RFS SBFS

MMBG Private Banking

Card services Home finance Auto finance CFS

PFS RFS SBFS

MMBG Private Banking

Retail Direct Response

Retail Direct Response

Retail Face-to-face

Retail Face-to-face

Commercial Face-to-face

Commercial Face-to-face

Private Banking Face-to-face

Private Banking Face-to-face

Convenience Competitive

price Trusted advisor

access Product

transparency Service quality Brand Customer

knowledge

Convenience Competitive

price Trusted advisor

access Product

transparency Service quality Brand Customer

knowledge

LOB Partners DistributionCustomer Value

Proposition

Strategy, Product Design

and Management

Strategy, Product Design

and Management

Targeting and Solicitation

Targeting and Solicitation

Underwriting/ Reinsurance

Underwriting/ Reinsurance

Compliance/Legal/

Licensing

Compliance/Legal/

Licensing

Segmented Customer Service

Segmented Customer Service

Marketing, Sales and

Structuring

Marketing, Sales and

Structuring

Value Chain Infrastructure

Strategic Partners Strategic Partners

Insurance Carrier Sourcing and Management

Chase Insurance Group Business Model

Multi channel distribution: 25% face-to-face; 75% direct marketed

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Focus on Business Model

Core Business Model

• Integrated cross sell

• Alignment with LOB strategies

• Distribution leverage

• Strategic Partnering

• Reinsure to capture incremental SVA

Business Structure

• “Thin” insurance agency model

• “Open architecture” business system

• Manufacturing, only very selectively

• Centralized expertise

• Centralized utilities

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Performance and growth

Line of Business Revenue Composition (2003F) Product Revenue Composition (2003F)

1999 2000 2001 2002 2003F

Revenue

NEBT

SVA($MM) 57 69 96 153 191

Home Finance18%

Investment Income

6%

Credit Card57%

CRB15%

PBG / MM4%

Other0%

PMI/Hazard Reinsurance

15%

Annuities11%

Credit Insurance / Debt Suspension

54%

Life 13%

N.I.I. / Other6%

Employee Benefits / P&C1%

CAGR’s:•Revenue 22%

•NEBT 28%

•SVA 38%

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Risk/Reward Opportunity Assessment

The Decision to Reinsure

Drivers

'99 '01 '03 '05 '07

Proven distribution success

Thorough understanding of profit dynamics of the business

Favorable risk/ reward equation

Reinsurance

Commission/ Fees

Experience / Understanding

S

U

C

C

E

S

S

Profit Sharing

Direct Writing

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The Decision to Reinsure

Drivers

'99 '01 '03 '05 '07


Thorough understanding of profit dynamics of the business

Favorable risk/ reward equation

Reinsurance


S

U

C

C

E

S

S

Lender Placed

Mortgage Insurance

Credit life, disability &

unemployment

AD&D

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Insurance Legal Entities

Life Reinsurance Companies

WHLIC

SSLIC

P&C Reinsurance Companies

GLIC

CCIC (Vermont)

Chase Re (Bermuda)

Annuity Direct Writing Companies

CLACNY (New York)

CLAC

FormationProliferationRationalizationConsolidation

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Reasons for Reinsurance

Quota Share

• EOL: Reinsurer responsible for all losses in excess of specified level, up to the reinsurer’s overall policy limit

• EOL: Reinsurer responsible for all losses in excess of specified level, up to the reinsurer’s overall policy limit

Excess of Loss

Structure Alternatives

Increase Underwriting Capacity

Diversify Risks

Source of Capital

Assumption Reinsurance (Profit Center)

• Quota Share: Reinsurer shares all losses and premium on a pro-rata basis according to quota share %

• Quota Share: Reinsurer shares all losses and premium on a pro-rata basis according to quota share %

Reinsurer

REINSURER

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Risk Assessment Challenges

Corporate New Products

Corporate Accounting/Risk Transfer

Product Development

and Product

Management

Process

CIG Executive Committee

LOB New Product Committee

Corporate New Products

Treasury, Credit, Market, Tax, Legal, Compliance, Insurance, Controllers, etc…….

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The Decision to Manufacture

Drivers

'99 '01 '03 '05 '07


Core Competencies of Firm

Captive Distribution

JPMF Asset Management

Interest Rate Risk Management

Leverage Brand Value


S

U

C

C

E

S

S

Direct Writing/ Manufacturing

Deferred Fixed

Annuities

Bank Managed Debt

Cancellation Contracts

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Reinsurance Risk/Reward

Full participation in value of business

Mitigate regulatory risk

Learning

Alignment of interests

Potential volatility in revenue and expenses

True appetite for Risk

Capital intensive

Maintaining Alignment

Benefits Challenges

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Revenue Illustration

Revenue derived from businesses where risk is assumed has become the majority our business

Credit Insurance

2003

Revenue Mix

PMI/Hazard Reinsurance

I

Debt Suspension

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Issues & Considerations

Transaction Structuring and Negotiation

Quota Share Level

Product Return Requirements/Risks

Accounting treatment and recognition of commissions earned on policies reinsured

Crediting Rate Process

Level of Bank Cash Outlay

Portfolio Segmentation/Earned Interest Crediting/Capital Gains

Results Monitoring

Financial Reporting Needs

Offshore Company Establishment

Required Capital Considerations

Start up time/Costs

In initiating a transaction, there are a number of critical success factors which need to be explored:



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Q&A

Economy & Finance

Reinsurance Opportunities for Banks ABIA 2003 Annual Conference