Dr. P. Nandagopal, MD & CEO IndiaFirst Life Insurance 40 th National Convention

1. Future Is Gray Risk is NOT a Black & White Issue Dr. P. Nandagopal, MD & CEO IndiaFirst Life Insurance 40th National Convention of Company Secretaries

2. Points To Ponder • What is Risk? • World in Protest- The Biggest Risk? • Mismatch in “What You Can” and “What You Do” • The Risk of Default • The Story is The Same: Country-Corporate-Common Man • Can We Plan For Happy Endings?

3. What is Risk? • Risk is when you are not sure about the outcome • And the outcome is not necessarily positive • The actions leading to the outcome are “optional” • Yet we take those actions, because we expect “rewards” • It’s a “bad risk” if actual losses outweigh the expected profit • A risk is bad or good, depending on the risk appetite

4. World in Protest- The Biggest Risk?

5. World is in Protest- The Biggest Risk • Popular revolt of Arab Spring • Street fights in Spain and Greece • Mindless shoot out in Norway • Budget deadlock in Washington • Unprecedented arson and violence in London • Anna Hazare - Parliamentary log jam in India • Diesel Prices Hike- FDI in Retail • Different symptoms- same problem: • The risk of the “old” resisting the “new” and vice versa.

6. Old Vs. Young: Demographic Ponzi Scheme • Life expectancy increasing every where • Fertility is declining as people don’t marry/marry late, have no kids/fewer kids • Population Pyramid slowly getting inverted - base narrower, burden heavier. • Welfare State politics: Feed the Old through Taxes Paid by the Young • Old need more money than the Young are willing to pay • This is a generational Ponzi scheme threatening the World Economic Order

7. Who Deserves More Privileges? The Young? Or the Old? • Dispute in division of political power - Arab Spring & India? • Disappointment in sharing of fiscal benefits - Greece and Spain • More Jobs or More Pensions? • Pensions to the Grandparents impacting jobs to Grand Children? • US Budget battles: Old Age Security Programs constitute almost half of non-interest government spending ( $1.6 trillion in 2010, of a $3.3 trillion total. This amount will shoot up as the baby boomers retire.

8. The Risk of Default

9. Living Beyond Means: Country and Corporate Risks • “Costs associated with population ageing are estimated to account for about half the public-debt run-up of the OECD economies over the past 20 years.” - Nicholas Eberstadt, Political Economist • “ Old folks may be less willing to repay sovereign debt.” “As the number of older voters relative to younger ones increases around the globe, the creditworthiness of borrowing countries could decline.” Ali Alichi, Economist at the IMF • Even China, the most brutal apostle of population control, now fears it will get old before it gets rich. Meanwhile, India, whose fertility was once seen as its national curse, is touted as a rising investment prospect thanks to its “demographic dividend”- Chriystia Freeland, NewyorkTimes • As countries struggle to meet their fiscal budgets, corporates have similar problem where the “un-funded liabilities” keep growing threatening solvency.

10. What Does Demographic Dividend Mean? • Having more hands to feed less mouths? • Having more earnings than spends? • Having higher rate of savings when you earn? • Having longer working life and shorter retired life?

11. The Mismatch in “What You Can” & “ What You Do”

12. Mismatch in “What You Can” and “What You Do” • If youth and earning capacity is the ASSET • and old age and income support is the LIABILITY • There is a serious arithmetical problem in the West: Asset – Liability Mismatch: • Result- Possible sovereign default? Economic collapse? Back to the period of grinding poverty? • Apply the same logic to Corporate Risks and we know why many go bust?

13. Story Is The Same: Country-Corporate-Common Man

14. Risk is the Same: Country – Corporate- Common Man • More Natural Resources, Less Human resources • More longevity- less fertility • More pension burden- less savings rate • More fiscal deficit- less job creation Country • More estimated profits- less actual cash flow • More operating expenses- less business revenues • Focus on Market share, top line- less emphasis on capital conservation and profitability • Low interest rate induced debt burden- crippling load when economy slows down • High wage costs – low value add of the employees • Dis-functional organization layers – slow decision making • Inability to differentiate between what’s a clear and present danger vs compelling opportunity Corporate • Breakdown of joint family system • Potential breakdown of even micro family system • High disposable incomes in the hands of youth but less locked in savings • Tendency to splurge than save • Short term investments- no long term regular savings • Health consciousness increasing longevity – but ignoring old age financial security • likely to result in population that’s old, sick and poor. Common Man

15. Story Is the Same: Country – Corporate- Common Man • Kingfisher, Deccan Chronicle, XYZ Companies: Where the story went wrong? • Relaince ADAG, DLF: Do you see liabilities stretching beyond asset values? • Dhanalaxmi Bank: Is there a case study for all of us? • Is “Cash Flow” more important than “ Accounting Profit?”

16. Can We Plan For Happy Endings?

17. Can We Plan for Happy Endings? • We are not Prime Ministers, Kings or Heads of the State • We may not even be CEOs, CFOs or Directors on the Board • But We Are Individuals Who Know What Could Go Wrong • If We Know what’s the Problem- We can seek the Solution • The Problem is at the Country-Company & Common Man level we have a serious Asset – Liability Mismatch • If you can not reduce the Liability (i.e. living longer) then we must improve the Asset quality (i.e. living better)

18. Living Better: The Happy Ending • Accept that “Less is More” • Think Long Term • Don’t leverage beyond means • Protect your core asset quality • Know Yourself: be on your “own”

19. Future is Bright Future is IndiaFirst Thank You