Solvency II – Investment Implications

1. FOR UK INSURANCE COMPANIES ONLY. NOT FOR PUBLIC DISTRIBUTION Solvency II – Investment Implications January 2011

2. Good returns from bond markets but yields are historically low Government Bond Yields Latest data as at December 2010. Source: Federal Reserve Bank of England, Barclays Capital, J.P. Morgan Source: J.P. Morgan UK Government Bond Index

3. Extremes in the equity markets UK equity risk premium relative to bills, 1900 - 2010 35 2004 30 1998 1992 1991 1988 2010 1987 2006 25 1985 2005 2007 1978 2003 1994 1965 1999 1981 1962 1997 1979 1961 1996 20 1976 1956 1995 1970 1955 1989 1966 1951 1986 1964 1945 1984 2009 2008 1960 1944 1983 15 1952 1927 1982 1948 1926 1980 1947 1925 1972 1940 1923 1963 1939 1917 1950 10 1938 1916 1946 2001 1921 1912 1943 2000 1915 1910 1942 1993 1957 1913 1909 1941 1971 2009 2002 1949 1911 1908 1936 1953 5 1990 1937 1907 1906 1935 1933 1977 1969 1930 1903 1905 1934 1922 1967 1968 2008 1931 1929 1901 1904 1928 1919 1958 1959 1974 1973 1920 1914 1900 1902 1924 1918 1932 1954 1975 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 >100 Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook 2010

4. Asset allocation European Insurers UK Insurers Equities Fixed Income Property, Alternatives, Other 100% 80% 60% 40% 20% 0% 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 Source: Association of British Insurers, Swiss Re Economic Research & Consulting Source: CEA

5. Solvency II Changes the way: • Regulatory capital is calculated • Projected liability payments are discounted 4

6. Solvency II – Implication for bonds / credit * Notes: 1) Under Solvency II QIS5 2) Profile of liabilities may affect the impact 3) Using an internal model can alter the impact Source:  J.P. Morgan Asset Management - January 2011 5

7. Solvency II - Implication for other asset classes * Notes: 1) Under Solvency II QIS5 2) Profile of liabilities may affect the impact 3) Using an internal model can alter the impact Source:  J.P. Morgan Asset Management - January 2011 6

8. Solvency II – Implications from liability discounting methodology * Notes: 1) Under Solvency II QIS5 2) Profile of liabilities may affect the impact 3) Using an internal model can alter the impact Source:  J.P. Morgan Asset Management - January 2011 7

9. Solvency II - Transparency and ‘Look through’ * Notes: 1) Under Solvency II QIS5 2) Profile of liabilities may affect the impact 3) Using an internal model can alter the impact Source:  J.P. Morgan Asset Management - January 2011 8

10. Summary – attractiveness of asset classes under Solvency II QIS5 versus current position Total Return • Transparency  • Segregated mandates  • Generic credit ? EM Debt Equities Expected return Long Govts Short Corp. Property Long Corp. Currency overlay Short Govts Swaps Expected risk * Notes: 1) Under Solvency II QIS5 2) Profile of liabilities may affect the impact 3) Using an internal model can alter the impact 4) Not drawn to scale Source:  J.P. Morgan Asset Management - January 2011 9

11. Known Unknowns • Changes to Solvency II regulations • Changes to accounting standards • Markets ‘price-in’ Solvency II effects • Development of Solvency II ‘efficient’ investment products 10

12. Outlook for 2011-2012 15% 60% 25% Deflation Disinflation Inflation 20% 80% 50% 50% 50% 50% QE fails Recovery stalls during 2010 Dream ticket Sub-par growth, easy policy Party Pooped Policy stimulus removed 2011/12 Stagflation Yields rise, growth stalls Fast & Loose Rapid growth, surging inflation Lost hope Growth snuffed out by rising yields in 2012 Equities drift to new lows in 2011 Equities drift to new lows in 2012 Markets rerated towards new all-time highs in 2011 Markets trend sideways to up Bond yields soar, equities suffer, new lows in 2010 Bonds plummet equities up but underperform commodities NEW LOWS NEW LOWS NEW HIGHS NO EXTREMES NEW LOWS NO EXTREMES

13. Conclusion What to consider: • Resources • Dialogue with asset manager • Investment strategy – including consideration of: • Profile of liabilities • Market environment and opportunities

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