Allianz Insurance Solvency II

1. Allianz InsuranceSolvency II How Solvency II might affect investment strategy Stephen Wilcox, Chief Risk Officer, Allianz UK

2. Table of contents

3. AllianzAn Introduction • Allianz Group is one of the world’s leading insurers and financial services providers • Founded in 1890 in Berlin, Allianz companies now extend to over 70 countries with more than 155,000 employees and 75 million customers • Insurer financial strength rating of AA from S&P and A+ from A.M. Best • International network of strong brands, with first-class products in the fields of: • property and casualty insurance • “P&C” – non-life insurance • life and health insurance • asset management For more information visit www.allianz.com.

4. The Chief Risk Officer is responsible for ensuring the company’s risk profile is managed within risk appetite Allianz in the UKAn Overview • Two main operating entities in the market: • Allianz Global Corporate and Specialty • Allianz Insurance plc • AGCS: globally operating company in the corporate P&C market • Product range includes Financial lines • Allianz Insurance: focuses on UK domiciled P&C risks, including retail and mid-corporate

5. The timetable for Solvency II is highly uncertain. Significant details are still not finalised. It is a political game now. Solvency II – current statusUncertainty • Working assumptions: • Key European parliament vote – March 21st • Details finalised October 2012 • Governments pass law by 1st Jan 2013 • In force 1st Jan 2014 • Key parliament vote already delayed c. 1 year • If it’s not passed in March, Solvency II will be delayed • A long history of things taking much longer than expected • There’s a good chance of further delays

6. Negative real yields – in search of higher returns from insurance and/or investments Issues affecting all firmsInvestment yields http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/default.aspx UK instantaneous implied real forward curve The days of making your money from investments are long gone

7. Principles-based regulation means that insurers have more discretion – but will need to reveal more Issues affecting all firmsSolvency II specific • Prudent person principle • Freedom to invest as you see fit, provided • You understand the risks • You take account of the interests of policyholders and other beneficiaries • Requirements for documentation, e.g. • Risk appetite • Various policies, specifically on derivatives • Public disclosure requirements • SFCR: Solvency and Financial Condition report • Qualitative report on your risk exposures • QRT: Quantitative Reporting Templates • Including detailed asset lists

8. Alternative investments likely to be relatively unattractive Standard formula firmsConservative strategy • Firms who rely on the regulatory model for their capital requirement • In the UK – mostly (but not wholly) small, less sophisticated firms • Abroad – more widespread • Standard formula appears to be relatively conservative • Across the board • Particularly in respect of alternative investments • Regulator can direct use of internal model if standard formula inappropriate for the risk • Guards against regulatory arbitrage – e.g. holding investments with unusual risk/reward patterns

9. Opportunities for more adventurous investment strategy – if there’s spare capital and the risk appetite Internal model P&C firmsUsing spare capital • Most UK P&C firms (by number and size) • Including probably all the biggest firms, and Lloyds • Key risks are insurance-related • Will aim to broadly match insurance liabilities • Using low-risk fixed income securities • Possible opportunity for something other than Gilts • Will want to be prudent with capital required to match regulatory requirement, perhaps plus a margin • May be more speculative with any additional capital • Investment risk diversifies well against core insurance risk • Rating agency constraint for many firms • Rating agency models tend to be conservative • Rating agencies consider risk in the widest sense

10. Looking for ways to match liabilities more closely Internal Model life firmsIn search of risk reduction • Key risk areas are market and credit • Value of investments and certainty of payment • Much uncertainty remains • Solvency II rules outstanding are critical to some business models • “What is this business worth?” • Very long-term, uncertain liabilities • Limited ability to match those liabilities • Bigger mismatch  more volatility in balance sheet • More volatility in balance sheet  more volatility in share price • Key question: “How can I match my liabilities more closely?”

11. Allianz Global Corporate & SpecialtyYour contact • For further information please contact: Sue Yen Leow Head of Financial Institutions Allianz House 60 Gracechurch Street London, EC3V 0HR Direct: +44 (0)20 3451 3334 Email: SueYen.Leow@allianz.com Allianz Global Corporate & Specialty (AGCS) provide class leading protection for Financial Institutions and can offer solutions to your Directors and Officers, Professional Indemnity and Crime Insurances. AGCS has a strong, experienced underwriting team focused on client and broker service with support from a sound processing operation, claims resource, and an extensive global office network. www.agcs.allianz.com