1. Impact of Low Interest Rates on European Insurers Dermot Corry June 8 th 2015

2. Context UK/Ireland Germany Non Life Solvency II Agenda

3. European Insurance Assets (€m)

4. “Weak European midsized life insurers face a high and rising risk of distress” IMF – April 2015

5. “24 percent of insurers may not be able to meet their solvency capital requirements under a prolonged low interest rate scenario” EIOPA Stress Test

6. Bundesbank Discussion paper 2014

7. Financial Times – April 2015

8. ECB Financial Stability Review – May 2015 “Despite the solid profitability reported so far, euro area insurers are facing growing challenges as the low- yield environment has tested their traditional reliance on fixed income assets as a means of generating portfolio returns.”

9. Long term rate context

10. 10 year bond yields Source: ECB

11. 10 year Eurozone AAA rate Source: ECB

12. Generally well matched Primarily SP business So little ALM loss However – Attractiveness of Annuities – Government action – Alternative options Impact on Longevity capital Search for yield Implications for Ireland/UK

13. Need to live for ? Years to get return of capital A: 15-17 B: 18-20 C: 21-23 D: 24+ At Age 65

14. Need to live for ? Years to get return of capital 24 So investment return earned after age 89 At Age 65

15. €90bn premium per annum (life only) €868bn in assets (life) 560 insurers 212,000 employees Heavily dependant on guaranteed business Focus on the German market

16. Market Shares – IMF report

17. Regular Premium Long duration – often pension Guaranteed return on net premium – Guarantee set at outset and applies for duration Assets invested in bonds – Shorter than liabilities – Don’t deal with reinvestment risk, though larger insurers use swaptions Excess of earned investment return paid out as annual bonus Typical German with profits

18. Guarantee based on 10 year average

22. Assets held at book value Liabilities held at retrospective value Bonus paid from – Earned interest – Realised gains/losses – Profits from mortality/expense Squeeze as earned rates decline – Supported by realised gains Reserving

23. ERGO sample figures Source: Munich Re Analysts Conference March 2015

24. Conveniently called ZZR Introduced in 2012 Aims to reserve for prospective issues €21bn across the market NPV of guarantees in excess of reference rate for next 15 years Reference rate based on average of last 10 years AAA rate Funded to date by Unrealised gains Zinszusatzreserve

25. Reference Rate will fall even if rates rise Ergo expect ZZR to increase by €900m this year Possible reference rate path Source: ERGO/Munich Re

26. Further rate hedging Search for yield Greater share of mortality profits to policyholders Restrictions on new business Withdrawal from with profits Focus on UL/other products Limits on dividends out of profit sharing account Some actions taken

27. Issues not as significant However reduced yield increases pressure – Assets are 3.4 time premiums – 1% fall in yield requires 3.4% increase in COR to compensate – Falls to date imply 10% increase in COR PPOs will accentuate the issues Non-Life

28. Some exceptional circumstances Reduces real yield for calculation of lump sum payment from 3% to 1% Substantial increase to reserves as a result But actual real yield at end of March 2015 was close to -1.00% Russell Judgement

29. Huge impact from low yields

30. Will look at three key points: – Interest Rate shock – Ultimate Forward Rate/Last Liquid Point – Transitionals Solvency II

31. Shock is a proportional shock up or down to interest rates At 10 years the shocks are – Up 42% – Down 31% 1.3%/1% when Solvency 2 designed At Q1 2015 0.19%/0.14% (Risk free rate 0.46%) Since Q1 rate has increased by 0.63%! Interest Rate Shock

32. LLP – Last Liquid Point UFR – Ultimate Forward rate (4.2%) Discount rate converges to UFR after LLP LLP and convergence period vary by currency Ultimate Forward Rate CurrencyEuroDollarSterlingSwedish Krona LLP2050 10 Convergence40 10

33. At Q1 2015 impact is large Table shows Spot Rate for appropriate duration

34. Impact on liability of 100 Duration20 years30 years40 years50 years Value with no LLP/UFR 86797369 Value with UFR/LLP 86684631 % Reduction 0%-14%-36%-55% All based on Euro at end March 2015

35. Solvency II is being implemented gradually Can use transitional – Blend in rates over 16 years; or – Blend in TP over 16 years Means that we will not have completely comparable figures until 2032 Transitionals

36. There are real guarantee issues in Europe This is on the radar of key global bodies Some recognition in German regulatory accounts But not market consistent Solvency II fudges the long term guarantees Summary

37. Dermot.corry@milliman.com +353 1 6475910 Questions?