Impact of the credit crunch on the European
Insurance Industry.
Insurance Breakfast
Tuesday 4 December 2007

Agenda
• Welcome Prof. Herbert Lüthy
• The Credit Crunch and the
European Economy Ian Stewart
• Impact on the European Insurance Industry Prof. Herbert Lüthy
2 Deloitte © 2007 Deloitte AG. All rights reserved.

The Credit Crunch
and the European Economy
Ian Stewart, Deloitte Research
4th December 2007

How it all started
Estimates of total US sub-prime losses are increasing
Rising US sub-prime mortgage
Rising US sub-prime mortgage
defaults
defaults as banks announce further details of their exposures.
Losses and downgrades on related
Losses and downgrades on related
ABS assets
ABS assets
Up to $50bn of losses and write-downs announced
by investment banks with significantly more expected in Q4
Loss of confidence in ABS globally
Loss of confidence in ABS globally
due to lack of transparency of
due to lack of transparency of [source: FT, various bank analysts]
value/losses
value/losses
Wider flight from risk in credit and
Wider flight from risk in credit and
other markets
other markets
Credit conditions have tightened as liquidity has been
hoarded to cover. Realised warehousing risk at end of Sept
Risks flow back to banks’ balance
Risks flow back to banks’ balance
sheets
estimated at $300bn
sheets
Money markets tighten as liquidity
Money markets tighten as liquidity
hoarded
Increasing downside risk of global economic impacts
hoarded
– with recession in the US a growing possibility
Continued deterioration in US housing
Continued deterioration in US housing
market and further downgrades in
market and further downgrades in
ABS values
ABS values
Investment banks are now facing unprecedented challenges
Investment Banks announce
Investment Banks announce
substantial Q3 and post Q3 losses and
substantial Q3 and post Q3 losses and
to the business models that have driven the significant share
predict challenging Q4
predict challenging Q4
of profits growth in recent years
4 Deloitte © 2007 Deloitte AG. All rights reserved.

August 10th: Europe liquidity
Early 2007: Slow down problems Mid November: An economist
in US housing market at Goldman Sachs releases a
• ECB injected € 94.8 billon into
• US housing activity at Mid July: S&P cuts report that suggests losses in
the money markets as interbank
near recession levels ratings on some top- lending vanishes due to the credit market could reach
and mortgage arrears rise
rated mortgage bonds concerns about banks’ subprime $400 billion and financial
sharply
Mid 2007: US Subprime exposure institutions may cut their lending
problems by $2 trillion
• Overnight Euro money markets
• Unprecedented level of were at 4.62% - highest level
repayment problems
for 6 years
Mid Sept: US Fed cuts Federal
Mid June: Losses in CDO funds target rate by 50 bp –
funds Equity markets rally
• Two Bear Stearns CDO hedge • Dow Jones Industrial Average
funds suffer heavy losses amid and the S&P 500 touched all time
a rapid decline in the market highs
for subprime mortgages
June July August September October November
Mid-June: Banks uncertain European banks September 14th:
about value of own assets announce losses Northern Rock
• Cut back on other • German rescue: IKB • Northern Rock seeks Fitch says it may
commitments require rescue due to emergency financial cut the AAA credit
• Exacerbated rising risk subprime exposure support from the ratings of bond
aversion • BNP Paribas freezes $2.2 Bank of England insurers, raising
concern that such
billion worth of funds,
action could trigger
citing subprime issues
a wave of
downgrades of
some of the $2.5
trillion of bonds
they insure
Timetable for the credit crisis October: Investment Banks,
particularly Citigroup and Merrill
Lynch, announce substantial Q3
and post Q3 losses and predict
challenging Q4
5 Deloitte © 2007 Deloitte AG. All rights reserved.

A CFO view on the credit crunch:
a problem for others?
Note: 46% see no impact
on their business
60%
positive impact
40%
Availability of credit for Your business
UK corporates The UK economy The UK corporate sector 12% 20%
0% 0% 0%
0%
negative impact
-20%
-40%
-42%
-60%
-80%
-82%
-92% -100%
-98%
Survey conducted21st September and 2nd October. “Overall, how do you think recent
developments in credit markets will affect the UK Economy, UK Corporate sector, availability of
credit for UK corporates and your business?”
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Global economy strong…but how quickly will it slow?
5.5 Global GDP growth: % change year on year
5
4.5
4
3.5
3
2.5
2
1.5
1
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: IMF
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Transmission channels from financials to the real
economy
Output of financial
services
Wealth
Financial
market
development A Bank lending Spending by Prospects
firms and for activity &
households inflation
Non bank
lending
Uncertainty
A The extent of bank lending depends on several factors, such as borrowers’ financial
positions, ratio of banks’ capital to their assets, price and availability of bank funding
8 Deloitte © 2007 Deloitte AG. All rights reserved.

A key worry: plentiful liquidity + cheap credit = debt boom
2000
T o t a l L ia b ilit ie s a s a % o f N o m in a l G D P
500 Europe’s joined in the debt boom too 2007
400
300
200
100
0
US Japan Germany UK France Italy Spain Netherlands
9 Deloitte © 2007 Deloitte AG. All rights reserved.

Spread of 3 month money over ECB repo
Rising risk aversion has led to a flight to liquidity and a sharp rise in 3 month
interest rates
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
99
00
01
02
03
04
05
06
07
19
20
20
20
20
20
20
20
20
10 Deloitte © 2007 Deloitte AG. All rights reserved.

Banks’ declared losses
Additional
announced
Q3 Structured credit and estimates of Q4 % of
leveraged loans losses losses and write- Market Market
and write-downs downs Total Capitalisation Cap
Citigroup 6.5 11 17.5 152 11.5%
Merrill Lynch 8.4 8.4 45 18.7%
Barclays 2.7 2.7 68 4.0%
Bank of America 4 3 7 189 3.7%
Deutsche 3.4 3.4 62 5.5%
UBS 3.6 3.1 6.7 86 7.8%
Goldman Sachs 1.5 1.5 85 1.8%
JPMorgan 1.3 1.3 139 0.9%
Wachovia 1.3 1.3 76 1.7%
Bear Stearns 0.7 1.2 1.9 13 14.6%
Source: Deloitte Research and press reports
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Asset bubbles are followed by a collapse in prices….this
takes time…and can be painful
5500 It took more than 2 years for the dot.com bubble to deflate
5000
4500
4000
3500
3000
2500
2000
1500
1000
Nov/97 Nov/98 Nov/99 Nov/00 Nov/01 Nov/02 Nov/03 Nov/04 Nov/05 Nov/06 Nov/07
12 Deloitte © 2007 Deloitte AG. All rights reserved.

US banks have become much more unwilling to lend
US credit conditions:
net % of banks tightening lending terms to corporates
55
45
35
25
15
5
-5
- 15
-25
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
20
20
20
20
20
13 Deloitte © 2007 Deloitte AG. All rights reserved.

Banks tend to under perform when the economy is
weak:
they are under pressure now
UK banks relative to the broad equity market
275
250
225
200
175
150
125
100
75
50
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
14 Deloitte © 2007 Deloitte AG. All rights reserved.

Good news…
global growth doesn’t just depend on the US anymore
Change in oil consumption, % (1996 to 2006)
50
45
40
35
30
%
25
20
15
10
5
0
BRICs The rest of the world G7
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Key features of the crisis
Sub prime was a result of easy credit and financial innovation. Other
asset classes have similar characteristics
Financial markets were slow to react to bad news. US housing
slowdown started in 2006, sub prime meltdown didn’t start in earnest until
Spring 2007
It’s been worse than expected. A financial event has become an
economic problem
Downside risks have emerging simultaneously. Record oil prices, the
lagged effect of past rate hikes, financial stress
16 Deloitte © 2007 Deloitte AG. All rights reserved.

What else could go wrong?
• US sub prime defaults are likely to rise further
– risk that it spread to other parts of the US housing market
• The full impact of recent events on financial institutions may not be fully apparent
– risk of further write-offs
• Crystallisation of warehousing risk + strain from SIVs/conduits
- risk balance sheet damage impedes credit creation hitting leveraged trades
• Strains in the commercial real estate sector
- risk of further balance sheet damage, confidence effects
• Equities are up on the year
- risk that weaker growth leads to weaker equity markets
• The dollar remains in downtrend
- risk of sharp downward correction which hits confidence
17 Deloitte © 2007 Deloitte AG. All rights reserved.

Europe – areas of vulnerability
• ECB rates have doubled to 4.0% in the last 2 years
• 40% appreciation in Euro since 2000 low
• Compressed high yield spreads
• Surge in low quality bond issuance, credit derivatives
• Buoyant real estate and equity prices
• Rise in household and corporate exposure to short rates
• Household debt/GDP ratio has risen 45% in the last 10 years
• Corporate gearing has risen 60% in the last 10 years
• Housing valuations stretched in a number of European economies
Problems in European covered bond and European Government bonds
illustrate risks
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Scenarios for the Credit Crunch
Scenario 1: Scenario 2: Scenario 3:
Consensus (around 12 months) Worse than expected (1-2 years) Large Impact (several years)
Comparable 1998 credit crunch 1990-91 recession and Savings & Loans problems Japan in 1990s
Event
FRB floods market with liquidity FRB provides liquidity FRB liquidity infusion and bail outs are insufficient
Key Actions
Taken Interest rates are lowered US Government sets up agency to assist ECB lowers interest rates sooner than expected
homeowners
Confidence returns in credit markets Credit is constricted; spreads stay high Further credit constriction
No significant slowdown in credit Increasing defaults prolong the crisis Adequate credit not available for normal operation
Market
Reaction of economy
Sub-prime defaults impact equity prices of some European banks suffer earnings loss and modest
financial institutions credit decline Bank balance sheets worsen
US GDP growth declines moderately in Q3-Q4 US recession; resumes slow growth in 2008 Prolonged economic stagnation seen in US
2007
Normal growth on hold until at least 2009 Europe experiences medium term decline in growth
Economic
Outcomes US normal real growth resumes by Q3-Q4 2008
Europe slows more quickly than expected Slower growth in Asia and Latin America
No significant effect on growth in Europe or Asia
Likelihood EXPECTED POSSIBLE UNLIKELY
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US slowdown in ‘07 spreads in ‘08
Evolution of 2007 GDP forecasts Evolution of 2008 GDP forecasts
3.3
2.9
UK
2.8
US US
2.7
2.3
2.5
UK
1.8
2.3
Germany
1.3 Germany
2.1
0.8
1.9
6
7
06
07
6
6
7
7
l/0
l/0
r/0
/0
r/0
/0
7
7
7
07
07
7
7
7
7
n/
n/
ct
ct
/0
l/0
0
/0
Ju
Ju
r/0
/0
0
Ap
Ap
Ja
Ja
n/
g/
/
O
O
p/
ay
ov
ar
ct
Ju
Ap
Au
Ju
Se
O
M
M
N
20 Deloitte © 2007 Deloitte AG. All rights reserved.

Something is changing in the global economy
Monsanto Share Price
1050
China Market Price Index
850 Gold Bullion U$/Troy Ounce
650
450
250
50
3
4
5
6
7
03
04
05
06
07
08
00
00
00
00
00
20
20
20
20
20
20
l/2
l/2
l/2
l/2
l/2
n/
n/
n/
n/
n/
n/
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Ja
21 Deloitte © 2007 Deloitte AG. All rights reserved.

The Effect on Global Growth
What the consensus expects:
• The US bears the brunt of the slowdown.
• The Euro Area and Japan are expected to “de-couple” from the US
• Emerging economies remain buoyant
What the Consensus Expects for Global Growth
2006 2007 2008 2007-08 forecast as
actual forecast forecast % of average rate*
United States 3.3 2.0 2.1 71%
Japan 2.2 2.0 1.8 191%
Euro area 2.6 2.6 2.0 119%
United Kingdom 2.7 2.9 2.1 98%
Emerging economies 7.9 7.5 7.1 138%
*Average growth rate between 1992 and 2006
Source: The Economist, IMF, Deloitte
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Impact on the European
Insurance Industry

Impact on the European Insurance Industry
Overview
• The direct impact on insurers
– Claims experience
– Investment portfolios
– Relevance of liquidity
– Investment policy and strategy
• The indirect impact on insurers
– Regulation
– Trust
– Financial Statements
– Consumer demand structure
– Economic impact
• Conclusion
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Impact on the European Insurance Industry
Direct impact on insurers
Claims
D&O Insurance
Credit Insurance
Legal protection insurance
Recommendation: Analysis of the insurance contracts
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Impact on the European Insurance Industry
Direct Impact
Investments: Market information*
Company Total Assets in Structured
billion CHF Products in billion
CHF**
Swiss Re 169 27.2
Zurich FS 186 27.6
Swiss Life 135 0.4
Baloise 52 -
Helvetia 30 -
* Source: SAL.Oppenheim / www.cashdaily.ch
** Structured products (including Subprime Mortgages, ABS, MBS, CDO)
26 Deloitte © 2007 Deloitte AG. All rights reserved.

Impact on the European Insurance Industry
Direct Impact
• Investments: Analysis and Valuation
– Analysis of the investment portfolio: Does the company have an end-to-end view
of its investment vehicles or are there significant amounts invested in opaque or
unregulated investments?
• CDO
• SIV
• real estate
• mortgages
– Valuation of structured products
• Appropriate vetting process regarding the use of counterparty prices
• Appropriate vetting process for model parameters (correlations, recovery rates, …)
• SST requirement: Quantification of hidden options and hidden guarantees
27 Deloitte © 2007 Deloitte AG. All rights reserved.

Impact on the European Insurance Industry
Direct Impact
• Investments: Review
– Review of processes to analyse the risk profile of new investments
– Review of investment policy
– Review of investment strategy
• The volatility and turmoil of the capital markets could lead to a change in the
investment strategy
• Investments: Liquidity
– Impact of liquidity
• Not usually an important theme for insurers
• Some solvency stress scenarios lead to high levels of policyholder lapsation
• Important as direct respectively indirect impact
– Liquidity management – Monitor the need to adapt liquidity planning
• Examine and reconsider existing processes to monitor liquidity
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Impact on the European Insurance Industry
Indirect impact on insurers
• Regulation
– After the equity market crisis the insurance regulator established risk based
systems to quantify risks (esp. risks of structured products).
– Can we avoid impairments by following regulatory requirements?
– Solvency II is not in place yet / SST is implemented
– Principles versus rules based regulation: The credit crunch highlights some
advantages of principles based regulation
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Impact on the European Insurance Industry
Indirect impact on insurers
• Trust
– Impact of information „trickle“ over time
– Potential damage to trust of shareholders / policyholders / creditors / …
– Important to avoid: new surprises / valuation issues / liquidity problems
• Impact on Financial Statements and Annual Reports
– Financial Review and Preview
– Impairments / Reduction of hidden reserves / Reserving
– Widening spread between Government Bonds and Swaps exacerbates debate
around „risk free rate“ (IFRS, EEV, SST, Solvency II)
– Special focus on valuation because of the public pressure and the sensitivity of
the market
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Impact on the European Insurance Industry
Indirect impact on insurers
• Change in consumer demand structure
– Volatility can lead to more risk averse investing
– Potential increase in propensity to save
– Increased popularity of insurance products with higher guarantees
– Increased demand for credit protection
31 Deloitte © 2007 Deloitte AG. All rights reserved.

Impact on the European Insurance Industry
Indirect impact on insurers
• Economic Impact
– Liquidity of the market regarding credit instruments
• Impact on value
• Possible impairments
• Solvency
– Reduction of the equity markets – Solvency
• Impact on value
• Solvency
– Customer demand reduction
• Recession
• Impact on growth and value
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Impact on the European Insurance Industry
Conclusion
• Insurers must fully understand the products they‘ve sold
• Insurers must fully understand what they`ve invested in
• Capital scenarios/stress tests should be designed to reflect all potential
risks
While the initial impact on the insurance industry has generally been less
severe than on some banks, the volatility of capital markets and the time lag
in information flowing through the system doesn`t rule out further negative
impacts.
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“As is common in such situations, one should first
focus on the current status, but also immediately
prepare for the future.”