APRIL 2013

Societe Generale Corporate & Investment Banking

Global Markets Division | CROSS-ASSET SOLUTIONS GROUP

GLOBAL MARKETS

ASSURFINANCE, APRIL 9, 2013

ALM TOPICS

Ludovic Antony & Alexandre Visentin

Ludovic.antony@sgcib.com | +42 13 59 61

THIS DOCUMENTATION IS EXCLUSIVELY FOR INSTITUTIONAL INVESTORS ACTING FOR THEIR OWN ACCOUNT AND CATEGORIZED AS ELIGIBLE OR PROFESSIONAL CLIENTS,

AS DEFINED BY THE 2004/39/CE DIRECTIVE ON MARKETS IN FINANCIAL INSTRUMENTS.

P. 2

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DISCLAIMER

INTRODUCTION

Once a safe heaven

Impact of equity markets fall in 2008, dampened by 2009 rebound, followed by a relatively flat 2010

Benefits from high bond coupons, in a decreasing rates environment which provided a competitive edge

A cost accounting and solvency framework that did not show the significant un-realised credit and equity losses (smoothing)

Low funding costs

A significant rise in premiums collected from 2008 onwards

2011 was tough

The insurance industry has been severely impacted by the Greek crisis, and subsequent equity crashes

Losses have so far been absorbed by profit sharing reserves. But they have contributed to fragilize the industry

Net outflows due to the recession, reduced comparative advantage, fears of reduced company strengths

Future margin prospects depressed by low interest rate environment with various pains depending on the businesses (long

term savings)

What’s next?

Yields (rates and spreads) are at historically low levels and may remain so for several years, below the level of most

guarantees provided by some European insurance companies

The economy is suffering, and companies are still reluctant to re-enter equity markets, fear defaults

Some companies are reshuffling their models

Solvency II implementation will not be clarified before mid 2013 and may not be implemented before 2016, in a context where

governments are looking for incentives to foster long term investments

P. 3

1. MARKET CONTEXT

2. REGULATORY CHANGES

3. DIRECTIONS

CONTENTS

P. 4

MARKETS I - RATES

Source Bloomberg April 5 2013.: THE FIGURES RELATING TO PAST PERFORMANCES AND/OR SIMULATED PAST PERFORMANCES

REFER OR RELATE TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO

HISTORICAL MARKET DATA.

0

10

20

30

40

50

60

70

80

90

100

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

10 Y Swap Rate 10Y10Y Swap Rate

Vol Swap 10Y 10Y (Right)

Chronological help

September 2007: Start of the subprime crisis

March 2008: Bear Stearns bailout

September 2008: Lehman Brothers collapses

November 2008 to June 2010: QE1 (in stressed corporate default context)

May 2010: IMF + Europe Greece bailout

November 2010: QE2 announced & IMF + Europe Irish Banks bailout

Summer 2011 to 1st Quarter 2012: Italy, Spain, and Portugal crisis

Decembre 2011 et Février 2012: LTRO

September 2012: QE3 Announced together with 0% FED rate

objective through 2015

Rate

Crash

P. 5

MARKETS II - CREDIT & EQUITIES

Source Bloomberg April 5 2013.: THE FIGURES RELATING TO PAST PERFORMANCES AND/OR SIMULATED PAST PERFORMANCES

REFER OR RELATE TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO

HISTORICAL MARKET DATA.

Euro

Sto

xx 5

0 (€

) &

VIX

(S&

P 5

00

)

Equity

Rebound

Low

Implied

Volatility

Spread

Meltdown

Cre

dit S

pre

ad

-1

0

1

2

3

4

5

10 Y OAT - Swap Spread 10 Y Bund - Swap Spread

10 Y BTP - Swap Spread ITRAXX MAIN EUR

0

10

20

30

40

50

60

70

80

90

0

1000

2000

3000

4000

5000

6000

7000

8000

SX5T

VIX (Right)

P. 6

LIMITED CREDIT DIVERSIFICATION & LOW SPREADS

Outstanding amounts (in EUR bn) – Total amount: EUR 1.0 trn Average current spread (in bps)

Bonds per issuer and

per rating

Maturity

buckets

AA Govt

3-5 Years

5-10 Years

10-15 Years

AAA Corporates

3-5 Years

5-10 Years

10-15 Years

AA Corporates

3-5 Years

5-10 Years

10-15 Years

A Corporates

3-5 Years

5-10 Years

10-15 Years

AAA Financials

3-5 Years

5-10 Years

10-15 Years

AA Financials

3-5 Years

5-10 Years

10-15 Years

A Financials

3-5 Years

5-10 Years

10-15 Years

244

366

123

Fre

nch is

suers

only

Sources: Bloomberg, end of 2012

P. 7

IN ABSOLUTE AND RISK-ADJUSTED TERMS, CREDIT PERFORMANCE SUFFERS

With 2% absolute yield target, only BBB make the cut in

the 5-7 Y bucket

A & BBB have positive risk-adjusted performances across

all maturities. This is not the case for better ratings

* **

***

* Average SCR = (SCR Maturity + SCR 1Y ) / 2

**Market spread for corporates only as of 13, November 2012, source Bloomberg

Defaults computed based on Moody’s average cumulated default rates (1982-2010) by

maturity and recovery values

*** Swap yield 3Y, 6Y, 9Y (as of 13, November 2012, source Bloomberg ) + market spreads

P. 8

SOLVENCY II CONSEQUENCES ON EQUITIES AND CORPORATE BONDS PERFORMANCE

European equity market indices -

Solvency II simulated impact

Overview of Solvency II estimated impact on

Equities and Corporate bonds AXA IM research

estimates EUR

500 bn assets

have already

been reallocated

since end 2009

by European

insurers in

anticipation of

Solvency II

This may have

had a strong

impact on

Equities total

return

performance

and corporate

bonds spreads Source: Lipper, Bloomberg, Datastream & AXA IM Research

Source: « Solvency II has and will make corporate bonds more expensive », AXA IM Research, 28 November 2012

P. 9

Shows

continuous

increase in

allocation to

Fixed income...

... and continuous

decrease in

allocation to

Equities

Consistent with

Solvency II asset

allocation

incentives

Moves on other

assets less

significant

Asset allocation data for the general account of 4 large continental

Europe insurers (AXA, Allianz, CNP and Generali)

CHANGES IN ASSET ALLOCATION

Source: Company Annual reports

P. 10

USE OF INTEREST RATE OPTIONS

Notional of interest rate swaptions, caps and floors as percentage of

general account assets (in %)

Continuous increase in

use of Interest rate

swaptions and Caps by

Allianz and CNP

% of Caps used for AXA

and Allianz are

expressed in % of total

assets, so that caps

exposure in countries

where savings products

are dominant should be

much more important

Again consistent with

Solvency II incentives

Source: Company Annual Reports

n.a.

P. 11

LOOKING AT MCEVs since 2008?

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

RFR + 100bps RFR - 100bps Imp Swaption Vol

2012 2011 2010 2009 2008

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

RFR + 100bps RFR - 100bps Imp Swaption Vol

2012 2011 2010 2009 2008

CNP

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

RFR + 100bps RFR - 100bps Imp Swaption Vol

2012 2011 2010 2009 2008

Generali

MCEV Risk Free Rates and Swaption Implied Volatility Sensitivities

AXA

P. 12

Reminder 10y swap rate (%) End 2008: 3.74 End 2009: 3.58 End 2010: 3.32 End 2011: 2.38 End 2012: 1.57

Vol 10y10y ATM (bps / an) End 2008: 74 End 2009: 68 End 2010: 76 End 2011: 80 End 2012: 70

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

RFR + 100bps RFR - 100bps Imp Swaption Vol

2012 2011 2010 2009 2008

Allianz

Source: Company Embbeded Value reports

LOOKING AT MCEVs SINCE 2008?

Generali

MCEV Spot and Implied Volatility Sensitivities

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

Equity + 10% Equity - 10% Imp Eq Vol

2012 2011 2010 2009 2008

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

Equity + 10% Equity - 10% Imp Eq Vol

2012 2011 2010 2009 2008

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

Equity + 10% Equity - 10% Imp Eq Vol

2012 2011 2010 2009 2008

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

Equity + 10% Equity - 10% Imp Eq Vol

2012 2011 2010 2009 2008

CNP

AXA Allianz

P. 13

Reminder Eurostoxx 50 (points) End 2008: 2 448 End 2009: 2 965 End 2010: 2 793 End 2011: 2 317 End 2012: 2 636

Equity volatility VIX (%) End 2008: 40 End 2009: 22 End 2010: 18 End 2011: 23 End 2012: 18

Source: Company Embbeded Value reports

LT Issuer credit Rating 31/12/2006 31/12/2007 31/12/2008 31/12/2009 31/12/2010 31/12/2011 31/12/2012

Aegon A+ A+ A+ A- A- A- A-/Stable

Allianz AA- AA AA AA AA AA AA/NEG

Aviva A+ A+ A+ A A A A-/Stable

Axa A A+ A+ A+ A A A-/Stable

CNP AA AA AA AA- AA- AA- A+/NEG

Generali AA AA AA AA- AA- AA- A-

Groupama A A+ A+ A A- BBB- NR

ING AA- AA- AA- A A A A/NEG

L&G AA- AA- AA- A+ A A A/Stable

Munich re AA- AA- AA- AA- AA- AA- AA-/Stable

Prudential A A+ A+ A A A A+/NEG

Standard Life BBB+ BBB+ BBB+ A- A- A- A-/Stable

The evolution of S&P ratings since 2006, aggregate the pessimistic view on the insurance industry trend

Source: S&P , 31st December 2012

ANY IDEA WHERE WE ARE HEADING?

P. 14

ANY IDEA WHERE WE ARE HEADING?

Underlying Observation What insurance company think or do?

Rates • Low

• Sloped curve

• High vol regime (SII

efforts, capacity)

• Margins deteriorate despite short term positive impact due to unrealized gains

• Expectations (or fear) that rates will rise in 1 or 2 years

• Some French companies have actively bought CMS caps & payer swaptions in 2012

• Protection costs suffer from high vol regime and sloped curve

• Disconnection with govies yields

• Hedging against further rate decrease is not envisaged

Core

Govies

• Low

• Sloped curve

• A strong focus of 2012 investments which has generated significant unrealized gains, but not

sustainable over the medium term for same reason as for rates

• Historically low yields will not last forever

• Implementing protections is complex due to lack of volatility market and accounting constraints

PII Govies • Still under tension

• Political uncertainty

• Greece trauma is still there

• No appetite yet to increase share of PII govies holdings, except in local subsidiaries

• Political tensions in Italy do not help

Corporate

credit

• Spreads are very low

• Lack of diversification

• Limited offer/diversification, alternatives are welcome (e.g. loan investment or refinancing)

• Break-even adjusted returns make llow rated corporate bonds attractive

• Appetite revived for some short term structured credit

• Protections enquiries in fear or defaults / MtM drawdowns

Equities • Risk premium (?)

• Low implied volatility

• Why not, but with protections as too costly under SII

• Buying volatility is a good time as it is really cheap

P. 15

1. MARKET CONTEXT

2. REGULATORY CHANGES

3. DIRECTIONS

CONTENTS

P. 16

EMIR

Developed in response to G20 leaders’ commitment in 2009 to introduce central clearing and reporting

of OTC derivatives

"...All standardised OTC derivative contracts should be traded on exchanges or electronic trading

platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC

derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be

subject to higher capital requirements... "

EMIR is a European regulation, not a Directive, and will pass directly into national law

EMIR is applicable to “systemic” corporates, insurance companies, asset managers, pension funds, and

banks

3 year exemption expected for pension schemes on the clearing obligation of clearable derivatives.

Intra group transactions are exempted, as well as public entities

Central clearing should come into force in the summer of 2013

Requirements for non centrally cleared derivatives should come into force by 1, January 2015

Initial margin requirements (with some netting and consolidated deductible)

Phase-in

EMIR is likely to make derivatives less attractive as they will be more expensive

P. 17

A REMINDER ABOUT SOLVENCY II

From a rules based approach to a principle based approach, with

Standard formula and internal model

Recognition of risk mitigating policies / use of derivatives to manage risks

From a “cost-cost” balance sheet to an MtM/Economic balance sheet

From a Minimum Solvency Requirement to a Two-Ladder Intervention regime

SCR: Target level of (economic) capital that company can temporarily move away from

MCR: Minimum level of capital below which companies can no longer operate

From prudent reserving and crude factor based regime to

Best estimate reserving; and

(Granular risk based) Solvency Capital Requirement calculated on total balance sheet, and set as 1 year 99.5% VaR (Delta

NAV approach) on astandard formula or internal model basis

From no recognition of intangibles to recognition of future profits as Tier 1 capital / Own funds

“When Solvency II comes into force this will mean that, literally overnight, the

solvency ratios will have changed, whereas the financial status of

companies has not “

P. 18

A FUNDAMENTALLY DIFFERENT APPROACH – BALANCE SHEET

PRUDENT

RESERVES

Single scenarios

Prudent discount rates or accrued

reserving basis on life side

Prudent mortality/longevity tables

Prudence in non life reserve

estimates and no discounting most

of the times

BONDS Amortized cost

Impairment in case of issuer strong

probability of default

Sometimes, subject to Réserve de

Capitalisation

FUNDS, EQUITIES,

REAL ESTATE, L&D

Historical cost (HC)

Impairments equal to HC –

Recovery value when MTM < 80-

70% of HC for 6 consecutive

months

Other reserves

REINSURANCE

RECOVERABLES

SUB DEBT

CORE EQUITY

BEST ESTIMATE

LIABILITIES

Probabilty weighted policyholder

cash flows

discounted at risk free rate

Market consistent view which

includes cost of financial options

and guarantees

INVESTMENTS

Mark-to-Market

SUB DEBT

CORE EQUITY

VIF & DTA

RISK MARGIN

SII

ASSETS LIABILITIES ASSETS LIABILITIES

REINSURANCE

RECOVERABLES

Available capital / Own Funds

UCG

UCG SI

P. 19

A FUNDAMENTALLY DIFFERENT APPROACH – ASSET COMPOSITION

SI* SII

FIXED INCOME

EQUITIES & FUNDS

EQUITIES AND REAL ESTATE

• OECD state and state agencies bonds

• Listed medium term notes

• Listed bonds and shares issued by

regulated sec. vehicules / SPV (insurance

risk, state guaranteed receivables, and

others)

ELIGIBILITY CRITERIA DISPERSION RULES

• Listed shares (including fund shares)

• OECD insurance company shares

• « Other » shares and mutual ins. co.

equity instruments

• « Other » shares of sec.vehicules

• Funds

LOANS AND DEPOSITS

• State guaranteed loans and local

collectivities

• OECD mortgage loans

• Loans to OECD listed companies

• Other loans to OECD counteprarts

• Short term deposits

• Real Estate (RE) owned directly

• Shares of real estate vehicules

• No aggregate

restriction except

for ins. sec.

• Max 5% for ins.

linked sec and state

guaranteed

receivables sec. )

• Max

65%

AGGREGATE INDIVIDUAL

• Max

5%**

• Max

10%

* Continental Europe example

** Except for OECD state bonds

*** Except for loans to listed OECD companies and to 50% owned OECD state agency

• Max1%

• Max

10%

• Max

10%

***

• Max

40%

• Max 5%*

ASSETS

• All assets eligible as long as

company can withstand the

SCR charge (including

concentration charge)

• Restrictions on securitizations

• Breakdown of assets by risk

bucket required to avoid

penalizing charges

« SAFETY AND LIQUIDITY »

P. 20

MAIN CONCERN IS VOLATILITY OF OWN FUNDS

P. 21

Allianz Example

21.9

12.5

7.3

2.5

4.4

- 16.3

- 5.2

0

5

10

15

20

25

30

35

Starting value

New business

adjs

MCEV earnings

Recognized economic variances

Ending value Year end volatilities

Adjusted ending value

Q2:2009: Recognized economic variances =

+ 12 EUR bn

Financial Market Impact MCEV Movement Analysis (in EUR bn)

7.3

21.4

0.12.0

12.0

0.0

5.0

10.0

15.0

20.0

25.0

Starting value

New business

adjs

MCEV earnings

Recognized economic variances

Ending value Year end volatilities

Adjusted ending value

Rates4

Implied volatilities

5.2

Creadit Spreads

2

Equity0.8

2008: Recognized economic variances + Year end

volatilities = - 21 EUR bn

Evolution 2008 – Q2 2009

Evolution 2008

Rates5.8

Implied volatilities

5.2

Creadit Spreads

5

Equity5

Source: Company report, SG Advisory analysis

RULES WILL CHANGE

P. 22

Reality check

Last year, discussions held by the Council, the Parliament,

and the Commission to finalize the Solvency II framework

were “contaminated” by insurance and pension funds panic

in North European countries

Extremely low swap rates and extremely low core Government bond spreads uncovered significant ALM mismatches in Germany, the Scandies, and Spain (and potentially UK annuity books)

The once discussed introduction of stress tests for European sovereigns was no longer a possibility (even if Greece default hit a lot insurers across the board)

Extreme financial and political tensions in the Euro Zone led to believe that uncertainty would ruin any attempt to manage balance sheets on an MtM basis

1.5

2

2.5

3

3.5

4

4.5

May

201

0

Jul 2

010

Sep

2010

Nov

201

0

Jan

2011

Mar

201

1

May

201

1

Jul 2

011

Sep

2011

Nov

201

1

Jan

2012

Mar

201

2

May

201

2

Jul 2

012

Sep

2012

Swap 30yGovies 30y

“Trialogue” between the Parliament, the Commission, and the Council

failed to reach a compromise before summer

The outcome for the industry came under the form of another field study (Long Term Guarantee Assessment (LTGA)) which ought to be completed

The LTGA is a prerequisite before both the Parliament and the Council vote the final text, and we can move on to the transposition of the full Solvency II Directive into national law in order to get ready for implementation

LTGA currently tested several discounting options for liabilities to reduce the cost of duration mismatches

EIOPA has recently published a set of requirements to be implemented 1, January 2014, but the

Pillar 1 implementation date is not expected until 1, January 2016

Two main “practical” issues:

Extremely low swap rates

Disconnection between sovereign yields

across Europe with some below swap and

some way above

Govies basket: average of OAT, BTP and Bund, normalized

Source: Bloomberg at end of December

MEASURE SPECIFICATION (STD & EXT. STD 1) IMPACTS / COMMENTS

Risk Free

Rate

Swap

+

Credit Risk Adjustment (CRA)

99-04: 10 bps / 04-09: 20 bps / 09-11: 35 bps

• Creates deficit if adjusted swap rates below

pricing rates

• Duration and convexity mismatches will

contribute to increase SCR

• Hedging needs pressure long end of the curve

• CRA seems to be changing only slowly

Ultimate

Forward

Rate (UFR)

@ 4.20%

• Extrapolate spot rates beyond last liquid point (LLP) (€20Y) using UFR, with

convergence in 10Y (in baseline scenario)

• Update of UFR?

• Artificially reduce long term rates and liabilities

• Concentration of hedging needs on 20Y rates, at

least in the short term

• If rates stay low, mismatches will be uncovered

through time

Matching

Adjustment

(MA)

• Ring fencing of assets and liabilities must be possible

• Applicable to single premium in force longevity linked liabilities w/o PH options (STD

only) or most types of life and annuity liabilities and future premiums (Ext.STD 1)

• Replicating portfolio of fixed, IG (except local govies and alike) assets:

Maximum exposure to BBB of 33%, sub IG not allowed

15% max. mismatch limit between PV of asset and liability cash flows

• MA = {Spread – Max( 75%(1) * LTA (2) of Spreads, Ultimate Losses + Cost of

Maintaining Portfolio Credit Quality)}

• AR = Max(0, 1–Discounted Cash Flow Shortfall / Best Estimate) under stressed

actuarial parameters scenarios, applied to MA

• Reduction of Spread Risk SCR due to reflection of Spread Risk SCR on MA

• Reduction of long term liabilities, and spread

risk SCR, which contribute to improve solvency

ratios, and reduce volatility induced by spread

movements

• Restrictions on A & L make it potentially hard to

apply to continental style with profit contracts:

Quasi-perfect matching

Ring fencing

Asset exclusions

• Extended alternative removes almost all

constraints. Will it be applied in the end ?

Contra

Cyclical

Premium

(CCP)

• Not cumulative with MA, but can be applied to liabilities to which MA is not applied

• Reflects increased portion of illiquidity premium in spreads during crisis peaks

• Applies to liabilities with duration above 7 years

• CCP(3) = 100 bps in baseline scenario

• Effect of CCP = SCR for illiquidity

• Temporarily reduce liabilities during crisis peaks

• Net effect on balance sheet is limited before

diversification benefits, as reduction of liability

requires an increase in SCR for the same

amount

LTGA – LIABILITY DISCOUNTING TESTS

(1) 80% for Extended Standard 1 (2) LTA = Long Term Average

(3) Previously: 50% * Max (Gov/Corp Spread – 40/49 bps, 0) up until LLP (extrapolation of CCP adjusted curve beyond LLP) P. 23

LTGA – ELIGIBLE ASSETS

2 criteria

Cash flows cannot be changed by third parties (no issuer options)

Fixed cash flows in timing and amount (except in extended alternative)

Examples of exclusions from standard MA and Extended Standard MA 1

Asset Type In or Out

Cash

Corporate, Government Bond

FRN / Variable Bond (allowed in extended alternative MA)

FRN / Variable Bond + Receiver Swap

Mortgage with Prepayment Risk, no Make Whole Provision

Mortgages with Make Whole Provisions (1)

Subordinated Debt (Call Date)

ABS with Fixed Cash Flows

Equities

P. 24

1. MARKET CONTEXT

2. REGULATORY CHANGES

3. DIRECTIONS

CONTENTS

P. 25

RATES

P. 26

Ideas Key Features Rationale Solvency II Impact

• Government

puttable

bond

• Long dated government /state owned

company fixed bond (e.g.15-20-30Y

puttable in 5, 10, 15Y)

• Works like a long term bond plus a

payer swaption, or a short term bond

plus a receiver swaption

• Duration and convexity management tool

• Swaption price become attractive due to steep forward

government curve as compared to swap curve

• No collateral management

• No bifurcation of swaption from bond

• Reduces SCR for IR

downside risk

• E.g. for a 20NP10

bond reduction of SCR

for IR downside risk is

roughly 12%

• Forward

bond

purchase

• Forward contract to purchase in 5Y

from now an existing government

bond (France, Belgium, Germany) of

remaining duration 10Y in 5Y

• Simple interest rate hedging instrument

• When government bond curve is steep enables to lock-in

attractive yield for the future to manage reinvestment risk

• Hedge accounting allowed to avoid any P&L volatility under

local GAAP or IFRS

• Reduces SCR for IR

downside risk

• Limited counterparty

default risk on Bank as

collateralized

transaction

• Protections

on govies

(several

instruments)

• TEC 10 bonds: which provide

coupons related to the credit standing

of governments (similar to CMS

bonds)

• Direct sale of govies

• Other instruments (e.g. option on

clean MTM of govies)

• Enables to increase coupons to improve profit sharing when

government yield rise (expensive convexity, limited number

of issuer, issuer credit risk different than state)

• Locks current unrealized gains, but gains need to be

reserved in the capitalization reserve which reduces

flexibility. Solves the problem if there are reinvestment

alternatives to the govies

• Directly protects a significant part of company holdings (no

basis risk). While companies keep retaining coupons from

the bonds, These solutions suffers from limited capacity due

to lack of vol market. Therefore alternative solutions need to

be found

• Reduces SCR for IR

upside risk

BUYING EQUITY WITH PROTECTIONS: WHAT DO INSURERS DO?

European put options

Payoff: Max[Strike –

S(Maturity), 0]

• Provides firm protection below the strike

• Positive MtM reaction to spikes in volatility

• Credit generally given in RBC framework, and will

dependon on:

Maturity of protection

Strikes as compared to spot

• Upfront cost is high due to volatility skew, and

prohibitive in flat or slowly upward trending

markets

• Sum of short term puts costs more than long term

put theoretically but long term put liquidity is

scarce

• Protection level is path and time dependent, with

delta decreasing as spot moves away from strike,

and time value decreasing with passage of time

• Permanent protection requires active restriking of

strategy

• Basis risk

Instruments / strategies « + » « - »

Systematic delta hedging

with futures

• Homemade protection with vanilla instruments

• Enables companies to replicate long dated puts

• Credit can potentially be given in RBC / Solvency

framework if dynamic management is considered

under an « internal » model approach

• Same as above

• Requires operational set up to do this

• Imperfect hedging (vega risk)

• Significant risk if delta not frequently rebalanced

Systematic volatility

management strategies

Investment in equity(t) =

Realized Volatility (t) /

Target Volatility x Index(t)

• Exposure to equity decreases/increases when

volatility increases/decrease, i.e. when markets

suffer / perform

• Leads to overal volatility being close to target

volatility and therefore cuts tail risks

• Not recognized under Solvency II

• No basis risk

• Timing risk on leverage/deleverage

• Protection level also depends on target volatlity

choice and period for calculation of the realized

volatilitty

P. 27

DESIGNING EFFICIENT EQUITY PROTECTION STRATEGIES

A FEW KEYS

Keep upside to bull equity markets

Minimise cost of carry when markets are

flat or rallying

Maintain level of protection constant

through time and scenarios

Manage basis risk

Monitor counterparty default risk and

execution risk

EURO STOXX 50 + PROTECTION OPTIMISEE: ROLLING ANNUAL PERF.

-60%

-40%

-20%

0%

20%

40%

60%

EuroStoxx 50 Euro Stoxx 50 +Vanilla Collar Zero Cost

Eurostoxx 50 +Enhanced Collar

Euro Stoxx 50 + Protection

Optimisée

0

10

20

30

40

50

60

70

80

90

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

Basis 100 SPVXSTR Index Basis 100 SGI VI Beta 2 Index VIX (Right)

IMPLIED VOLATILITY DIVERSIFICATION : INDICES BACKTESTS

SCR Reduction:

approx 20%

EC Reduction:

approx 10%

P. 28 Source: SG engineering

HEDGING CORPORATE CREDIT SPREADS

Senior tranches offer a naturally leveraged way of taking a bearish position. Like options, their value increases exponentially when credit

spreads widen

A senior tranche protects against extreme loss levels and can be seen as a deep out-of-the-money put

SG Cross Asset Research analysed the efficiency of the different tranches to hedge tail risk in Europe and in the US by looking at two

different types of structure to see which structure offers the best trade-off between cost and hedging power, from both a model-based and a

historical perspective

Standard tranches and

K-100% pieces

Jun-18 iTraxx Main S9 22 – 100% offers the best characteristics in Europe while the Dec-17 CDX IG S9 10-15% looks the most

attractive in the US

Source: SG Cross Asset Research, 10th April 2012. extract from “Finding the best tail risk hedge in the tranche market”

P. 29

P. 30

Reserved Based

Finance

2 – 5 years, secured by oil

& gas reserves

Mixed credit profile (BBB- to

B+), predominately non-

investment grade

8 Commodity Finance

1 – 5 years,

predominantly secured by

commodity assets

Energy and Agricultural

Typically non-investment

grade

9 Metals & Mining

Finance

2 – 10 years, secured by

reserves and fixed assets

Primarily non-investment

grade issuers, but mixed

credit profile

10 Energy/Project

Finance

5 – 15 years, secured by

assets and contractual CF

Non-rated issuers, but off

takers are typically IG -

Projects usually BBB- to

BBB. Generally involves a

drawdown period

7

Commercial Real

Estate

10 – 20 years, secured real

commercial estate

mortgages and rents

6

Local Authority

5 – 15 years, unsecured

financing

Repayment reliance on tax

collections

5 Infrastructure Finance

5 – 20 years, secured by

payments/ related to use of

underlying asset

(concession)

Mixed credit profile (BBB to

BB). Generally involves a

drawdown period

3 Mid Caps

3 – 10 years, unsecured

financing

Private placement in bonds,

loans or Schuldschein

format, with loan type

covenants.

4 Asset Based

Financing

6 – 20 years, secured by

asset (LTV)

Rail, aircraft, and

shipping

2 Export Finance

5 – 15+ years, secured by

export credit agency (ECA)

guarantee

Investment grade, based

upon ECA guarantee

1

0 5Y 10Y 15Y 20Y 25Y

6

1

3

8

7

9

1Y

10

2

3Y

4

5

LOANS AS AN ALTERNATIVE TO TRADITIONAL CREDIT ASSETS - OVERVIEW

P. 31

Asset Spread (a)

Average cumulative

default rate over

asset tenor (b)

Average recovery

rate(c)

Risk-adjusted return

[ a - (b*(1-c) / asset

tenor) ]

French Mid Cap

Private placement 200-300 bps

3% (Source : French Central

Bank)

65% (Source SG)

185 - 285 bps

BBB French

corporate debt

portfolio

114 bps 3.4%

(Source : S&P)

50% (Source : S&P and

Moody’s)

99 bps

Infrastructure loan 300 bps 4.4%

(Source : Moody’s)

87.5% (Source : S&P and

Moody’s)

294 bps

BBB Utilities

Corporate bond 200 bps 4.82% 50% 176 bps

0.80%

0.45%

0.88%

1.50%

0.44% 0.64% 0.62%

0.33%

0.80%

0.15%

0.54%

1.00%

0.10% 0.14% 0.13% 0.33%

ECA loan AAA Financial

AA Financial A Financial AA Industrials

A Industrials A Utility AA Sovereign

Gross spread Cost of defaults Cost of capital Spread net of cost of defaults and capital

Mid Cap

Loans

Infra-

structure

Loans

Export

Credit

Agencies

-covered

Loans

1

2

3

Sources: SG, Bloomberg, EIOPA

LOANS AS AN ALTERNATIVE TO TRADITIONAL CREDIT ASSETS - EXAMPLES

P. 32

Current activity from insurers Prospects

Export Finance US EXIM bonds

European insurers in loans European ECA Bonds

Asset Based

Financing None

Relative value to

corporate bonds?

Infrastructure

Finance

US and Canada: active investors

Europe: PFI in UK, Allianz, and several active

discussion

European Project Bonds

SME Corporate US and Canada: active private debt investors

Europe: M&G, AXA, few AM projects

Private placement in

loans or bonds

Commercial Real

Estate

Already the most advance example of

disintermediated market

Developed and active market with several

players: AXA, Allianz, Aviva, L&G, Generali…

Local Authority Historical market for Dutch and Scandinavian

insurers

Early discussion in new

markets

Commodity

Finance Strong interest for Trade Commodity Finance Securitisation

Energy/Project

Finance

Metals & Mining

Finance

US and Canada: few investors

Europe: limited by USD and Emerging market

risks

US Project Bonds

Reserve Based

Finance Only very specialized investors

Limited development due

to complexity

Examples of initiatives

from insurers

announced since 2011:

AXA - SG & CA CIB

partnership on Mid Cap

loans (EUR 1 bn)

Crédit Agricole

Assurances - Caisses

régionales du Crédit

Agricole partnership on

Local authorities

financing (EUR 1.5 bn)

Ageas - Natixis on

Infrastructure loans

(EUR 2 bn)

Cardif - BNPP on Mid

Cap loans (EUR 0.3 bn)

Swiss Life - Macquarie

on Infrastructure loans

(USD 0.5 bn)

INSURERS’ INVOLVEMENT IN LOANS

MERCI

P. 33

The contents of this document are given for purely indicative purposes and have no contractual value.

Authorisation: This document is issued in the U.K. by the London Branch of Société Générale. Société Générale is a French credit institution (bank) authorised by the Autorité

de Contrôle Prudentiel (the French Prudential Control Authority). Société Générale is subject to limited regulation by the Financial Services Authority in the U.K. Details of the

extent of our regulation by the Financial Services Authority are available from us on request.

No offer to contract: This document does not constitute an offer, or an invitation to make an offer, from Société Générale to purchase or sell a product.

Prior to investing in the product, investors should seek independent financial, tax and legal advice.

Confidentiality: This document is confidential and may be neither communicated to any third party (with the exception of external advisors on the condition that they themselves

respect this confidentiality undertaking) nor copied in whole or in part, without the prior written consent of Société Générale.

Information on data and/or figures drawn from external sources: The accuracy, completeness or relevance of the information which has been drawn from external sources is not

guaranteed although it is drawn from sources reasonably believed to be reliable. Neither Société Générale nor the Issuer shall assume any liability in this respect.

Market information: The market information displayed in this document is based on data at a given moment and may change from time to time.

SOCIETE GENERALE CORPORATE & INVESTMENT BANKING

SG HOUSE – 41 TOWER HILL – LONDON EC3N 4SG – UNITED KINGDOM

Website: www.sgcib.com – Tel: +44 (0)20 7676 6000

IMPORTANT INFORMATION

P. 34