FOR UK INSURANCE COMPANIES ONLY NOT FOR PUBLIC

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

Solvency II_0111_BC. ppt 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 1

Solvency II_0111_BC. ppt Extremes in the equity markets UK equity risk premium relative to bills, 1900 - 2010 35 2004 1998 1992 1991 1988 1987 1985 1978 1965 1962 1961 1956 1955 1951 1945 1944 1927 1926 1925 1923 1917 1916 1912 1910 1909 1908 1906 1905 1904 1902 30 25 20 2008 15 10 5 2008 1973 1974 -50 -40 2002 1990 1969 1931 1920 -30 2001 2000 1957 1949 1937 1930 1929 1914 -20 2007 1994 1981 1979 1976 1970 1966 1964 1960 1952 1948 1947 1940 1939 1938 1921 1915 1913 1911 1907 1903 1901 1900 -10 0 2010 2006 2005 2003 1999 1997 1996 1995 1989 1986 1984 1983 1982 1980 1972 1963 1950 1946 1943 1942 1941 1936 1935 1934 1928 1924 10 2009 1993 1971 1953 1933 1922 1919 1918 20 2009 1977 1967 1958 1932 30 1968 1959 1954 40 Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook 2010 2 1975 50 60 70 80 90 100 >100

Solvency II_0111_BC. ppt Asset allocation European Insurers UK Insurers Fixed Income Equities Property, Alternatives, Other 100% 80% 60% 40% 20% Source: Association of British Insurers, Swiss Re Economic Research & Consulting Source: CEA 3 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0%

Solvency II_0111_BC. ppt Solvency II Changes the way: n Regulatory capital is calculated n Projected liability payments are discounted 4

Solvency II_0111_BC. ppt Solvency II – Implication for bonds / credit Gilts More use of gilts at high duration where yield is above swaps. Less use at lower duration. Corporate Bonds More use of corporate bonds at low duration where risk adjusted return is higher. Less use at higher duration. Structured Credit, ABS etc 3 Significantly curtailed use of structured credit unless Standard calculation is amended * Notes: 1) Under Solvency II QIS 5 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

Solvency II_0111_BC. ppt Solvency II - Implication for other asset classes Property 3 Lower allocation to property n. Due to higher capital charges, with no index based dampener n. Issues with the treatment of property backed structures Equity 3 Lower equity allocation n. Due to higher base charges that vary under a “symmetric adjustment” to levels very much higher than currently applied n. EEA/OECD listed preferred n. Much higher charges will make “other” equity category unattractive. Other, including: Hedge Funds, Private Equity, Commodity, Infrastructure 3 Lower allocations n. They are not well defined by QIS 5 n. Unless they are sufficiently transparent to allow moving into another risk module (such as Global equity, property or spread (credit) risk), they are subject to very high “other equity” charges. Total Return 3 Wider use of total return n. Due to investment mandates becoming less constrained with aims to “beat cash” plus the illiquidity premium * Notes: 1) Under Solvency II QIS 5 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

Solvency II_0111_BC. ppt Solvency II – Implications from liability discounting methodology Swaps Greater use of swaps n. Due to the valuation interest rate curve for discounting liabilities is based on the swap curve. Generic Credit Unknown at present n. CIOs will need to deal with some complex issues for benchmark setting or asset allocation that arise from the use of an illiquidity premium which is based on a corporate bond index n. Illiquidity premium varies by type of business (with-profits, annuities, all remainder) n. At present this illiquidity premium is not ‘matched’ by any available investment * Notes: 1) Under Solvency II QIS 5 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

Solvency II_0111_BC. ppt Solvency II - Transparency and ‘Look through’ Segregated Mandates Attraction of segregated mandates increases n. Especially if using an internal model due to the “look-through” requirements Collective Investment Funds Transparent funds preferred to those that are not n. Requirement to apply “look-through” approach will raise a “hassle” factor barrier that fund managers will have to address to retain insurance investors Currency overlay mandates Attraction of currency overlay mandates n. Due to advantage of hedging currency risk, otherwise currency risk carries a 25% charge * Notes: 1) Under Solvency II QIS 5 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

Solvency II_0111_BC. ppt Summary – attractiveness of asset classes under Solvency II QIS 5 versus current position Expected return Total Return Long Short Govts Corp. EM Debt n Transparency n Segregated mandates n Generic credit Equities Property Long Corp. Short Govts Swaps Currency overlay Expected risk * Notes: 1) Under Solvency II QIS 5 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

Solvency II_0111_BC. ppt Known Unknowns n Changes to Solvency II regulations n Changes to accounting standards n Markets ‘price-in’ Solvency II effects n Development of Solvency II ‘efficient’ investment products 10

Solvency II_0111_BC. ppt Outlook for 2011 -2012 15% 60% Deflation Disinflation 20% 80% 50% 25% 50% Inflation 50% QE fails Lost hope Dream ticket Party Pooped Stagflation Fast & Loose Recovery stalls during 2010 Growth snuffed out by rising yields in 2012 Sub-par growth, easy policy Policy stimulus removed 2011/12 Yields rise, growth stalls Rapid growth, surging inflation Equities drift to new lows in 2011 Equities drift to new lows in 2012 Markets rerated towards new alltime highs in 2011 Markets trend sideways to up Bond yields soar, equities suffer, new lows in 2010 Bonds plummet equities up but underperform commodities NO EXTREMES NEW LOWS NEW HIGHS 11

Solvency II_0111_BC. ppt Conclusion What to consider: n Resources n Dialogue with asset manager n Investment strategy – including consideration of: – Profile of liabilities – Market environment and opportunities 12

Solvency II_0111_BC. ppt J. P. Morgan Asset Management Important Information This material is for the use of UK insurance companies only – not for onward distribution The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Investing in alternative assets involves higher risks than traditional investments and investors should consult a professional adviser prior to investing. Alternative investments have higher fees than traditional investments, may not be tax efficient and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The information provided is for use by professional investors within UK insurance companies only and is not for public distribution. It may include opinions based upon understanding of complex regulatory proposals that may well change or not be implemented at all. The services being promoted are not, are not intended to be and should not be construed as providing investment advice or advice on regulatory requirements or the law. Readers should take appropriate independent professional advice on such matters which is relevant to their particular situation before acting on anything contained in this document. This document is for informational purposes only and is intended solely for the person to whom it is delivered by J. P. Morgan Asset Management. This document is confidential and may not be reproduced or distributed in any jurisdiction without the express prior written consent of J. P. Morgan Asset Management. The opinions expressed are those held by J. P. Morgan Asset Management at the time of publication and are subject to change. This material should not be considered by the recipient as a recommendation relation to the acquisition or disposal of investments. This material does not contain sufficient information to support an investment decision and investors should ensure they obtain all available relevant information before making any investment. Issued in the UK by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Services Authority. Registered in England No. 288553. Registered address: 125 London Wall, London EC 2 Y 5 AJ. 13