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  • Solvency II: A Market Risk Perspective

    September 2010

    David Lomas, ACII

    Managing Director

    FOR PROFESSIONAL INVESTORS ONLY

  • 2

    Agenda

    I. BlackRock Overview

    II. Solvency II v Market Reality

    III.Conclusions

  • 3

    Multi-Asset

    121 Bn

    Advisory

    130 BnAlternatives

    1

    83 Bn

    Equity

    1,133 Bn

    Cash

    Management

    229 Bn

    Fixed Income

    885 Bn

    BlackRock Overview

    Independent firm in ownership and governance

    Established in 1988, BlackRock is a public company

    (NYSE:BLK)

    No majority owners

    Majority of Board of Directors is independent

    Laurence Fink, Chairman & CEO since firms inception

    Leader in creating solutions for clients

    Strategies and services differentiated for clients

    Customized solutions to meet risk/return objectives

    Innovative strategies and services within and across asset

    classes

    Client dialogues have resulted in advisory assignments

    Senior level of commitment to client service

    One BlackRock approach results in consistency & quality

    throughout firm

    Pioneer in risk management and technology

    Provides risk management and enterprise investment services

    for 7.37 trillion in assets

    BlackRock Solutions offers independent risk management

    products

    Risk culture embedded in both people and systems

    Total Assets of 2.58 Trillion

    1Includes commodity and currency mandatesAUM in EUR as of 30 June 2010

  • 4

    BlackRock Solutions Overview

    Uniquely positioned to address the risk management needs of financial institutions

    Investment platforms, risk reporting, financial markets advisory and disposition management/trading

    Customised Solutions

    Proprietary analytics + highly

    scalable investment platform

    + capital markets expertise

    Services tailored to best

    address each clients

    challenges

    Client requirements treated

    as though they are our own

    act as an extension of the

    in-house team

    Investment Platform & Process

    Aladdin Investment Management Platform

    Green Package, AnSer , and SPEAR Risk Analysis Tools

    Middle and Back Office Outsourcing Services

    Investment Accounting

    Comprehensive Risk and Investment Management Platform

    Unbiased Capital Markets Expertise

    Valuation, Advisory and Execution Capabilities

    Valuation/Risk Assessment

    Financial/Balance Sheet Strategy

    Dispositions and Workouts of Distressed Assets

  • 5

    BlackRock Solutions (BRS)

    Proven ability to deliver solutions

    7.37 trillion in assets, liabilities and derivatives

    processed on the platform

    140+ clients including several of the largest

    investment organisations in the world

    Scalable processing capabilities

    2+ million positions maintained and analyzed

    180+ million option adjusted calculations per week

    8,000+ live portfolios

    6,000+ Aladdin users

    BlackRock Solutions - Client Type

    Banks 28

    Asset Managers 28

    Insurance

    Companies 50

    Other Financial Institutions - 20

    Pensions, Corporations &

    Endowments 18

    List is a representative sampling of clients based upon mandate, client type, and geographic location who allow their names to be publicly disclosed as of 30 June 2010. Disclosure does not indicate approval or disapproval by such client of BlackRock Solutions or of the services provided.

    AT&T

    CalPERS

    CalSTRS

    Employee Retirement System of Texas

    GuideStone Financial Resources

    HSBC UK Pension

    LACERA

    Pennsylvania Public School

    Employees' Retirement System

    Pension Fund Assoc.

    Virginia Retirement System

    Fortune 10 Company

    Pensions, Corporations & Endowments

    AMP Capital Investors

    BlackRock

    Charles Schwab & Co.

    Colonial First State Asset Management

    Columbia Management

    Commonfund

    DIAM

    Guggenheim Capital

    Northern Trust Global Investments

    Queensland Investment Corporation

    SEI Investments

    Asset Managers

    AEGON

    Aetna

    Arch Capital

    Brit Insurance

    Genworth

    ING Investment Management

    Liberty Mutual

    Munich Re

    NLI International, Inc.

    NY Life Investment Management

    Prudential Investment Mgmt

    Reinsurance Group of America

    Swiss Re

    Insurance Companies Banks & Financial

    Institutions

    Asian Development Bank

    FHLB-Atlanta

    Fifth Third Bank

    Freddie Mac

    GMAC

    JPMorgan

    Nomura Holdings America

    Norges Bank Investment Mgmt

    PNC Financial Services

    Singapore GIC

    Sumitomo Mitsui Banking Corp

    Sumitomo Trust and Banking

    SunTrust Bank

    As of 30 June 2010

  • 6

    Financial Markets Advisory (FMA)

    Engaged to provide risk reporting and related advisory services to the Pension Board

    Selected by the Federal Reserve Bank of New York to manage assets in a $30 billion facility provided with respect to the acquisition of Bear Stearns

    BlackRock structured and arranged for the purchase of $22 billion of U.S. RMBS from UBS by an FMA-managed Fund

    AIG engages BLK to advise on the wind

    down of $400 bn in credit positions

    Engaged by an Austrian Bank to provide

    valuation and risk assessment in connection

    with European Commission state aid

    calculation process

    Mitsubishi UFJ hires BLK for global balance sheet review of Morgan Stanley

    Advised HM Treasury in its Asset Protection Scheme (APS), involving approximately 500 bn in assets

    DTCC engages BLK to liquidate $190 billion Lehman account, largest close-out in DTCCs history

    As of 30 June 2010Representative sampling of clients based upon mandate, client type, and geographic location who allow their names to be publicly disclosed

    Disclosure does not indicate approval or disapproval by such client of BlackRock Solutions or of the services provided.

    HSBC Pension TrustFederal Reserve Bank of New York

    and JP Morgan/Bear Stearns

    UBS AIG Austrian Bank

    Mitsubishi UFJ and Morgan Stanley Her Majestys TreasuryDepository Trust Clearing Corp.

    and Lehman Brothers

    Provided a valuation and risk assessment of 100 bn of cash and synthetic obligations related to an asset guarantee

    Federal Reserve retained BLK and other managers to buy up to $500 billion of agency MBS

    Selected by the Federal Reserve Bank of New York to manage two portfolios, multi-sector CDOs with a par value of ~$62.1 billion and RMBS of ~$39.3 billion, in connection with the actions taken by the FRBNY in support of AIG

    Federal Reserve Bank of New York and AIG

    NatixisFederal Reserve Bank of New York

    FMA has managed or advised on over 5 Tn of assets in all major fixed income areas

    Engaged BlackRock as a Valuation Agent and general advisor in connection with West LB AG stabilisation measures

    SoFFin

  • 7

    Agenda

    I. BlackRock Overview

    II. Solvency II v Market Reality

    III.Conclusions

  • 8

    Market risk

    55%

    Non-life u/w

    risk

    16%

    Health u/w

    risk

    12%

    Life risk

    15%

    Counterparty

    Risk 2%

    Health u/w

    risk

    1%

    Life risk 36%

    Market Risk

    60%

    Counterparty

    Risk 3%

    Market Risk

    33%

    Non-life u/w

    risk

    44%

    Life risk

    1%Health u/w

    risk

    16%

    Counterparty Risk

    6%

    The Significance of Market Risk

    Reliance on regulation and modelling to manage market risk falls short

    The challenge of managing market risk

    Life Composite

    Source CEIOPS QIS 4 Final Report

    Markets cannot be assumed to always be efficient

    Models are an abstraction of an infinitely more complex reality

    Physics envy - do not confuse the expected behaviour of a model with the realities of the market

    Non-life

    Source CEIOPS QIS 4 Final Report Source CEIOPS QIS 4 Final Report

  • 9

    Moment US AGG TSY AGY CORP MBS ABS CMBS

    Mean 0.52 0.51 0.51 0.54 0.53 0.44 0.52

    St Dev 1.09 1.42 1.08 1.81 0.84 1.27 3.08

    Kurtosis Pre-Lehman 1.55 1.24 1.91 1.41 0.29 0.04 1.33

    Kurtosis Full Sample 1.47 1.46 1.88 5.5 2.53 9.86 17.67

    Fixed Income Monthly Return Moments 8/31/1999 - 9/31/2009 (in%)

    Worst Period Second Worst PeriodBest Period

    *Unannualized*Barclays U.S. Corporate High Yield Index**Barclays Emerging Markets Index (USD)

    3797

    5955

    1990

    2960

    2496

    495

    288

    746

    2009

    122

    249

    21

    900

    192

    119

    66

    81

    July 2010 YTD*

    -2842-457702959823246523-5411482417-2046Emerging Markets**

    -3832-777843478002642-1329-285-1897476-843High Yield*

    -1786

    -3274

    -2223

    -232

    -152

    -710

    2008

    -464119-85159527-187277-463170-238Credit

    -43513715118201210131-4187N/ACMBS

    -6348732145181-1613943137-88ABS

    -177122-3714211173-75-77113-90MBS

    -56751378279673-1341-49Agency

    -20685-311031552954-13180-80Barclays Agg

    2007200620052004200320022001200019991998

    3797

    5955

    1990

    2960

    2496

    495

    288

    746

    2009

    122

    249

    21

    900

    192

    119

    66

    81

    July 2010 YTD*

    -2842-457702959823246523-5411482417-2046Emerging Markets**

    -3832-777843478002642-1329-285-1897476-843High Yield*

    -1