Capital & Liquidity Management

Managing the unprecedented turmoil on financial markets in 2008 has only reinforced the need for strong structural capital and liquidity management, also through our dedicated team. For Eureko, severe losses on the investment portfolio due to massive falls on equity markets and widening of credit spreads put real pressure on both own equity and solvency. Total equity decreased to €7,451 million (2007: €10,375 million) and the Group solvency ratio decreased to 150% from a robust 232% in 2007. A significant capital increase from shareholders agreed in February 2009 will provide the essential buffer that reinforces own equity and brings solvency well above internal and external minimum requirements. Liquidity has not been an issue for Eureko in 2008 due to the highly liquid nature of the investment portfolio and the access to committed credit lines.

Capital increase

The 28% fall in Eureko’s own equity in 2008, driven down by €1.9 billion in impairments, tested our solvency position. To strengthen the capital position, in May 2008 Eureko had issued successfully €225 million in hybrid capital securities in an over-subscribed offering. When markets deteriorated rapidly in the second half of 2008, additional measures were necessary. The main measure taken is a €1 billion capital increase agreed in February 2009 with major shareholders Achmea Association and Rabobank of €600 and €400 million, respectively. The minority shareholders have also been offered to participate in the capital increase.

Solvency position
Eureko’s solvency position against regulatory requirements is monitored frequently. In line with our conservative and prudent overall policies, Eureko has set stringent internal requirements with minimum coverage ratios equal to 170% and 160% of the minimum solvency requirements for its Life and Non-Life businesses, respectively. For Health insurance, the minimum coverage ratio is 125% for the basic health insurance and 150% for the supplementary insurance coverage. At year-end 2008, Life was at 160% which is lower than internal requirements. Non-Life and Health more than satisfied internal requirements. Due to the capital increase, Eureko’s solvency ratio (pro forma) improved to 175% (based on December 2008 figures). For our banking activities the new Basel II regulatory regime applied in 2008. We opted for the standardised approach to measure capital requirements for credit risk. The Tier 1 ratio declined marginally to 11.1% (2007: 11.2%). Besides managing our capital resources on regulatory requirements, rating agencies requirements and the internally developed Economic Capital (ECAP, see also chapter Risk Management) is also taken into account.

Funding and liquidity
Eureko’s funding strategy is based on assuring excellent access to international capital and credit markets, underpinned by credit ratings in line with its peers. In principle, each operating subsidiary is responsible for financing its own activities. However, Eureko, as the holding company, coordinates all these activities and, in this role, may participate in financing the operations of certain subsidiaries, usually through subordinated debt funding and other forms of capital and loans. As a holding company, Eureko, and its major Dutch holding entities, relies principally on distributions of internal dividends and short term excess liquidity from operating subsidiaries and associated companies to meet its funding needs. Such distributions and internal funding are usually subject to regulatory restrictions, and, in the case of associated companies, by the dividend policies as determined by those companies.

Eureko and its principal holding entities’ cash flow gives a comprehensive, high-level overview of the Group’s sources of capital as a complement to the cash flow statement in the financial statements.

Liquidity - holding
For liquidity purposes, Eureko and its principal Dutch holding entities maintain committed and uncommitted credit facilities with a variety of international banks. At year-end 2008, Eureko had used €750 million in committed credit lines. We redeemed a €500 million medium-term note in 2008, but due to difficult markets did not refinance in the capital markets. Earlier in the year, Eureko had issued €225 million in hybrid capital securities. Eureko’s external borrowings not allocated to its banking and finance operations amounted to €1,470 million at year-end 2008 (2007: €1,334 million). Debt leverage, measured as non-banking debt as a percentage of the sum of Total equity and nonbanking debt, increased from 11.0% to 16.1%, due primarily to the decline in equity, rather than an increase in borrowings. Non-banking debt excludes debt related to re-insurance contracts at Eureko Re amounting to €38 million (2007: €51 million).

Liquidity – insurance entities
The liquidity position of our insurance entities is sound as we maintain a high level of liquid investments in the investment portfolio including short term deposits, liquid government bonds and listed equities.

Liquidity – banking
It has been an extremely difficult year for the banking sector. Funding was scarce. Achmea’s banking operations were more than able to maintain their position, with liquidity well above regulatory requirements. Our mortgage bank’s liquidity position is adequate, but remains a focus in 2009 as new funding will be necessary. The (mortgage) banks can also use the ECB repo facility and savings. In 2008, both Centraal Beheer Achmea and FBTO offered a highly successful, high-interest product to the retail market. Staalbankiers, finally, also has a more than adequate liquidity position.

Ratings

One of Eureko’s primary goals is to maintain ratings in the A category. Eureko B.V. has an A- rating and the most important insurance operating companies have an A+ rating. At Group level, capital adequacy is measured based on Standard & Poor’s capital adequacy model. Eureko seeks to maintain its Group capital and capital structure within this rating. In December 2008, Standard & Poor’s revised its outlook on core entities from stable to negative, emphasising the need for an improvement in operational performance, specifically in the Life and Pension business. In the same report, Eureko’s capital strength was rated as ‘strong’ (the capital increase was already included). Achmea Hypotheekbank’s A- rating with stable outlook was affirmed in November 2008.

Solvency II preparations

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry, with implementation expected in 2012. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency I requirements. Eureko is actively participating in the development of Solvency II through representation in national and international industry groups and by providing information through quantitative impact studies (QIS). We have a dedicated international team preparing the Group for Solvency II. Capital requirements under Solvency II may be calculated using a standard formula or, if there is supervisory approval, using capital models developed inhouse. Eureko aims to use its own internal models. In 2008, Eureko participated in the fourth QIS study based on the standardised approach as well as the internal model approach. Although the insurance industry had comments on the design and calibration of the standard model, Eureko would still meet comfortably the capital requirements based on the QIS 4 requirements.