Regulatory Update February 2008

Regulatory Update February 2008 (Incorporating Financial Statistics for the Quarter ended September 2007) Protection Integrity Accountability

C O N T E N T S Regulatory, Legislative and Other Developments. 4 7 Special Feature......8 9 Statistical Annexe Bermuda Money Supply... 10 BD$ Deposit Profile Combined Banks and Deposit Companies (Unconsolidated)..10 Combined Banks and Deposit Companies Foreign Currency Position (Consolidated)...11 Combined Balance Sheets of Bermuda Banks and Deposit Companies (Consolidated)..12 Companies Partnerships & Permits Statistics... 13 Investment Fund Statistics........14 Additions to the Insurance Register.....15

REGULATORY, LEGISLATIVE AND OTHER DEVELOPMENTS This bulletin reports on recent activities at the Bermuda Monetary Authority ( the Authority ) and recent developments affecting the financial sector, as well as the community generally. Attached to it are the regular statistical data covering Bermuda dollar money supply, Bermuda banks balance sheet and other financial and company sector information, updated for the quarter ended September 30 th 2007. (I) REGULATORY DEVELOPMENTS a) Banks and Deposit Companies Basel II Policy Handbook The Authority has circulated for industry comment a first draft of the Basel II Policy Handbook, Revised Framework for Regulatory Capital Assessment. The handbook is set out in four parts. The first part, detailing the scope of application, provides an explanation of how capital requirements are applied within those institutions subject to Basel II. The methods of calculation of the minimum capital requirements for credit risk, operational risk, and market risk are provided in part two. The third and fourth parts which set out the process for Pillar 2 supervisory review as well as the market discipline requirements under Pillar 3, will be added to the handbook at a later stage after further consultation with industry. A copy of the handbook can be found on the Authority s website at www.bma.bm. b) Investment Funds Fund Administrator Code of Conduct The Authority is finalising the Code of Conduct for Fund Administrators who are to be licensed under the Investment Funds Act 2006. Comments were solicited and submitted to the Authority from industry and are currently being incorporated into the Code. Fund Administrators who are required to be licensed under the Act should take note that they must submit their applications to the Authority no later than March 7 th 2008. c) Insurance Risk-based capital model The Authority has updated its proposal to reflect comments from prior consultation regarding the implementation of its risk-based capital model. A second phase of the consultation began in mid-february with the goal of having the amended legislation tabled in the House during the spring period. 4

In line with its powers to request information under the Insurance Act 1978, the Authority has requested filing of the risk-based capital model and supplementary schedules for the 2007 year-end by April 2008. The Authority has also committed to a post-mortem discussion with the Class 4 sector in June 2008 to discuss the implementation process and any model-related challenges. GAAP financial statements The Authority is currently engaged in a second phase of consultation with industry regarding amendments to the Insurance Act 1978 that will provide for the filing and publishing of GAAP financial statements by insurance companies. The Authority has also requested that insurers voluntarily file their audited GAAP financial statements for the 2007 year-end by April 2008. (II) LEGISLATIVE DEVELOPMENTS a) Proceeds of Crime Amendment Act 2007 The Authority is preparing further amendments to the Proceeds of Crime Amendment Act 2007, in consultation with the Ministry of Finance and the Ministry of Justice. The amendments will give effect to recommendations in the International Monetary Fund (IMF) report on the jurisdiction s anti-money laundering / combating financing of terrorism (AML/CFT) regime. Among the recommendations is a proposal to expand the Authority s responsibilities to include enforcement powers as regards financial institutions compliance with AML/CFT regulations. The Authority is also working on draft AML/CFT regulations. b) The Insurance Amendment Bill 2008 The Authority completed a draft of the Insurance Amendment Bill 2008, which supports the filing of GAAP financial statements by Class 4 insurers and provides for their publication. The Bill, which was tabled in the House of Assembly in July 2007, was not enacted due to the House being prorogued as a result of the national election held on December 18 th 2007. The Bill has since been modified to include provisions on minimum capital surplus requirements and prudential standards for insurance companies. c) Bermuda Monetary Authority Amendment Bill 2007 The Authority has completed a draft of the Bill which consolidates all provisions relating to assistance to overseas regulators under the Bermuda Monetary Authority Act 1969. The Bill also makes provisions for increases in licensing and annual fees for regulated entities. 5

(III) OTHER DEVELOPMENTS a) Bermuda Monetary Authority Business Plan 2008/09 The Authority has published its 2008/09 Business Plan which outlines key regulatory initiatives and business goals for the organisation. Highlights of the initiatives in the plan include introducing new risk-based capital standards for insurance companies; strengthening anti-money laundering supervision; implementing Basel II standards for banks and investment firms; and initiating standards for insurance groups. More information regarding the Business Plan can be found in the Special Feature on page eight of this Regulatory Update. b) Jeremy Cox Appointed Deputy Chief Executive Officer Jeremy Cox has been appointed to the newly-created position of Deputy Chief Executive Officer. With this new appointment, Mr. Cox, who was formerly the Authority s Supervisor of Insurance, will be responsible for all supervisory activities conducted by the BMA. In addition to insurance supervision, the supervision of banks, trust companies and investment businesses will come under his responsibility. Also, as deputy to CEO Matthew Elderfield, Mr. Cox will assist in the on going strategic development and direction of the Authority. He will also formally deputize for the CEO in his absence in various capacities related to the executive management of the Authority, as well as via participation in key external initiatives or meetings with government and industry stakeholders here and overseas. c) IMF AML/CFT Report The International Monetary Fund conducted a review of Bermuda s regulatory regime for combating money laundering and the financing of terrorism in 2007, on behalf of the Caribbean Financial Action Task Force (CFATF). The CFATF, a regional body affiliated to the Financial Action Task Force (FATF) which sets international regulatory standards for anti-money laundering and combating the financing of terrorism, has published the final Detailed Assessment Report that resulted from the review. The Report recognises the robustness of various components of Bermuda s AML/CFT framework, and acknowledges the substantial steps already undertaken by Bermuda authorities to develop the jurisdiction s regimes to reflect revised FATF standards. The Bermuda authorities are using the recommendations in the Report to develop a roadmap for further enhancements to Bermuda s AML/CFT regime. A number of the required changes are already in place, while implementation of others is at an advanced stage. Implementation of the changes will require on going dialogue with private and public sector stakeholders and the Authority remains committed to participating in that 6

consultation process to ensure Bermuda s AML/CFT regime remains effective, consistent with international standards and appropriate for the Bermuda market. A copy of the Report is available on the Authority s website at: www.bma.bm. d) Seminars, Conferences and Publications Shelby Weldon, Director, Insurance (Compliance), attended the National Association of Insurance Commissioners (NAIC) Winter Conference, in Houston, Texas from December 1 st 5 th 2007. Craig Swan, Deputy Director, Policy, Research & Risk Assessment and Rick Shaw, Director, Actuarial Services, attended the International Association of Insurance Supervisors (IAIS) Solvency Subcommittee meeting in Paris from December 4 th 8 th 2007. Mr. Swan also attended the IAIS Solvency & Actuarial Issues Conference in Malaysia from January 28 th February 2 nd 2008. Matthew Elderfield, CEO, attended the Solvency II Hearings hosted by the European Union Commission on January 28 th in Brussels. He also was a presenter at the Group of Thirty seminar on Reinsurance Risk in International Insurance and Reinsurance in Brussels on January 29 th. Harry Whitcher, Deputy Director, Insurance Restoration, Run-Off & Monitoring, spoke on the insolvency regime in Bermuda at a conference hosted by the International Association of Insurance Receivers from January 29 th February 1 st in Tucson, Arizona. Graeme Dargie, Director, Banking, Trust & Investment was a speaker at the Society of Trust & Estate Practitioners (STEP) Bermuda conference on February 21 st. e) New Staff & Promotions Shanna Lespere has been promoted to Director, Insurance (Licensing & Authorisations) Mesheiah Crockwell has been promoted to Assistant Director, Insurance (Compliance) Jay-Lee Smith has been promoted to Senior Analyst in the Banking, Trust & Investment department Michael Bean and Takiyah Tucker have been promoted to Senior Analysts in Insurance Restoration, Run-Off & Monitoring Alan Cleave has joined the Authority as a Senior Officer in the Legal Services & Enforcement department Jennifer Vargesko has joined the Authority as a Senior Analyst in the Insurance department within the Licensing & Authorisations team 7

Special Feature The BMA Business Plan 2008/09 The Bermuda Monetary Authority s 2008/09 Business Plan sets out key regulatory initiatives and business goals for the organisation, some highlights of which are shown below. Publication of the Business Plan, a first for the Authority, demonstrates the BMA s commitment to transparency by explaining to its stakeholders its future work programme. The Plan shows the organisation s commitment to remaining highly compliant with international standards while building on its strong operational capability, through continuous development of the regulatory framework and expansion of the Authority s professional staff. Key regulatory initiatives in the plan include introducing new risk-based capital standards for insurance companies; strengthening anti-money laundering supervision; implementing Basel II standards for banks and investment firms; and starting work to develop standards for insurance groups. These are the same regulatory issues challenging authorities in other leading jurisdictions. Insurance solvency, models and group supervision The Authority believes that capital adequacy should properly reflect an insurer s risk profile, including the nature and complexity of the business it writes. As such, the Authority is planning to introduce a risk-based capital model, the Bermuda Solvency Capital Requirement (BSCR), as a tool to both measure risk and determine appropriate capitalisation for insurance companies, beginning with Class 4 companies. The BSCR will enhance the Authority s existing capital adequacy regime by taking into account the different risk profiles of Bermuda s insurance companies. The Authority plans to allow the use of internal capital models in cases where such models demonstrate that they better reflect a company s risk profile. The Business Plan also outlines the Authority s intention to move towards group supervision of large insurance firms. Anti-money laundering Pending legislation will enhance the Authority s existing enforcement capabilities to assess institutions compliance with anti-money laundering (AML) standards. In addition, the Authority is currently preparing a series of specific on-site assessments of institutions to test the quality of their AML controls. 8

Basel II The Authority intends to implement Basel II, the new internationally accepted regulatory capital framework for banks, with effect from January 1 st 2009. Basel II consists of three pillars. The Authority s policy framework for Pillars 1 and 2, which set out new rules for calculating an institution s base capital requirements and which describes the process whereby institutions assess, and the Authority reviews, the amount of capital they need to hold, is at an advanced stage of development. The Authority plans to publish final rules and guidance for the implementation of Pillars 1 and 2 in the second quarter of 2008, subsequent to a final phase of consultation. In addition, the Authority is currently reviewing how other countries propose to implement Pillar 3, which addresses enhanced provisions for market discipline and disclosure, before publishing proposals for consultation in mid-2008. New Currency Series The Authority will in early 2009 be launching the first complete redesign of Bermuda banknotes since the introduction of the Bermuda dollar in 1970. The Government of Bermuda has agreed to the creation of a distinctive and updated design for the Bermuda note family, which will also incorporate the latest security features for the notes. Prior to launching the redesign, the Authority will engage in a full round of industry consultation for the transition process, and will conduct related public awareness and educational programmes within the local community. Operational Capability The Business Plan also explains that the Authority s supervisory staff has grown in recent years and that the organisation has recently restructured its supervisory teams, added an actuarial team, created a risk and policy team and implemented a run-off team. The plan shows the Authority s intention to continue adding to the depth of technical skills and resources within the organisation, in line with its increasing responsibilities as Bermuda s financial regulator. Copies of the Authority s Business Plan are available online at www.bma.bm. 9

S T A T I S T I C A L A N N E X E BERMUDA MONEY SUPPLY (BD$ millions) 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 Notes & Coins in Circulation* 106 106 121 107 111 110 Deposit liabilities: Banks and Deposit Companies (unconsolidated) 3,481 3,480 3,499 3,411 3,597 3,666 3,588 3,586 3,620 3,518 3,709 3,776 Less: Cash at Banks and Deposit Companies 31 30 44 29 31 29 BD$ Money Supply 3,557 3,557 3,575 3,489 3,677 3,747 % Growth on Previous Period 1.84% -0.02% 0.53% -2.43% 5.41% 1.88% % Growth Year on Year -2.11% -0.75% 4.04% -0.12% 3.38% 5.35% * This table includes the supply of Bermuda dollars only. United States currency is also in circulation in Bermuda but the amount has not been quantified. BD$ DEPOSIT PROFILE - COMBINED BANKS AND DEPOSIT COMPANIES (Unconsolidated) (BD$ Millions) 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 Deposit Liabilities 3,481 3,480 3,499 3,411 3,597 3,666 Less: Loans, Advances and Mortgages (3,589) (3,700) (3,810) (3,905) (4,093) (4,206) Surplus deposits (107) (219) (311) (494) (495) (540) Percentage of Deposit Liabilities Lent 103.1% 106.3% 108.9% 114.5% 113.8% 114.7% Following amalgamations within the sector, separate data for the deposit companies are no longer published. 10

COMBINED BANKS AND DEPOSIT COMPANIES FOREIGN CURRENCY POSITION (Consolidated) (BD$ millions) 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 Total Foreign Currency Assets 18,617 18,141 18,831 18,661 20,239 18,965 Less: Other Assets 495 498 644 549 653 561 Less: Foreign Currency Loans to Residents 1,074 1,085 1,189 947 945 975 Net Foreign Currency Assets 17,048 16,558 16,998 17,165 18,641 17,428 Foreign Currency Liabilities 16,882 16,251 16,725 16,724 18,098 16,925 Add: BD$ Deposits of Non-Residents 134 128 147 150 205 211 Net Foreign Currency Liabilities 17,016 16,379 16,872 16,874 18,304 17,136 Net Foreign Currency Position (consolidated) 32 179 126 291 338 292 Totals may not add due to rounding 11

COMBINED BALANCE SHEETS OF BERMUDA BANKS AND DEPOSIT COMPANIES (Consolidated) (BD$ Millions) 2006- Q2 2006- Q3 2006- Q4 ASSETS Total BD$ Other Total BD$ Other Total BD$ Other Cash 1,440 43 1,396 460 40 420 89 62 26 Deposits 6,868 15 6,853 7,088 11 7,077 7,324 24 7,299 Investments 7,407 199 7,208 7,379-6 7,385 7,758-6 7,764 Loans & Advances 6,151 3,541 2,610 6,358 3,656 2,702 6,806 3,763 3,044 Premises & Equipment 369 314 55 378 318 60 376 322 54 Other Assets 568 74 495 590 93 498 747 104 644 TOTAL ASSETS 22,804 4,186 18,617 22,253 4,113 18,141 23,100 4,269 18,831 22,804 3,832 18,269 22,253 3,832 18,269 23,100 3,832 18,269 LIABILITIES Demand Deposits 10,471 798 9,673 9,465 777 8,688 8,755 785 7,970 Savings 2,064 1,257 808 2,037 1,243 795 2,845 1,216 1,628 Time Deposits 7,366 1,414 5,951 7,802 1,420 6,382 8,306 1,495 6,811 Sub Total - Deposits 19,901 3,469 16,432 19,304 3,440 15,864 19,906 3,496 16,409 Other Liabilities 706 256 450 640 253 387 748 432 315 Sub Total - Liabilities 20,607 3,725 16,882 19,943 3,693 16,251 20,653 3,929 16,725 Equity 2,196 1,362 834 2,310 1,352 958 2,447 1,436 1,011 TOTAL LIABILITIES AND CAPITAL 22,804 5,087 17,717 22,253 5,045 17,208 23,100 5,365 17,736 2007- Q1 2007- Q2 2007- Q3 ASSETS Total BD$ Other Total BD$ Other Total BD$ Other Cash 54 33 22 65 34 31 67 33 34 Deposits 7,195 23 7,172 7,798 23 7,775 6,359 26 6,333 Investments 7,766 16 7,750 8,693 16 8,677 8,960 15 8,945 Loans & Advances 6,958 3,862 3,096 7,020 3,998 3,022 7,119 4,117 3,002 Premises & Equipment 401 328 73 414 333 81 429 339 90 Other Assets 661 112 549 729 76 653 643 81 561 TOTAL ASSETS 23,036 4,375 18,661 24,719 4,480 20,239 23,576 4,611 18,965 LIABILITIES Demand Deposits 9,213 668 8,545 9,883 805 9,078 8,886 841 8,045 Savings 2,988 1,210 1,778 3,357 1,205 2,152 2,963 1,199 1,764 Time Deposits 7,708 1,473 6,235 8,151 1,584 6,567 8,483 1,630 6,853 Sub Total - Deposits 19,909 3,352 16,558 21,391 3,594 17,798 20,332 3,670 16,662 Other Liabilities 557 391 166 706 405 300 558 296 262 Sub Total - Liabilities 20,466 3,742 16,724 22,097 3,999 18,098 20,890 3,966 16,925 Equity 2,570 1,680 889 2,622 1,565 1,057 2,686 1,564 1,121 TOTAL LIABILITIES AND CAPITAL 23,036 5,423 17,613 24,719 5,564 19,155 23,576 5,530 18,046 Totals may not add due to rounding 12

COMPANIES PARTNERSHIPS PERMITS STATISTICS APPLICATIONS APPROVED SUMMARY Q3-2007 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 Exempted Companies 246 230 306 236 330 302 (Bermuda companies exempted from the 60% Bermudian ownership requirement) Exempted Partnerships 73 16 57 39 32 39 (partnerships established in Bermuda to carry on business in or from within Bermuda) Overseas Partnerships 1 0 12 2 0 1 (overseas partnerships applying for permits to carry on business in or from within Bermuda) Overseas Permit Companies 5 4 14 7 6 7 (overseas companies applying for permits to carry on business in or from within Bermuda) Unit Trusts 19 7 4 24 6 14 Continuation Companies 10 9 3 8 5 7 (companies from other jurisdictions continuing into Bermuda as exempted companies) Unlimited Liability Companies 1 6 0 0 6 1 Local Companies 64 56 49 64 62 40 Total Applications Approved* 419 328 445 380 447 411 * Quarterly Numbers are amended to reflect more up-to-date consent information 13

INVESTMENT FUND STATISTICS 2006-Q1 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 Mutual Funds 850 869 878 906 887 887 879 Umbrella Funds 62 62 63 67 68 68 71 Sub-Funds 293 284 279 283 270 269 261 Segregated Account Companies 61 64 67 69 75 77 78 Segregated Accounts 394 394 393 390 399 397 396 Total 1,660 1,673 1,680 1,715 1,699 1,698 1,685 Unit Trusts 107 108 108 109 108 106 106 Umbrella Trusts 122 139 151 151 134 138 153 Sub-Trusts 232 232 222 215 215 215 215 Total 461 479 481 475 457 459 474 TOTAL PORTFOLIOS 2,121 2,152 2,161 2,190 2,156 2,157 2,159 TOTAL NUMBER OF FUNDS 1,202 1,242 1,267 1,302 1,272 1,276 1,287 TOTAL NET ASSET VALUE (IN BILLIONS) $209.07 $207.52 $210.95 $211.52 $212.80 $223.14 $230.54 14

ADDITIONS TO THE INSURANCE REGISTER 2006 2006 2006 2007 2007 2007 Q2 Q3 Q4 Q1 Q2 Q3 Class 1 6 2 2 3 2 1 Single-parent captive insuring only risks of its owners or affiliates of the owners Class 2 1 1 0 0 1 1 (a) a multi-owner captive insuring risks of its owners or affiliates of the owners; (b) a single-parent and multi-owner captive: (i) insuring the risks related to or arising out of the business or operations of the owners and affiliates, and/or (ii) deriving up to 20 percent of its net premiums from unrelated risks Class 3 12 4 26 6 14 11 Insurers not included in Class 1, 2 or 4, such as i) Reinsurers writing third party business; ii) Insurers writing direct policies with third party individuals; iii) Single parent, group, association, or joint venture captives where more than 20% of their net premiums written arises from risks which are unrelated to the business of the owners; iv) Finite reinsurers and rent-a-captives Class 4 1 0 2 0 1 0 Insurers and reinsurers capitalised at a minimum of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk Long-Term Insurers 0 3 2 4 2 2 Insurers writing long-term (or life) business Composites 0 1 2 0 2 0 Insurers writing combination of long-term (or life) business and Class 1, 2, 3 or 4 business Total additions during quarter 20 11 34 13 22 15 15

Prepared and Published by the Bermuda Monetary Authority ( BMA 2008) All enquiries relating to this Notice should be directed to the Bermuda Monetary Authority (by email to info@bma.bm) The contents of this publication may be reproduced providing the source is acknowledged.