II- Capital and Capital Management

II- Capital and Capital Management

Presented by Michel M. Dacorogna

Moscow, Russia, April 23-24,2008

2Economy of Risk in InsuranceMichel M. DacorognaApril 23-24, 2008

Important disclaimerAlthough all reasonable care has been taken to ensure the facts stated herein are accurate and that the opinions contained herein are fair and reasonable, this document is selective in nature and is intended to provide an introduction to, and overview of, the business of Converium. Where any information and statistics are quoted from any external source, such information or statistics should not be interpreted as having been adopted or endorsed by Converium as being accurate. Neither Converium nor any of its directors, officers, employees and advisors nor any other person shall have any liability whatsoever for loss howsoever arising, directly or indirectly, from any use of this presentation.

The content of this document should not be seen in isolation but should be read and understood in the context of any other material or explanations given in conjunction with the subject matter.

This document contains forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. It contains forward-looking statements and information relating to the Company's financial condition, results of operations, business, strategy and plans, based on currently available information. These statements are often, but not always, made through the use of words or phrases such as 'expects', 'should continue', 'believes', 'anticipates', 'estimated' and 'intends'. The specific forward-looking statements cover, among other matters, the reinsurance market, the outcome of insurance regulatory reviews, the Company's operating results, the rating environment and the prospect for improving results, the amount of capital required and impact of our capital improvement measures and our reserve position. Such statements are inherently subject to certain risks and uncertainties. Actual future results and trends could differ materially from those set forth in such statements due to various factors. Such factors include general economic conditions, including in particular economic conditions; the frequency, severity and development of insured loss events arising out of catastrophes; as well as man-made disasters; the outcome of our regular quarterly reserve reviews, our ability to raise capital and the success of our capital improvement measures, the ability to exclude and to reinsure the risk of loss from terrorism; fluctuations in interest rates; returns on and fluctuations in the value of fixed income investments, equity investments and properties; fluctuations in foreign currency exchange rates; rating agency actions; the effect on us and the insurance industry as a result of the investigations being carried out by US and international regulatory authorities including the US Securities and Exchange Commission and New York’s Attorney General; changes in laws and regulations and general competitive factors, and other risks and uncertainties, including those detailed in the Company's filings with the US Securities and Exchange Commission and the SWX Swiss Exchange. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Please further note that the Company has made it a policy not to provide any quarterly or annual earnings guidance and it will not update any past outlook for full year earnings. It will however provide investors with perspective on its value drivers, its strategic initiatives and those factors critical to understanding its business and operating environment.

This document does not constitute, or form a part of, an offer, or solicitation of an offer, or invitation to subscribe for or purchase any securities of the Company. Any securities to be offered as part of a capital raising will not be registered under the US securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the US securities laws.


Agenda

1The different perspectives on capital

Risk-Based Capital and economic capital. Are they the same?

2Capital management framework

How much capital does a company need and what should it do with excess capital?

3Capital structure

What type of capital should a company have? Equity vs long term debt

4 Wrap-up


The need for capital

We have seen that beyond the expected loss, the insurer needs to make sure that he can pay his liability.

For this, he uses the capital he got from his shareholders to guarantee that he will pay up to a certain probability.

Then the first question to ask is: how much capital the company is willing to risk within a given time horizon (usually 1 year)?

It is helpful to clearly distinguish between the available capital: equity, long-term debts, unrealized gains, discount in loss reserves, latent taxes, …, which is called the economic capital.

And the minimal amount of capital the insurer would technically need in order to cover the risk it has taken: the risk-based capital (RBC).


The two dimensions of capital:available versus required capital

Capital as reported in financial statement

Economic Adjustments: discount in loss reserves(+)

miscellaneous other discounts...(+/-)

RBC for underwriting risk:New business

Reserves

RBC for investment risks

RBC for other risks

Economic resources available to develop the

business or take on more risk

Economically adjusted capital:

Available Capital

Capital required given management’s risk appetite:

Risk-Based Capital

Less reinsurance

More reinsurance


Risk-Based Capital

Let us define, as in the previous presentation, the underwriting result (UWR) as:

UWR = Premium – Losses – Expenses

(everything discounted according to their payout patterns).

Risk Based Capital depends on:

The risk measure chosen (, VaR, ES,),

The risk tolerance level .

We define Risk Based Capital (RBC) as a function of the risk measure and the risk tolerance.


Three possible definitions ofRisk Based Capital

UW Result Distribution

Bankruptcy Level

Pre

miu

m

Cost

Losse

s

UW

Resu

lt

Solvency Requirement

Capital needed

to insure Solvency

RBC 2

Capital needed to

insure against

Bankruptcy

RBC 1

0

Expected UW Result

Capital needed

to insure UW

ResultRBC 3


Each definition plays a role

Given our definition of risk, which is the probability of not meeting a certain expectation (different for customers, regulators and investors), we can define the following notions of RBC:

RBC1 is used when pricing. We want to make sure that the business is well written: The more premium for the same risk, the less capital.

RBC2 is needed to satisfy the regulators. We want to keep the business running.

RBC3 is needed to meet investors’ expectation. They expect our business to be profitable.

The optimal deployment of capital as the shareholders expect must be implemented through the business strategy (and not through the definition of capital itself).


Capital and allocation of capital as foundation of the Risk / Reward strategy

In financial institutions the primary focus of capital is not to provide finance, but to absorb the risks undertaken

It is thus the “commodity” to produce the company business

Its allocation is not ancillary to the business processes; it must be at the heart of them

It is a precondition for the optimisation of shareholder value

The heart of a risk / reward strategy is thus the proper definition and allocation of capital


What is economic capital?Different people have different views

For shareholders:

Capital is the monetary “value” of a firm for its “owners”

It is employed to generate future profits and should stay as small as possible (target capital) to avoid agency problems

For regulators and policyholders:

Capital is the guarantee of the ability to make liability payment beyond the expectation

It should be as large as possible

For rating agencies:

Capital equals the monetary value of a company from which some creditworthiness is derived for risk assessment of the company

They conduct an assessment of “sufficient” capital levels

For management and employees:

Capital is their core means to generate profit

It needs to be managed to satisfy all stakeholders


(Potential) stakeholders of capitaland their business interests

Current shareholders: risk – return perception, i.e. invested capital to be adequately rewarded within defined limits

Potential investors: risk – return perception, similar to shareholders

Policyholders/bondholders: seek value protection, no direct risk / reward perception

Employees/Management/Board of Directors: more complex picture

Agents:

Employees/Management/Board of Directors: agents of shareholders

Regulatory bodies: agents of policyholders, demand “sufficient” lower capital limit

Rating agencies: agents of investors and clients, assessment of “sufficient” economic capital levels for different credit levels


What is “sufficient” capital?

“Sufficient” capital equals the monetary value of a company that it has to have, given the risk assessment of the company by a stakeholder or his agents (rating agencies, regulators, investors, management).

How much is the investor prepared to lose in return for the profit expectation? (How well is a policyholder protected?)

This is basically Risk-Based Capital (RBC) + some “buffer capital” on top

The various stakeholders use different definitions regarding RBC depending on:

The risk tolerance of the stakeholderThe depth of knowledge about the risks and their dependencies regarding the concrete company

SCOR measures its Risk-Based Capital based on the expected shortfall of the firm’s economic profit. This measure is in general also used by the Swiss Solvency Test (SST).


Accommodating the differentviews in capital

The art of capital management is to accommodate these very different views in order to achieve both an adequate return on equity and a stable rating for the company

Finally, model uncertainty should also enter in the equation


Capital allocation and performance

Concepts of capital are crucial within the company when it comes to investing profitably the capacity across the different lines of business and for the investment risk.

Optimal “allocation of capital” to a line of business or a treaty is related to the risk contribution of the line of business or the

treaty to the overall expected shortfall

The allocated capital has to be profitable, i.e. generate adequate profit

The pricing tool must take care of this at treaty level


Underwriting RBC and Pricing:Capital allocation down to a treaty level

MarketName

ClassCode

ContractNumber

EffectiveDate P/NP OUR EPI NPV TRAC RoRAC

Perf ExcessHurdle

Perf ExcessTarget

PricingStatus

PricingDate

Arab World II PR M5463D 01.01.2007 Prop 668'776 29'495 172'863 17.1% 2'138 -3'806 Imported 04-Dez-06Arab World II LA M3077D 01.01.2007 NonProp 95'282 29'980 175'664 17.1% 10'339 5'374 Imported 14-Dez-06Arab World I EN M5462D 01.01.2007 Prop 156'590 19'082 111'741 17.1% 6'588 3'602 Imported 11-Jan-07Turkey MA M5966D 01.01.2007 NonProp 12'831 3'725 21'764 17.1% 1'195 530 Imported 09-Jan-07Arab World I PR M5886D 01.01.2007 Prop 538'957 45'923 267'827 17.1% 15'975 6'480 Imported 04-Dez-06Arab World I PR M6730D 01.01.2007 Prop 46'163 717 4'180 17.2% 250 123 Imported 09-Jan-07Marine & Energy CS M9530D 01.01.2007 Prop 264'000 44'411 258'731 17.2% 15'231 8'161 Imported 14-Dez-06Turkey MA M1707D 01.01.2007 Prop 35'831 2'073 12'068 17.2% 724 351 Imported 08-Jan-07Switzerland MA M1879D 01.01.2007 NonProp 39'854 17'814 103'634 17.2% 5'718 2'408 Imported 22-Jan-07Asia I (Singapore) MA M469D 01.01.2007 Prop 117'247 4'118 23'934 17.2% 1'442 699 Imported 22-Jan-07Northern Europe/Baltics PR M1603D 01.01.2007 NonProp 14'123 3'713 21'565 17.2% 1'302 541 Imported 03-Jan-07France PR M7370D 01.01.2007 NonProp 251'644 113'407 658'490 17.2% 39'781 16'553 Imported 26-Jan-07Greece, Malta, Cyprus MT M9996D 01.01.2007 NonProp 33'835 13'975 81'029 17.2% 3'878 2'059 Imported 17-Jan-07Arab World II PR M4804D 01.01.2007 NonProp 77'059 40'136 232'536 17.3% 14'134 5'935 Imported 27-Dez-06Germany I MA M1096D 01.01.2007 NonProp 3'049 1'631 9'423 17.3% 577 291 Imported 11-Jan-07Germany II CS M8736D 01.01.2007 NonProp 53'794 22'623 130'702 17.3% 8'009 4'133 Imported 17-Jan-07Eastern Europe PR M3732D 01.01.2007 NonProp 37'252 22'591 130'387 17.3% 8'013 3'665 Imported 28-Dez-06Austria MT M9653D 01.01.2007 NonProp 144'471 60'452 348'875 17.3% 21'353 11'664 Imported 23-Nov-06Asia I (Singapore) MA M8318D 01.01.2007 Prop 79'980 1'878 10'816 17.4% 668 334 Imported 05-Jan-07Eastern Europe PR M5087D 01.01.2007 NonProp 76'810 38'053 218'769 17.4% 13'591 5'877 Imported 07-Dez-06Asia II (Malaysia) EN M9623D 01.01.2007 Prop 56'690 4'518 25'916 17.4% 1'621 842 Imported 05-Jan-07Austria PR M5972D 01.01.2007 Prop 7'918 129 737 17.5% 46 20 Imported 04-Jan-07Latin America II PR M5804D 01.01.2007 Prop 87'829 1'922 10'999 17.5% 692 336 Imported 12-Jan-07Eastern Europe PR M8648D 01.01.2007 NonProp 158'885 23'741 135'505 17.5% 8'590 4'345 Imported 12-Jan-07Arab World I PR M5777D 01.01.2007 NonProp 4'867 1'150 6'561 17.5% 371 141 Imported 03-Jan-07Israel PR M2561D 01.01.2007 NonProp 50'921 14'253 81'233 17.5% 5'170 2'312 Imported 05-Jan-07Arab World I PR M6474D 01.01.2007 Prop 209'648 10'265 58'436 17.6% 3'731 1'981 Imported 04-Jan-07Australia PR M2430D 01.01.2007 NonProp 29'472 11'390 64'835 17.6% 4'141 1'855 Imported 03-Jan-07Asia I (Singapore) MT M9139D 01.01.2007 NonProp 4'884 2'645 15'051 17.6% 769 293 Imported 04-Jan-07Greece, Malta, Cyprus PR M7538D 01.01.2007 NonProp 30'136 12'774 72'638 17.6% 4'639 2'078 Imported 20-Nov-06Eastern Europe PR M6886D 01.01.2007 Prop 118'679 18'638 105'804 17.6% 6'808 3'385 Imported 05-Jan-07Greece, Malta, Cyprus MT M4324D 01.01.2007 NonProp 50'109 31'092 176'479 17.6% 11'360 6'720 Imported 19-Jan-07Austria PR M2562D 01.01.2007 NonProp 11'740 4'216 23'877 17.7% 1'547 754 Imported 03-Jan-07Arab World I PR M6679D 01.01.2007 NonProp 90'201 21'831 123'465 17.7% 7'588 3'474 Imported 09-Jan-07Arab World II PR M1507D 01.01.2007 NonProp 48'015 6'352 35'916 17.7% 2'259 1'127 Imported 02-Jan-07Credit & Surety EN M9065D 01.01.2007 Prop 54'454 4'543 25'510 17.8% 1'691 1'019 Imported 18-Jan-07Arab World I PR M1731D 01.01.2007 Prop 16'784 1'188 6'668 17.8% 442 243 Imported 17-Jan-07Asia I (Singapore) PR M5877D 01.01.2007 NonProp 14'174 5'719 32'083 17.8% 2'131 1'061 Imported 05-Jan-07Central Europe PR M5921D 01.01.2007 NonProp 13'440 2'566 14'351 17.9% 910 432 Imported 22-Dez-06Northern Europe/Baltics PR M6528D 01.01.2007 NonProp 712'690 131'616 736'192 17.9% 33'667 8'086 Imported 19-Jan-07Credit & Surety MA M6142D 01.01.2007 Prop 147'000 7'602 42'501 17.9% 2'776 1'486 Imported 14-Dez-06Asia II (Malaysia) EN M4409D 01.01.2007 Prop 105'470 13'530 75'611 17.9% 5'076 3'068 Imported 22-Jan-07Germany III PR M9436D 01.01.2007 NonProp 172'141 43'752 244'490 17.9% 16'415 8'897 Imported 23-Jan-07Latin America I CS M9392D 01.01.2007 Prop 201'211 18'335 102'445 17.9% 7'903 4'588 Imported 13-Okt-06

Market … … P/NP Our EPI NPV TRAC RoRAC Perf. Perf.Name ExcessExcess

HurdleTarget

Eastern Europe Prop 118‘679 18‘638 105‘804 17.6% 6‘808 3‘385

Risk- based performance indicators per treaty:

Capital (TRAC)

RoRAC

Performance excess against Hurdle and Target rates


Agenda





3Capital structure


4 Wrap-up


Capital management framework (1/2)

1. How much capital does a company need and what should it do with excess capital?

2. What type of capital should it

have?

3. How should it reward capital on an ongoing basis?

Regulators

Rating Agencies

Management/Economic Capital

Industry peers

Capital Markets

Key QuestionsDrivers


Buffer Capital

Target Capital

Required Capital (RBC)

1,600

700

2,200

???

2,200

Key challenge: determine appropriate

buffer (see next page)

???

Capital Management Framework (2/2)

Available Capital*

2,900

Take the maximumof the three definitionsto satisfy all stakeholders

SignalingCapital

Internal model

Regulatory model*

A-range Rating model

Risk Based Capital* All the other capital are computed at t1 while available capital is computed at t0

In € million, the numbers are illustrative


Determining the size ofthe capital buffer (1/2)

A capital buffer is required for two reasons:

1. Need for a safety margin to avoid having to go to the capital market every year

2. Model uncertainty

Internal models give as a result the probability distribution of the shareholders’ equity after one year

To determine the buffer we add to the required capital the quantile of the distribution corresponding to a probability of being exhausted of 10 to 13%

The buffer plus the required capital constitute the target capital of the company


Determining the sizeof the capital buffer (2/2)

Such a buffer gives a probability to hit the required capital not more than once every 7.5 to 10 years

This means a safety margin to avoid frequent capital increases

The threshold at which to determine the buffer will depend on the risk appetite and the access to financial markets of the company as well as its target ROE


Buffer capital limitsprobability of a capital increase

Expected Net Income

300

Revise business

model

Buffer Capital

300 -400

Required capital

2,200

Profit/loss distribution determines probabilities for recapitalization necessity

Proposed Buffer capital

range

In million EUR

Consider capital return transaction

Recapitalization probability

5% (1 in 20 years)

10% (1 in 10 years)

13% (1 in 7.5 years)

20% (1 in 5 years)

25% (1 in 4 years)

600

400

300

150

80

Net income exceeds expectations

Net income below expectations

Negative net income partially reduces buffer

10 -13% probability

Capital raising necessary

Scenarios:

S&P CAR: 150%

S&P CAR: 140%


Revise business

model

12.9%

Next YearROE

Recapitalization every x years (probability)

3 (33%)

4 (25%)

5 (20%)

7,5 (13%)

10 (10%)

20 (5%)

15.5%

12.0%

13.4%

14.1%

14.6%

Lower recapitalization probability requires more buffer capital The more target capital, the less ROE at given profit There is a natural trade-off between safety and profitability

Risk-return tradeoff for different recapitalization probabilities

Proposed Target Capital

range

Consider capital return transaction

The mathematical relation between target ROE and buffer is as follows:

Buffer / Required Capital =(Market Risk Premium – Target ROE) / Target ROE

In this case 9% above the risk free rate corresponds more or less to 1/10 years buffer (should be the result of the internal model)


Buffer capital - model uncertaintysingle worst-case scenarios (examples)

In million EUR

US earthquake

US hurricane

EU windstorm

All currencies down 20% vs. EUR

All equity, real estate and hedge funds down 30%

All interest rate parallel up by 300 bp

Global pandemic

Tokyo earthquake of 1923 incl. capital market effects

Severe adverse development in reserves

Equity: 0Capital

increase necessary

Single peril scenarios

Capital market scenarios

Multi risk driver scenarios

Equity: +300

Probability0.4%

0.4%

0.4%

N.A.

1.7%

0.4%

0.7%

0.2%

0.2% 705

620

350

345

325

320

180

100

280


Capital position over a three year period

Required Capital

Buffer Capital

Target Capital

In million EUR

Available Capital

Excess Capital

S&P CAR

+-1351702.870*2.7004202.280Y3

+-1332002.850*2.6504102.240Y2

+-1303002.900*2.6004002.200Y1

152%

154%

161%

Neutral Range

Neutral target

capital range

Neutral excess

capital range


Excess capital return frameworkCurrent year

Plan forthe next years

Available Capital falls short of neutral Target

Capital range

Available Capital within neutral Target Capital

range

Available Capital exceeds Target Capital

Available Capital falls short of neutral Target

Capital range

Change business model immediately

Reduce underwriting limits

Increase retro coverage

De-risk asset book

Exercise authorized capital

Change business model for the next years



De-risk asset book


Change business model for the next years



De-risk asset book


Available Capital within neutral Target Capital

range

Accept a higher default/ recapitalization probability for one year

or

Change actual year’s business model while trying to keep plan for future

No change

Potential for capital return transaction up to the amount that Available Capital does not fall short of Target Capital for

any of the next years

Available Capital exceeds Target Capital

Accept a higher default/ recapitalization probability for one year

or

Change actual year’s business model while trying to keep/exceed plan for future

Plan for capital return transaction up to the amount that Available Capital does not fall short of Target Capital for

any of the coming years

Potential for capital return transaction up to the amount that Available Capital does not fall short of Target Capital for

any of the next years


Agenda





3Capital structure


4 Wrap-up


Equity versus long term debt (1/2)

Equity is the most flexible form of economic capital and very much liked by regulators and rating agencies, but disliked by shareholders

For companies, equity is the most expensive form of capital because they are required to pay the cost of equity on it

Long term debt is usually less expensive than equity. Particularly, for companies that have a good credit rating, which is the case for reinsurances

Long term debt is thus a way to reduce the cost of capital and increase the return on equity


Equity versus long term debt (2/2)

Long term debt is however quite inflexible: contrary to dividends, costs must always be paid to avoid bankruptcy

This is why a company must carefully decide by how much it should leverage its capital

All the return and risk considerations must be taken into account (Enterprise Risk Management)

The ratio between long term debt and equity is called leverage

Often a peer review would help assess the reasonableness of the chosen leverage


The various forms of capital

Rating agencies generally treat hybrid as capital up to 25% of total adjusted capital

Senior DebtHybrid

Perpetual, Junior Subordinated Debt, Perpetual Preferred

Mandatory Convertible

Equity

Insurance Regulation (CH)

NoneSolvency Capital (25-

50% limit)Solvency Capital

Solvency Capital (Equity)

Equity treatment by rating agencies 0%

100% Equity Credit up to 25% of TAC

100% Equity Credit up to 35% of TAC

100%

Potential Dilution None None

Yes, potentially at a premium to current share

price

Yes, immediate

Investor Base Institutional or Retail

Mostly institutionalInstitutional or

RetailInstitutional or

Retail

Increasing equity characteristics


Leverage constraints

In million EUR

S&P model required TAC at 125% + hybrid capacity

3.410

850

S&P available TAC + hybrid capacity

3,920

980 980

3,410

S&P available TAC after 1 in 7.5 year loss + hybrid capacity

1 in 7.5 years

25% 29%

Only Required Capital is leveraged by 25%

Buffer Capital and Excess Capital are not leveraged at all since they are kept for absorbing adverse events

Maximum hybrid capital exposure set by rating agencies serves as a good proxy for leverage constraints


Then confirmed by a peer analysis

90% 87%78% 76% 74% 73% 70% 69% 66% 64% 60%

10% 12%

10% 17% 16% 14%29% 26%

20% 21%

15%

1%11% 7% 10% 12%

1% 5%14% 15%

26%

Shareholder's equity Subordinated debt (e.g. Hybrid) Senior debt

Capital Structure of the major European re(insurance) companies in 2007

Source: JP Morgan


Authorized and Contingent Capitalmust be first defined by the ERM approach

Loss of required capital125 250 375 500

25%

75%

100%

Authorized capital of EUR 250 million would enable the company to relatively quickly re-establish the Required Capital in about 55% of these negative scenarios

Contingent capital of EUR million on top would enable quick re-establishment of Required capital in another 25% of these negative scenarios

Only 1 in 37.5 to 50 years would it be necessary for the company to raise more than EUR 500 million in capital to re-establish the Required Capital

50%

Conditional Probability

Example: Loss of Required Capital, given complete loss of Buffer Capital

Figures derived from internal RBC model


Agenda





3Capital structure


4 Wrap-up


Wrap-up Capital Management (1/2)

In a modern reinsurance company, capital allocation is used to optimize the risk / reward strategy

Capital allocation to all business units will steer the portfolio towards better diversification and profitability

A clear capital management framework is appealing to all stakeholders of the company

A company should aim its capital to be within a Target Capital range consisting of two elements:

Required Capital must be held at any time and is defined so that requirements of all relevant stakeholders are met

A Buffer Capital range is defined on top of Required Capital in order to manage the probability with which the company has to get additional capital


Wrap-up Capital Management (2/2)

When available capital is (consistently) above the upper end of the Target Capital range the company should give it back to the shareholders

When available capital is (consistently) below the lower end of the Target Capital range the company should rethink its business model including a possible capital injection

The use of hybrid capital should be limited by the amount that can be fully used from a rating agencies’ perspective even in a crisis situation and in line with the company’s peers

A prudent capital management requires sufficient authorized/contingent capital to enable management to quickly regain Required Capital in about 80% of all recapitalization scenarios


Appendix


Glossary (1/2)

Economic Capital: The difference between the marked-to-market value of the assets and the market consistent value of the liabilities

Available Capital: The economic capital deduced from the balance sheet at t0

Risk-Based-Capital (RBC): the quantity computed by the various models (internal, rating agency, solvency) for t1*. For the internal model, we suggest using the difference between the expected value and the 1% expected shortfall of the economic capital at t1.

* The RBC at t1 for the internal model and the SST model allows for planned new business, expected claims, lapses (life) and non-renewed business between t0 and t1


Glossary (2/2)

Required Capital: The maximum of the internal model RBC, the capital requirements of the rating agencies model, and the solvency model, all computed for t1, at t0*.

Buffer Capital: The monetary amount above the required capital which has an X% probability (we choose 10%) of being exhausted, as calculated from the internal model computed for t1, at t0.

Target Capital: The monetary amount of capital the company needs to have at t0 in order to be able to meet its obligations at t1. In our definition, this is the required plus buffer capital.

Signalling Capital: The difference between the required capital and the available capital. It can be different from the buffer capital if the company wants to grow the business in a multi-step period.

* because it is needed at t0!

II- Capital and Capital Management

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