STRESS TEST YOUR PORTFOLIO

1. STRESS TEST YOUR PORTFOLIO

2. Stress Test Your Portfolio Speakers: • Kevin Gardiner, Barclays Wealth • Jeff Johnson, Vanguard • Joe LoPorto, Brown Brothers Harriman • David Burns, Schroders Moderator: • Robert Paton, Aon Insurance Managers (Bermuda) Ltd.

3. Stress-testing portfolios: cash management Kevin Gardiner, Head of Global Investment Strategy, Barclays Wealth

4. The stress test to end them all: 2008/9 • Counterparty risk – interbank freeze • Breaking the buck • Deflation risk • Illiquidity

5. VIX and safe haven assets Source: Datastream, Barclays Wealth Strategy

6. Money market tension: LIBOR-OIS spreads Source: Bloomberg, Barclays Wealth Strategy

7. Real gold price, indexed Source: Datastream, Barclays Wealth Strategy

8. Nominal Fed Funds, % Source: Datastream, Barclays Wealth Strategy

9. What stresses now? • Banks broadly fixed • Insurance enhanced • Official rates on hold • Look for high quality, low duration cash alternatives

10. Disclaimer This document must not be regarded as independent research, which means that it has not been prepared in accordance with legal requirements designed to promote the independence of ‘investment research’, as defined in the UK FSA Handbook. As such, it has been signed off as a financial promotion. Investment ideas presented herein are not subject to any prohibition on dealing ahead of the dissemination of investment research, which applies only to independent research. Employees of Barclays Wealth are, however, subject to our internal Personal Account Dealing Policy and our Conflicts Management Policy. This document has been prepared by Barclays Wealth, the wealth management division of Barclays Bank PLC ("Barclays"), for information purposes only. Barclays does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modelling or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modelling or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The value of any investment may fluctuate as a result of market changes. The information in this document is not intended to predict actual results and no assurances are given with respect thereto. The information contained herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The investments discussed in this publication may not be suitable for all investors. Advice should be sought from a financial adviser regarding the suitability of the investment products mentioned herein, taking into account your specific objectives, financial situation and particular needs before you make any commitment to purchase any such investment products. Barclays Wealth and its affiliates do not provide tax advice and nothing herein should be construed as such. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Neither Barclays Wealth, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of or reliance upon this publication or its contents, or for any omission. Past performance does not guarantee or predict future performance. The information herein is not intended to predict actual results, which may differ substantially from those reflected. The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors. This document shall not constitute an underwriting commitment, an offer of financing, an offer to sell, or the solicitation of an offer to buy any securities described herein, which shall be subject to Barclays’ internal approvals. No transaction or services related thereto is contemplated without Barclays' subsequent formal agreement. Barclays Bank plc, Barclays Capital Inc., Member SIPC, and / or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or other derivatives based thereon. Barclays, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in transactions or securities (or related derivatives) identical or similar to those described herein. One or more directors, officers, and / or employees of Barclays Capital Inc. or its affiliated companies may be a director of the issuer of the securities mentioned in this document. Barclays Capital Inc. or its affiliated companies may have managed or co-managed a public offering of securities for any issuer mentioned in this document within the last three years. "Barclays Wealth" is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised and regulated by the U.K. Financial Services Authority and is registered in England. Registered No: 1026167. Registered Office: 1 Churchill Place, London E14 5HP. This publication has been issued and approved by Barclays Bank PLC. Barclays Bank PLC is incorporated in England. Its members have limited liability.

11. Vanguard’s Approach to Manager Oversight & Selection Jeffrey A. Johnson, CFA

12. Agenda • Vanguard Overview • Internal vs. External Management • Manager Search & Oversight Process

13. Vanguard overview Steady Asset Growth • Proven Experience • Wellington™ Fund—1929 • The Vanguard Group—1975 • $1.6 trillion under management worldwide $919 billion More than 6,000 institutional clients • Global Investment Platform • More than 200 portfolios • Equity, fixed income, and money markets • Index, enhanced equity, and active $721 billion More than 20 million shareholder accounts • Best in class investment advisors • 35 years experience working with external managers • 29 manager relationships Diverse Asset Mix (billions) Other$131 Balanced$89 Index Equities$563 • Captive Manager Experience • Serve both onshore and offshore captives • 75 captives with just under $1 billion AUM • Comprehensive array of services Bonds$385 Active Equities$209 Money Market$172

14. Location: Investments General/Portfolio Review Dept/Manager Selection & Oversight Update: Q; Dave Stinnett (assets performance data) 46% 50% 50% Indexed Externally managed Actively Managed 54% Internallymanaged There are benefits to usinginternal and external managers Diversity and Specialization • Index and fixed income assets managed internally • Cost-effectiveness • Disciplined execution • External active managers selected for specialized expertise • No dominant approach or management “group think” Discipline and Risk Control • Tightly defined investment mandates • Clear and style-consistent investment processes • Rigorous selection and monitoring process for portfolio managers • Experienced portfolio managers with track records in all market cycles

15. Location: Investments General/Portfolio Review Dept/Manager Selection & Oversight Update: Q; Lisa Curran Blend of qualitative and quantitativecriteria for manager selection Firm People People Philosophy Philosophy • Ownership structure • Business viability • Investment culture • Fiduciaries • Perspective • Experience • Depth • Stability • Unwavering • Coherent • Rooted in research • Aligns with our beliefs Process Portfolio Performance Process Portfolio Performance • Consistent with philosophy • Transparent • Disciplined • Repeatable • Reflects philosophy and process • High conviction • Aware of risks • Outcome of other elements • Various perspectives • Risk-adjusted • Time periods • Benchmarks

16. Location: Investments General/Portfolio Review Dept/Multimanager Approach Update: Q; Lisa Curran Note: Not data driven, just a page check Closing Thoughts We believe manager oversight, selection, and risk management combines art and science Results Vanguard’s low costs, which allows investors to keep more of a fund’s return Select talentedmanagers Combine managers effectively Provide rigorous oversight + +

17. Fixed Income Joseph LoPorto Vice President Brown Brothers Harriman & Co. Insurance Asset Management

18. Normal Probability DistributionWhat are common risk measures telling us?

19. Hypothetical Asset Allocation

20. The Black Swan of 2008The Subprime Chickens Come Home to Roost

21. Sources of Fixed Income Investment Risk • Primary Sources: • Interest Rate Risk • Credit Default Risk • Secondary Sources: • Asset Specific Risk • For example: Prepayment or Extension Risk in MBS

22. Interest Rate RiskDuration

23. Bonds How risky are bonds?

24. Hedging Interest Rate Risk • Asset Liability Management is primarily meant to hedge risk to surplus. • The first step to stress testing interest rate risk is to test the captive’s ALM approach. DA = DL x [L / A] Where: DA equals asset duration DL equals liability duration L equals total discounted liabilities; and A equals total assets

25. Problems with the Equation • Duration Assumptions: • The yield curve is not flat • Rates shift in a parallel fashion • Cash flows do not change with interest rates • Inflation is the most difficult element to account for in this process. • ALM Issues: • The duration budget is effected by balance sheet factors (point in time specific, pro forma’s change) • The equation matches ALL assets, not limited to the fixed income component of invested assets • Deferred tax assets probably have zero duration • Equities?

26. Stress Testing Parameters • The residual duration budget is an important factor when evaluating the fixed income component of the captive’s investment strategy. • The probability that the target duration is incorrectly estimated is important • The ultimate parameters should incorporate the manager’s risk management processes and reflect empirical and hypothetical scenarios. • If we can be fairly confident in our ALM study, stress testing should focus on the risk of permanent impairments.

27. Manager Influence • Portfolio duration should be highly constrained (usually a 10% band). • The strategy should set strict position limits • Risk taking boundaries should be well delineated • Tracking error is not a perfect measure!

28. Conclusion Some Final Thoughts

29. Hypothetical Result 4% is a safe estimate.

30. Schroders Investment Management Stressing equity portfolios and managing risk trusted heritage advanced thinking

31. IntroductionStressing equity portfolios and managing risk Stressing portfolios Cyclical market forum (CMF) presents economic scenarios used to shape equity portfolio positioning Portfolio managers use proprietary software (SMART) to stress portfolios Regulatory influence on risk analysis and capital requirements Managing risk Diversification reduces specific risk Active positioning according to market view Portfolio managers can use equity index futures or option strategies

32. IntroductionThe need to hedge risk Volatility and downside risk put pressure on earnings and balance sheets

33. Cyclical market forum Determining Schroders portfolio positioning Quarterly Monthly Daily Global Asset Allocation Committee Fund Management & Analysis Cyclical Market Forum Fund Managers & Analysts 40+ Senior Investment Specialists 5 Independent Specialists Individual Fund Managers & Analysts Equity 162 Construct Portfolios • Sizing positions • Fund / Vehicle selection • Monitor risk & return Gather Information • Outlook for asset classes • Specialist views • Discuss economic scenarios Determine Investment Policy • Asset class preferences • Conviction & Accountability • Set stop-loss/take-profit Fixed Income 53 Alternatives 68 Models & economic cycle analysis InvestmentStrategy Models & economic cycle analysis

34. Schroders Multi Asset Risk Technology (SMART) Allows us to analyse: • Alpha and Beta separately • VaR and CVaR • Non-normality i.e. extreme events • Stress tests for any asset class / market scenario • Changes in correlations between assets • Cyclical views on assets and economic cycle • Regulatory constraints can be imposed This allows us to construct more robust portfolios, optimised from multiple risk return perspectives, and which therefore deal with volatile markets better. Proprietary third generation portfolio risk analytics

35. Schroders Multi Asset Risk Technology (SMART) Scenario analysis based on historic events Analysis replicates portfolio performance through periods of historic stress

36. Mitigating short term equity risk Collar Strategy A collar strategy mitigates downside risk while maintaining upside volatility. Construction: long put and short call Step1.Purchase a 12 month Put Option on a Benchmark Index, with a strike 10% below the current spot level. Then if the index falls by more than 10% over the period, the loss on the physical portfolio in excess of 10% will be offset by an equal and opposite payout from the put option. There is a cost to removing the downside risk, the premium to be paid for the put option. Step 2.We can also sell a 12 month Call Option over the portfolio with the same premium as that of the put option. This can be achieved by solving for the strike price of the option. Which will then place a cap (15% on the sample chart) on the 12 month return of the portfolio. The result of this process is called an Equity Collar. Note that between the -10% ‘floor’ and the +15% ‘cap’, full exposure to the underlying equity portfolio is maintained. Strategy Payout at maturity Equity Returns • Equity • Long Put Option • Short Call Option • Collar Strategy

37. Mitigating short term equity risk Improving on the collar strategy Implement the collar as an individual overlay on the physical portfolio • Fund manager can set a different strike price and maturity date for each option in line with target ‘take profit’ level for the corresponding underlying stock • More value can be generated by selling calls on each of the individual stock components of an index than by selling a single call on the index itself Replicate the put option strategy • Dynamically hedging the option position within the equity portfolio, using the tried and trusted techniques that investment banks have always employed to hedge their exposure to the options they provide • Eliminates both the cost and the counterparty risk of having a ‘middle man’ and able to choose the level of volatility of the market at which to implement the replication Price transparency • Should be improved through the best execution process. In this process a panel of counterparties is made to compete head to head for the best price on each leg of the collar strategy Index futures • Fund manager can reduce market exposure by selling index futures instead of selling holdings thus hedging market risk and reducing transaction costs

38. Regulatory requirements Increasing granularity of assessment necessary to capture risk profile Solvency II equivalence • Stress test formulae calibrated to 99.5% VaR • ‘Global’ equities (listed in OECD or EEA) 30% market level shock, ‘Other’ 40% shock • Correlations • 1st June BMA announced pilot risk analysis study of Class 3 insurers – future extension to Class 1 and 2? Capital assessment • Interaction with liabilities • Interaction with other assets • Whole balance sheet approach

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