Alton Cogert, CFA, CPA, CAIA, CGMA President & CEO March 21st, 2013

1. Insurer Investment Forum XIII Investing for Insurers: Review and Preview • Alton Cogert, CFA, CPA, CAIA, CGMA • President & CEO • March 21st, 2013

2. The #1 Investment Challenge in Over 30 Years: “Low Rates for Longer”

3. U.S. Financial Repression Source: Federal Reserve, J.P. Morgan Asset Management

4. Where We Are Today • Book Yields Continue Downward Path • Insurers Grappling with Risk • Insurers Grappling with Product Pricing • Insurers Grappling with ERM “A further unpleasant reality adds to the industry’s dim prospects: Insurance earnings are now benefiting from “legacy” bond portfolio that deliver much higher yields than will be available when funds are reinvested during the next few years - and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.” - Berkshire Hathaway Shareholders’ Letter, March, 2013

5. Improving Investment Income - It Takes Planning Improved Investment Income - It is possible...

6. Key Long-Term Asset Class Return Assumptions Source:JP Morgan 2013 Long-Term Capital Market Return Assumptions

7. Key Long-Term Asset Class Risk Assumptions Source:JP Morgan 2013 Long-Term Capital Market Return Assumptions

8. Risk/Return/Correlation Expectations vs. Aggregate Investment Grade Bond

9. What Does “Low Rates for Longer” Mean? • How Long? • NOV, 2009 “Federal Reserve Chairman Ben Bernanke said interest rates will remain low for an extended period as the U.S. economy still faces considerable challenges.” • FEB, 2010 “Chairman Ben Bernanke told Congress on Wednesday a weak job market and tame inflation warrant low interest rates for an extended period.” • JAN, 2012, “The Federal Reserve anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” • FEB 2013 - “It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent.”

10. What Does “Low Rates for Longer” Mean? • Until Unemployment Rate Hits 6.5%, which will be... • It would take an average job-growth rate of 250,000 each of the next 13 months to arrive at a 6.5% unemployment rate. • But if increases were just 125,000, the average trend rate for the last 30 years, it would take 96 months — or eight full years — before unemployment got to 6.5%. • (This isn’t just job additions, mind you, but net job creation; that’s why simply jumping from 125,000 to 250,000 cuts the time down so dramatically.) • So bond bulls and dollar bears take heart. It looks like Helicopter Ben will be hovering for some time to come. • - http://blogs.wsj.com/marketbeat/2013/01/04/when-the-unemployment-rate-hit-6-5-calculate-it/ • Here’s the Atlanta Fed’s calculator to help answer this question: • http://www.frbatlanta.org/chcs/calculator/

11. What Does “Low Rates for Longer” Mean? • Comparison with Japan - 15 Years and counting? • 10 year JGB: Jan, 1990 to March, 2013

12. How About ‘Black Swans’ - Very Low Probability/Very High Impact? • Inflation - according to the ‘experts • Keynesians - • - Demand/pull - increased economic activity • - Cost push - supply side disruptions • - Built-in inflation - wage/price spiral • Monetarists - • - Quantity Theory of Money • - Long run inflation = • Money supply growth rate • + Rate of change in Velocity of Money • - Growth rate in Real Output

13. How About ‘Black Swans’ - Very Low Probability/Very High Impact?

14. The Fed says, “Take More Risk”...Should You? • What is Your Risk Appetite?

15. The Fed says, “Take More Risk”...Should You? • Over the long run, Process determines Results. • Thus, Process becomes more important than Results.

16. What about Luck versus Skill? Text • http://insurercio.com/content/how-much-ones-success-or-failure-skill-or-luck Text

17. What about Luck versus Skill? • Paradox of Skill: • Standard deviation of skill decreases as expertise increases, which means • Luck has more to do with results • And that means • Difficult to rely upon historical performance • More important to rely upon process • Counter-intuitively, process is more important than results

18. From the London Business School... • Decisions Are More Important Than Results • Results don’t necessarily reflect a high-quality process • Ultimate criteria for good decision making is tied to: • What are we trying to achieve with this decision? (Criteria) • What can we feasibly do? (Alternatives) • What do we have to watch out for? (Consequences) • It’s not enough to measure leaders on results; How they are achieved is equally important. • Implement a good process; Manage risks • - http://bsr.london.edu/lbs-article/407/index.html

19. Could we make understanding risk any more complicated? Text Text Text Text Text Text Text

20. 8 Steps to Answering: “Should You Take More Risk?” • Step 1 - What do you mean by ‘risk’? • Probability of Not Meeting a Goal • Not VaR • What Goal? • Return on Surplus, • Net Income • Spread Over Liability • PV Enterprise Value • Drawdown • Step 2 - Quantify Risk • Single, multi periods, 1 yr. 5 yr.? Text Text Text Text Text Text Text

21. 8 Steps to Answering: “Should You Take More Risk?” • Step 3 • How do different asset mixes impact risk metric Text Text Text Text Text Text Text

22. 8 Steps to Answering: “Should You Take More Risk?” • Step 4 - Implementation Issues • Strategic or Tactical Text Text Text Text Text Text Text

23. 8 Steps to Answering: “Should You Take More Risk?” • Step 5 - Consider Game Theory Impact Text Text Text Text Text Text Text

24. 8 Steps to Answering: “Should You Take More Risk?” • Step 6 • Know your Board/Senior Management Team • Step 7 • Make a Decision - Even if it is to make no decision • Step 8 • Monitor the Impact of the Decision • Stewardship Report Text Text Text Text Text Text Text

25. What has SAA seen so far? Text Text Text Text Text Text Text

26. Goldman Sachs Insurance CIO Survey - July, 2012 Insurers expecting to increase risk: 26% Insurers expecting to decrease risk: 14% Text Text Text Text Text Text Text http://www.goldmansachs.com/s/GMeT_othermailings_attachments/6347837329351787503251.pdf

27. Asset Classes - a Layer Cake of Choices • The Basics • Make certain all IG asset classes are included (public/private) • Diversified equity allocation • High yield/growing dividend slant • Tex The Next Layer • Lower investment grade mandates for munis (where applicable) • Below investment grade in various guises t Text Text Text Text Text Text Text

28. Asset Classes - a Layer Cake of Choices • The Next/Next Layer • Non-equity exposures • More illiquid asset classes • What your manager may suggest, based upon their proven expertise Text • Tex The Next/Next/Next Layer • More complex strategies using derivatives explicitly or implicitly t Text Text Text Text Text Text

29. The Risk Trap • Always ask, “Who is on the other side of the trade? And why?” • Too easy to see well groomed, credentialed person in a suit as authority figure. • It could still be snake oil. • If presenter is too confident, walk out of the room. • Investment management is a humbling activity. • Ask more questions - the “dumber” the better until... • You fully understand ALL aspects of the asset class • Remember: • There is NEVER a dumb question, especially in a Committee or Board setting. Text Text Text Text Text Text Text

30. The Risk Trap • Other Questions: • Will this play in Oldwick? • Ask for ideas from your peers, independent third parties, etc. • There is no way you are expected to know it all. Text Text Text Text Text Text Text

31. The #1 Investment Challenge in Over 30 Years

32. The #1 Investment Challenge in Over 30 Years • Low rates for longer gives us the opportunity to • Reassess our asset allocation • Shed the blinders of ‘we’ve always done it this way’ • Reassess the relationship between investments and reserves • Reassess the relationship between investments and product pricing • Take a deep breath, step back and review the overall investment process • Be better prepared for meeting future challenges • Improve profitability over what it might have been • Get a ‘leg up’ over competitors - succeed where others may fail • Develop a process for constantly improving your company Text Text Text Text Text Text Text

33. The #1 Investment Challenge in Over 30 Years • Thank You • More updates at: • LinkedIn: www.linkedin.com/in/acogert • Twitter: www.twitter.com/saa123 • www.insurercio.com • www.saai.com Text Text Text Text Text Text Text