The siege of low rates upon insurer financials continues. How are your peers bending the curve of the ongoing decline in portfolio book yield? What risks are being embraced or shunned as insurers continue to reposition their portfolios in this unprecedented financial environment? This session serves as the starting point for the days’ sessions, which are focused on helping you succeed in an increasingly challenging investment environment.

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Insurer Investment
Forum XV
Investing for Insurers:
Review and Preview
March 19, 2015
Alton Cogert, CFA, CPA, CAIA, CGMA
President & CEO

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Q. What is Your Biggest Investment Challenge Going Forward?
Hint: It is not Low Interest Rates.
Question of the Day
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 Where We Are Today
 How Insurers Have Reacted
 What’s Next?
 How Insurers Should React
Review and Preview
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WHERE WE ARE TODAY
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5. 5
Key U.S. Economic Indicators
Source: Russell Investments Dashboard
Monthly: Jan ‘90 – Dec ‘14
Monthly: May ‘53 – Dec ‘14
Monthly: Jan ‘54 – Dec ‘14
Monthly: Jan ‘01 – Oct ‘14
Monthly: Jan ‘48 – Nov ‘14
Monthly: Jan ‘48 – Dec ‘14
Quarterly: Jun ‘47 – Sep ‘14
Monthly: Jan ’78 – Dec ‘14

6. 6
Global Interest Rates in One Chart
Source: Russell Investments Dashboard
Did you know?
58% of Developed Nations plus China are experiencing deflation.
Only 3 of 19 Euro-area members are not experiencing deflation.
US inflation turned negative for only the second time in 60 years.

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HOW HAVE INSURERS REACTED SO FAR
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How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
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 Equities
o All Capitalization Equity 2
o Dividend Equity 2,3
o Global Active Tax- Advantaged Equity 3
o Large Capitalization Equities 1
o Large Capitalization Growth Equities 1
o Small Capitalization Growth Equities 1
Q3 2014 Non-CFI Searches – US/Canada Insurers
1 – Over $5 Billion Portfolio
2 - $1-5 Billion Portfolio
3 – Under $1 Billion Portfolio or Undisclosed
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Source: Asset Outsourcing Exchange

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 Fixed Income
o Alternative Credit 2
o CMOs/CMBS/CDOs/CLOs 1
o Emerging Market Debt 1
o Global Fixed Income 1,3
o High Yield Bonds 2
o Mezzanine Debt 1
o Opportunistic Structured Products 2
Q3 2014 Non-CFI Searches
1 – Over $5 Billion Portfolio
2 - $1-5 Billion Portfolio
3 – Under $1 Billion Portfolio or Undisclosed
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Source: Asset Outsourcing Exchange

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 Other
o Commodities 3
o Hedge Fund 2,3
o Multiple Alternative Investments 1
Q3 2014 Non-CFI Searches
1 – Over $5 Billion Portfolio
2 - $1-5 Billion Portfolio
3 – Under $1 Billion Portfolio or Undisclosed
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Source: Asset Outsourcing Exchange

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 Slow move towards more risk
o Interest rate – Not much
o Credit risk – Yes
o Market Risk – Yes
o Liquidity Risk – A little
What SAA has seen…
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 Asset classes not noted in Q3 US/Canada Searches that we have seen:
o Bank Loans
o Commercial Mortgage Loans
o High Grade High Yield Bonds
o Private Placements
 Also seen, as in Q3 US/Canada Searches:
o Dividend Equity
o Emerging Market Equities
o Various Style Box Equities – US and Non-US – ETFs/Index Funds
What SAA has seen…
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 Your investor quiz of the day
o (When) will the Fed start raising short term interest rates?
o Will evaporated liquidity in the bond market become a problem?
o Do US equities have further to run, or with Shiller CAPE and a strong
dollar catch up with them?
o Will negative interest rates continue to spread globally?
o Will Greece slip out of the Euro?
What’s Next
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(When) will the Fed start raising short term interest rates?
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Source: Federal Reserve

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Will evaporated liquidity in the bond market become a problem?
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0
2
4
6
8
10
12
14
16
18
0
5
10
15
20
25
30
35
40
45
50
1860 1880 1900 1920 1940 1960 1980 2000 2020 2040
Long-TermInterestRates
Price-EarningsRatio(CAPE,P/E10)
Price-Earnings
Long-Term
Interest Rates
2000
1981
1929
1901
1921
27.85
1966
Can US equities run more, or will Shiller CAPE and strong dollar be a problem?
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Source: Robert Shiller

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Can US equities run more, or will Shiller CAPE and strong dollar be a problem?
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Source: Barchart.com

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Will negative interest rates spread globally?
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Would you buy a used car from this man?
Will Greece slip out of the Euro?
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Source: Reuters

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 Most likely
o Rates stay range bound; US equities return to ‘normal’ returns
 ‘Worst Case’
o Rates fall further or go negative; correlating well with Euro and Japan
rates.
o US and non-US equity returns become more volatile
How Insurers Should React: Consider At least Two Major Scenarios
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 Declare Your Independence from Investment Myopia – white paper
 Best approach
o Long term approach tied to supporting the insurer’s lines of business
o Define and refine your company’s risk appetite
o Asset allocation decisions based upon long term (7-10 year) planning
horizon
o Review asset allocation annually, along with the overall investment
process.
o Stress test all material assumptions.
How Insurers Should React: Proceed with Caution
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Q. What is Your Biggest Investment Challenge Going Forward?
Hint: It is not Low Interest Rates.
A. The Probability of Negative Interest Rates
Question of the Day
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