In Q3 2012, central banks in the U.S. and Europe enacted quantitative easing to bolster the global economy amid declining growth forecasts, leading to a performance boost in riskier assets over core fixed income. Unemployment remains a major challenge for the U.S., as job growth fails to recover losses from the recession, impacting consumer spending. Looking ahead, financial repression is expected to persist, with significant concerns surrounding the European debt crisis and the U.S. fiscal cliff influencing market dynamics.

1. INVESTMENT MANAGEMENT:
ECONOMIC OUTLOOK
Alton Cogert, CFA, CPA, CAIA, CGMA
President and CEO
Strategic Asset Alliance
November 8th, 2012
www.saai.com
www.insurercio.com

2. WHERE ARE WE NOW?
SUMMARY MARKET COMMENTARY FOR Q3-2012
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3. SAA Commentary – 3rd Quarter 2012
 MARKETS
 Central bankers took center stage in the U.S. and Europe as both announced additional quantitative
easing measures to support the global economic recovery amid lower economic growth forecasts.
 Given the additional monetary stimulus measures by both the ECB and Fed, riskier assets
outperformed core fixed income as investors sought out higher yielding alternatives in a low rate
environment that looks to remain stable in the intermediate term.
 U.S. unemployment remains a significant issue as current job growth still fails to attain a level that
will fully replace the 4.3 million net jobs lost during the Great Recession. While this glut in the
labor market keeps wage growth/inflation under wraps, it also places a strain upon consumer
spending growth.
 LOOKING AHEAD
 For U.S. core fixed income investors, financial repression will continue on the heels of QE3 and the
flight to quality away from Europe. The raw earnings power of core fixed income portfolios will
continue to deteriorate into 2013 and 2014 as reinvestment rates remain extremely low.
 If organizations can come to terms with the increased risk and potential financial statement
volatility, making a case to explore and invest in higher yielding asset classes will be
compelling.
 The overhang of the Eurozone debt crisis will continue to intensify as recession continues.
 Crisis resolution will be arduous as various cultural and structural issues must be deftly
handled to truly achieve any “grand bargain” for the Eurozone.
 In some ways, it makes little difference who wins the oval office in November as the structural
issues of America’s deficit must be dealt with in some fashion. Regarding the most austere version
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of the fiscal cliff ($600B or potential 4% hit to GDP), the general consensus is that some deal will

4. U.S. TREASURIES AT 9/30/2012 LARGELY UNCHANGED FROM Q2-2012
• UST yields fell slightly across shorter maturities (where the bulk of UST issuance is occurring), but overall UST yields remained largely unchanged
from 6/30/2012.
• While longer-term inflationary pressures build, UST yields remain low reflecting both the global flight to quality away from Europe and continuing
Fed stimulus actions.
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Source: Bloomberg

5. FIXED INCOME MARKET YIELDS DURING Q3-2012
Yield-To-Worst (YTW) at 9/30/2012
• Barclay’s Aggregate (White): 1.61% YTW
• Barclay’s Treasury (Red): 0.82% YTW
• Barclay’s U.S. Credit (Blue): 2.64% YTW
• Barclay’s High Yield (Green): 6.51% YTW
• Using the fixed income market yields as of 6/30/2012 (Base = 100), the graphic above illustrates the relative change in interest rates for Q3-
2012.
• Treasury yields were the most volatile but remained very low in absolute terms. Yields across spread sectors tightened as investors sought out
higher yielding assets.
Source: Bloomberg 4

6. Fixed Income Sector Returns / Duration: QTD Through September 30, 2012
• All broad, spread sectors
strongly outperformed
Treasuries during Q3-2012
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7. INVESTORS REGROUP AND RETURN TO RISK ASSETS DURING Q3-2012
• S&P 500 (White): +6.35%
• EAFE (Red): +6.34%
• EM (Violet): +7.42%
• All World (Green): +6.42%
• Using the equity index values as of 6/30/2012 (Base = 100), the graphic above illustrates the relative performance across the world equity markets for
Q3-2012.
• Two key themes spurred the rapid return of risk taking across the world equity markets during Q3-2012:
• The ECB announced an unlimited government bond-buying program boosted confidence; however, structural impediments continue to cast
dark shadows over any real and/or perceived progress in resolving the Eurozone debt crises.
• The Fed announced a third round of quantitative easing with additional MBS purchases and extended Operation Twist through 2012. 6
Source: Bloomberg

8. CAPITAL MARKETS‟ PERFORMANCE DETAIL
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9. Fixed Income Performance – Trailing Returns
• For Q3-2012, yields fell across
non-Treasury sectors as
spreads tightened on the heels
of continued Central Bank
stimuli in both the U.S. and
Europe.
Source: Zephyr StyleAdvisor 8

10. Fixed Income Market Yields: As of September 30th, 2012
Yield-to-Worst Total Return
US Treasuries # of Issues Mkt. Value (bn$) Chg Qtr 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 Q3-2012
2-Year -0.1% 0.2% 0.3% 0.3% 0.3% 0.3% 0.2%
5-Year -0.1% 0.6% 0.7% 1.1% 0.8% 1.0% 0.8%
222 6,068
10-Year 0.0% 1.6% 1.7% 2.2% 1.9% 1.9% 0.9%
30-Year 0.1% 2.8% 2.8% 3.4% 2.9% 2.9% -0.3%
Yield-to-Worst Total Return
Sector # of Issues Mkt. Value (bn$) Chg Qtr 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 Q3-2012
Broad Market 7,999 $16,815 -0.4% 1.6% 2.0% 2.2% 2.2% 2.4% 1.6%
MBS 838 5,052 -0.7% 1.8% 2.4% 2.7% 2.7% 2.8% 1.1%
CMBS 964 316 -0.9% 2.0% 2.9% 2.9% 3.7% 4.2% 3.8%
ABS 180 53 -0.3% 0.9% 1.2% 1.3% 1.6% 1.4% 1.2%
Corporates 4,313 3,551 -0.5% 2.8% 3.3% 3.4% 3.7% 3.8% 3.8%
Municipals 46,210 1,339 -0.3% 2.2% 2.5% 2.6% 2.8% 3.0% 2.3%
Emerging Debt 545 798 -0.8% 4.6% 5.4% 5.4% 6.1% 6.6% 6.8%
High Yield 1,961 1,082 -0.8% 6.5% 7.4% 7.2% 8.4% 9.5% 4.5%
Convertibles 520 210 N/A
Source: Barclays Capital
 While longer-term inflationary pressures build, UST yields remain low reflecting both the global flight to quality away from Europe
and continuing Fed stimulus actions. Yields across the spread sectors tightened, spurred by investors seeking higher yielding assets.
 Spread products’ excess returns performance was mixed for Q3-2012:
 Aggregate Bond: +107 bps excess return
 Corporates: +324 bps excess return
 ABS: +77 bps excess return
 MBS: +71 bps excess return
 CMBS: +332 bps excess return
 High Yield: +394 bps excess return 9

11. Equity Market Performance – Trailing Returns
• Investors‟ appetite for risk returned during Q3-2012 driven primarily
by:
1. The ECB‟s announcement of an unlimited government bond-
buying program boosted confidence; however, structural
impediments continue to cast dark shadows over any real and/or
perceived progress in resolving the Eurozone debt crises.
2. The Fed announcement of a third round of quantitative easing
(i.e. QE3) with additional MBS purchases and the extension of
Operation Twist through 2012.
Source: Zephyr StyleAdvisor 10

12. WHERE ARE WE GOING?
KEY ISSUES - LOOKING AHEAD
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13. U.S. Financial Repression Will Continue
• Financial repression allows governments to issue debt at lower interest rates than would otherwise be possible. A low nominal
interest rate can help governments reduce debt servicing costs, while a high incidence of negative real interest rates liquidates or
erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a
steady dose of inflation, and it can be considered a form of taxation.
• For U.S. core fixed income investors, financial repression will continue on the heels of QE3 and the flight to quality away from
Europe. The raw earnings power of core fixed income portfolios will continue to deteriorate into 2013 and 2014 as reinvestment
rates remain extremely low.
• With current inflation assumptions (2.0-2.5%) at 9/30/2012, , the real yield of the Barclay’s Aggregate Index is between -0.39% and -
0.89%) 12
Source: Federal Reserve, J.P. Morgan Asset Management

14. When Might Financial Repression End...FOMC Interest Rate Projections?
• What time period encompasses long-term and how
might an inflationary spike change Fed direction after
stating a low rate policy into 2015?
• If creditor nations stopped buying Treasuries at
current yields, what yield level would “clear the
market”?
• What impact would this new yield level (read:
increased funds for debt service) have on
Federal fiscal policy and initiatives?
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Source: Federal Reserve, J.P. Morgan Asset Management

15. Unemployment
• Unemployment remains a significant issue as current job growth still fails to attain a level that will fully replace the 4.3 million net
jobs lost during the Great Recession.
• While this glut in the labor market keeps wage growth/inflation under wraps, it also places a strain upon consumer spending growth.
14
Source: BLS, Fact Set, J.P. Morgan Asset Management

16. European Crisis
• A monetary union effected in a
neutral/good economic environment.
• With no fiscal union or collective policies to address
structural imbalances post-Great Recession, the monetary
union is effectively undone via the government bond
markets.
• Austerity without growth will not solve the Eurozone crisis.
• Crisis resolution will be arduous as various cultural and
structural issues must be deftly handled to truly achieve any
“grand bargain” for the Eurozone.
• Greece is bankrupt. The real issue is whether to let them fail
in an organized or unorganized manner.
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Source: Fact Set, ECB , J.P. Morgan Asset Management

17. U.S. Government Finances & The Fiscal Cliff
• In some ways, it makes little difference who wins the oval office in November as the structural issues of America‟s deficit must be
dealt with in some fashion. Regarding the most austere version of the fiscal cliff. the general consensus is that some deal will be
hastily made before year end to defer the first wave of reckoning until Q1-2013.
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Source: U.S. Treasury, BEA, CBO, and J.P. Morgan Asset

18. Key Questions to Ask Now:
- What is our projected book yield (investment income) assuming interest rates do indeed stay low
for longer?
- Can we consider changing our risk/reward profile?
- Duration
- Credit
- Liquidity
- „Risky Bucket‟ Size and Diversification
- Should the change be strategic (preferred) or tactical (difficult to execute)?
- Do we have the right investment manager to execute the strategy?
- Do we have the right benchmark(s)?
- Most importantly: How do our current and proposed investment strategies dovetail with the
Board‟s/senior management‟s risk appetite? (Quantitatively and qualitatively)
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