1
Presented by
Edward Yao, FCAS, CFA, CERAVice President, Risk & Capital ManagementSolutions
Economic Scenario Generator and InvestmentStrategy in a Low Interest Rate World
CAS CLRS – Boston, MA – 9/17/2013
Placeholderfor HeadShot ifdesired
1CAS CLRS – Boston, MA – 9/17/2013
Agenda
Economic Scenario Generator
Current Interest Rate Environment and Impact on P&C InsuranceIndustry
Investment Strategy for A Sample P&C Insurer
Q & A
2CAS CLRS – Boston, MA – 9/17/2013
What is an Economic Scenario Generator (ESG)
A stochastic model in most cases Can be deterministic, but application would be very limited Randomness: Uncertainty in the future A system of stochastic difference/differential equations
A Monte-Carlo simulator “Monte Carlo methods (or Monte Carlo experiments) are a broad
class of computational algorithms that rely on repeated randomsampling to obtain numerical results; i.e., by running simulationsmany times over in order to calculate those same probabilitiesheuristically just like actually playing and recording your results in areal casino situation: hence the name.”
-- Wikipedia A generator of future distributions of different economic variables A generator of time-series of economic variables Not a tool to make forecasts
2
3CAS CLRS – Boston, MA – 9/17/2013
Purposes of ESG
Why do we need a ESG?
Business decision making under uncertainty
Demand of better risk management from regulators and rating agencies Solvency II ORSA S&P AM Best
Pricing/valuation of contingent cash flows
4CAS CLRS – Boston, MA – 9/17/2013
Clarification of Some Terminology
Real world
Initial-to-normative vs. normative-to-normative
Risk neutral
Market consistent valuation
Arbitrage free
5CAS CLRS – Boston, MA – 9/17/2013
Key Features of an ESG
Key economic variables are being modelled
Covering a broad range of asset types
Dynamic relationships among the variables are captured andinternal consistency are maintained
Flexibility and efficiency in calibration and parameter estimationusing benchmark data
Models can be fully validated
Simulation can lead to unexpected/not-yet-observed but plausibleoutcome.
3
6CAS CLRS – Boston, MA – 9/17/2013
Important decisions for an ESG
Type of scenarios Real World or Risk Neutral Initial-to-normative or Normative-to-normative
Model choices Interest Rate Models Credit Models Inflation Models Equity Index Models Models for additional asset classes and economic variables
Model calibration Expected level, volatility, and correlation
Simulation properties Frequency: annual, quarterly, or monthly Number of periods Number of paths
7CAS CLRS – Boston, MA – 9/17/2013
Calibration of A Real-World ESG
Calibration is a process of setting the parameters so that thescenarios generated ESG satisfy certain pre-defined quantifiablecharacteristics.
The goal of a real-world ESG is to generate economic andfinancial time series that are “realistic” and reflect the assumptionsof future development of economic and financial variables: Representing the observed dynamics and distributional
characteristics of historical data Professional forecasts / Expert opinions
8CAS CLRS – Boston, MA – 9/17/2013
Interest rate environment
Source: Bloomberg
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1/31
/200
24/
30/2
002
7/31
/200
210
/31/
2002
1/31
/200
34/
30/2
003
7/31
/200
310
/31/
2003
1/31
/200
44/
30/2
004
7/31
/200
410
/31/
2004
1/31
/200
54/
30/2
005
7/31
/200
510
/31/
2005
1/31
/200
64/
30/2
006
7/31
/200
610
/31/
2006
1/31
/200
74/
30/2
007
7/31
/200
710
/31/
2007
1/31
/200
84/
30/2
008
7/31
/200
810
/31/
2008
1/31
/200
94/
30/2
009
7/31
/200
910
/31/
2009
1/31
/201
04/
30/2
010
7/31
/201
010
/31/
2010
1/31
/201
14/
30/2
011
7/31
/201
110
/31/
2011
1/31
/201
24/
30/2
012
7/31
/201
210
/31/
2012
1/31
/201
34/
30/2
013
7/31
/201
3
Inte
rest
Rat
e (%
)
As of Date
10 Year Treasury Yield
90 day Treasury Yield
4
9CAS CLRS – Boston, MA – 9/17/2013
Interest rate environment
Source: Global Financial Database; Bloomberg
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
1/30
/194
8
1/30
/195
0
1/30
/195
2
1/30
/195
4
1/30
/195
6
1/30
/195
8
1/30
/196
0
1/30
/196
2
1/30
/196
4
1/30
/196
6
1/30
/196
8
1/30
/197
0
1/30
/197
2
1/30
/197
4
1/30
/197
6
1/30
/197
8
1/30
/198
0
1/30
/198
2
1/30
/198
4
1/30
/198
6
1/30
/198
8
1/30
/199
0
1/30
/199
2
1/30
/199
4
1/30
/199
6
1/30
/199
8
1/30
/200
0
1/30
/200
2
1/30
/200
4
1/30
/200
6
1/30
/200
8
1/30
/201
0
1/30
/201
2
Inte
rest
Rat
e (%
)
As of Date
90 day Treasury Yield
10 Year Treasury Yield
10CAS CLRS – Boston, MA – 9/17/2013
Interest rate environment
Source: Bloomberg
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
1/29
/198
2
1/29
/198
3
1/29
/198
4
1/29
/198
5
1/29
/198
6
1/29
/198
7
1/29
/198
8
1/29
/198
9
1/29
/199
0
1/29
/199
1
1/29
/199
2
1/29
/199
3
1/29
/199
4
1/29
/199
5
1/29
/199
6
1/29
/199
7
1/29
/199
8
1/29
/199
9
1/29
/200
0
1/29
/200
1
1/29
/200
2
1/29
/200
3
1/29
/200
4
1/29
/200
5
1/29
/200
6
1/29
/200
7
1/29
/200
8
1/29
/200
9
1/29
/201
0
1/29
/201
1
1/29
/201
2
1/29
/201
3
Term
Pre
miu
m (%
)
As of Date
Term Premium
11CAS CLRS – Boston, MA – 9/17/2013
Interest rate environment
Source: Bloomberg
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4/1/
1991
11/1
/199
16/
1/19
921/
1/19
938/
1/19
933/
1/19
9410
/1/1
994
5/1/
1995
12/1
/199
57/
1/19
962/
1/19
979/
1/19
974/
1/19
9811
/1/1
998
6/1/
1999
1/1/
2000
8/1/
2000
3/1/
2001
10/1
/200
15/
1/20
0212
/1/2
002
7/1/
2003
2/1/
2004
9/1/
2004
4/1/
2005
11/1
/200
56/
1/20
061/
1/20
078/
1/20
073/
1/20
0810
/1/2
008
5/1/
2009
12/1
/200
97/
1/20
102/
1/20
119/
1/20
114/
1/20
1211
/1/2
012
6/1/
2013
US Industrial Credit A Spread
3 Month 10 Year
5
12CAS CLRS – Boston, MA – 9/17/2013
Impact on P&C Insurance Companies
Source: A.M.Best.
Year
Net investmentincome earned
($'000)Net underwritinggain (loss) ($'000)
Net Capital Gains(Losses) ($'000)
Other Income($'000)
Net incomeBefore Income
Tax ($'000)
2012 49,236,993 (13,438,268) 9,032,838 2,499,107 47,330,669
2011 51,369,890 (35,212,378) 7,579,382 2,415,894 26,152,788
2010 49,861,020 (8,527,901) 8,296,097 979,289 50,608,505
2009 50,918,364 1,314,557 (8,254,481) 887,556 44,865,996
2008 54,421,335 (19,506,667) (21,222,553) 391,595 14,083,709
2007 58,063,181 22,831,900 8,994,578 (814,688) 89,074,971
2006 55,084,608 35,436,197 3,594,307 2,798,457 96,913,569
2005 51,906,655 (6,220,796) 12,119,428 1,853,805 59,659,092
2004 41,788,071 4,194,824 9,192,055 (323,164) 54,851,786
2003 41,151,925 (2,912,620) 6,518,958 (223,707) 44,534,555
2002 41,097,451 (29,368,464) 2,823,786 (730,465) 13,822,308
13CAS CLRS – Boston, MA – 9/17/2013
Impact on P&C Insurance CompaniesRecent History of US P&C industry’s Combined and Operating Ratios
80%
85%
90%
95%
100%
105%
110%
2008 2009 2010 2011 2012
Operating Ratio Net Investment Income Ratio Combined Ratio
Source: A.M.Best, Conning analytics.
14CAS CLRS – Boston, MA – 9/17/2013
Impact on P&C Insurance Companies
Note: Calculations based on net investment income divided by net investable assets.Source: A.M.Best, Conning analytics.
US Property-Casualty Insurance Industry Historical Book YieldRates
5.1%
4.7%
4.3%4.2% 4.1%
3.9%
3%
4%
4%
5%
5%
6%
2007 2008 2009 2010 2011 2012
Book Yield
6
15CAS CLRS – Boston, MA – 9/17/2013
How to respond strategically?Asset Allocation
2007 2008 2009 2010 2011 2012 Trend
Net Cash 2.1% 2.1% 1.1% 1.8% 1.4% 2.1%AAA-A Bonds 76.8% 78.3% 77.6% 75.9% 74.6% 71.9%BBB Bonds 4.9% 7.0% 8.0% 8.2% 9.3% 10.7%High Yield Bonds 1.7% 1.6% 1.8% 2.2% 2.3% 2.6%Common Stock 8.1% 5.0% 5.9% 6.4% 6.4% 7.1%Schedule BA 3.5% 3.4% 3.3% 3.4% 3.8% 3.6%Investment Real Estate 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%Other* 2.8% 2.4% 2.1% 2.0% 1.9% 1.9%
Bond Sector Allocation2007 2008 2009 2010 2011 2012 Trend
US Govt 12.7% 12.4% 13.8% 13.6% 13.2% 10.6%Corp 23.2% 24.6% 26.9% 29.6% 31.0% 32.9%Agency / Muni 40.3% 40.7% 37.4% 35.3% 32.5% 33.7%Hybrid 0.0% 0.0% 0.4% 0.3% 0.3% 0.2%Other Govt 1.3% 1.0% 1.5% 1.9% 2.3% 2.3%Parents / Subs / Affiliates 0.9% 0.9% 0.8% 0.9% 0.8% 0.8%Structured Securities 21.6% 20.2% 19.1% 18.2% 19.8% 19.5%
Bond Market Allocation2007 2008 2009 2010 2011 2012 Trend
Publically-traded Bonds 96.4% 96.1% 95.0% 93.7% 92.2% 90.6%Private Placement Bonds 3.6% 3.9% 5.0% 6.3% 7.8% 9.4%
Source: A.M.Best; Conning analytics.
16CAS CLRS – Boston, MA – 9/17/2013
How to respond strategically?
Quality Distribution2007 2008 2009 2010 2011 2012 Trend
NAIC 1 92.2% 90.1% 88.8% 87.9% 86.5% 84.4%NAIC 2 5.9% 8.1% 9.2% 9.5% 10.8% 12.6%NAIC 3 1.0% 0.9% 1.1% 1.3% 1.4% 1.5%NAIC 4 0.7% 0.5% 0.6% 0.8% 0.9% 1.1%NAIC 5 0.2% 0.3% 0.2% 0.3% 0.2% 0.2%NAIC 6 0.1% 0.1% 0.2% 0.2% 0.2% 0.2%
Avg. 1.1 1.1 1.1 1.2 1.2 1.2
2007 2008 2009 2010 2011 2012 Trend
Investment Grade 98.0% 98.1% 97.9% 97.5% 97.3% 97.0%Below Investment Grade 2.0% 1.9% 2.1% 2.5% 2.7% 3.0%
Maturity Distribution2007 2008 2009 2010 2011 2012 Trend
<=1 Yr 14.1% 15.6% 15.2% 15.0% 14.2% 15.5%1-5 Yrs 30.7% 32.8% 36.9% 40.3% 41.9% 41.3%5-10 Yrs 33.0% 29.9% 28.0% 26.5% 26.4% 26.7%10-20 Yrs 13.4% 13.2% 12.1% 11.4% 10.7% 10.1%>20 Yrs 8.8% 8.6% 7.7% 6.8% 6.9% 6.5%
Avg. 7.7 7.4 7.0 6.7 6.6 6.4
Source: A.M.Best; Conning analytics.
17CAS CLRS – Boston, MA – 9/17/2013
How to respond strategically?
Investment strategy: shorten duration, search for additional yield,buy floating rate assets, use derivatives
Underwriting strategy: write less long tailed lines, be moreselective in risks underwritten, change product features (for lifeinsurers with interest sensitive liabilities)
Management needs to evaluate a wide range of options in aconsistent framework
The evaluation needs to consider both asset and liabilities, bothrisk and reward, and a wide range of possibilities
7
18CAS CLRS – Boston, MA – 9/17/2013
Modelling system for strategy evaluation
Assets Liabilities
Investment Model
All Major Asset Classes
Investment Portfolios
Duration, Credit Quality, etc..
Rebalancing
Economic Scenario Generator Interest Rates Credit Spreads Equity Indexes Inflation, GDP, Unemployment Market Value and Cash Flows Prepayments Credit Rating Transitions
ManagementDecision
Dynamic Management Behavior Investment Strategy Shifts Dividends
Financing AccountingTax Regulatory
GAAP, Stat, IFRS, Fair Value Balance Sheet Income and Cash Flow Statements Regulatory/Rating Agency Capital Tax Model
Liability Model
Premiums Losses and Expenses CAT models Detailed Inflation/Trend Models Reinsurance models Correlation Etc..
ExternalEnvironment
Enterprise Model
19CAS CLRS – Boston, MA – 9/17/2013
Investment Strategies: An Example of A Long Tailed P&C Insurer
Some key long-term economic and capital market assumptions: US Inflation: 2.5% 3 Month US Treasury Yield: 3.25% 10 Year US Treasury Yield: 4.75% US Large Cap Equity Index Total Return: 8.5%
Liability assumptions (expected loss and expense ratios andvolatility, loss reserve volatility, payment patterns) based on thedata of AM Best Workers Compensation Composite with reserveduration about 5 years.
The future business development assumptions use ConningResearch & Publication’s forecasts for Workers’ Compensationline of insurance.
The projection horizon is five year.
20CAS CLRS – Boston, MA – 9/17/2013
Simulated Distributions of Economic Variables: Example
Source: Bloomberg, Conning GEMS® model simulation.
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
10 Year US Treasury Yield
0.9-0.99
0.8-0.9
0.6-0.8
0.4-0.6
0.2-0.4
0.1-0.2
0.01-0.1
Average
0
80
40
357
37
Paths
8
21CAS CLRS – Boston, MA – 9/17/2013
Simulated Asset Class Returns: Example
Source: Conning GEMS® model simulation.
0 0.05 0.1 0.15 0.2 0.25 0.3
Private Equity
US Large Cap Equity
US Intermediate High Yield Bonds
US 5 to 7 Year A-rated Corporate Bonds
US 5 to 7 Year Government Bonds
US 5 to 7 Year Tax-exempt Municipal Bonds
Cash Equivalents
Annual Return: Std. Dev. Average Annual Return
Cash Equivalent US 5 to 7 Year Govt Bond US 5 to 7 Year Corp Bond US 5 to 7 Year TE Muni Bond US Intermediate HY US Large Cap Equity Private EquityCash Equivalent 1.000US 5 to 7 Year Govt Bond 0.017 1.000US 5 to 7 Year Corp Bond 0.011 0.927 1.000US 5 to 7 Year TE Muni Bond 0.024 0.980 0.909 1.000US Intermediate HY (0.008) 0.549 0.612 0.538 1.000US Large Cap Equity 0.085 0.012 0.104 0.017 0.365 1.000Private Equity (0.097) (0.008) 0.036 (0.009) 0.173 0.478 1.000
22CAS CLRS – Boston, MA – 9/17/2013
Economic Value Efficient Frontier
Economic Value = Market Value of Assets- Discounted Value of Liabilities+ Value of future business- Discounted Value of Taxes
More objective More consistent across entities and countries Other measures converge to economic value overtime
Ret
urn
Risk
x
y z
Ret
urn
Risk
Ret
urn
Risk
Efficient Frontier
Ret
urn
Risk
23CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.5 3.5 3.6 3.7 3.7 3.8 3.9 3.9 4.2 4.6 5.4
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 56% 30% 10% 5% 3% 3% 2% 0% 0% 0% 0%Corporate 44% 70% 90% 95% 97% 97% 98% 100% 100% 100% 100%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 50.5 16.4 6.2 3.4 2.6 2.1 1.8 1.2 0.7 0.3
Duration: Rising Interest Rates
A
B
C
D E FG H IJ K
39.50
39.60
39.70
39.80
39.90
40.00
40.10
40.20
40.30
40.40
8.10 8.15 8.20 8.25 8.30 8.35 8.40 8.45
Rew
ard
($bi
llion
s)
Risk ($billions)
Source: Conning FIRM® analysis.
9
24CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.3 3.6 3.9 4.2 4.5 4.9 5.3 5.8 6.5 7.2 8.1
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 69% 32% 22% 16% 12% 5% 3% 3% 0% 0% 0%Corporate 31% 68% 78% 84% 88% 95% 97% 97% 100% 100% 100%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 52.0 15.4 8.2 5.9 4.3 3.4 2.7 2.2 1.8 1.4
Duration: Prolonged Low Interest Rates
A
BC
DE
FG
H
IJ
K
43.00
44.00
45.00
46.00
47.00
48.00
49.00
50.00
51.00
7.90 8.40 8.90 9.40 9.90
Rew
ard
($bi
llion
s)
Risk ($billions)
Source: Conning FIRM® analysis.
25CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.3 3.5 3.8 4.0 4.2 4.5 4.8 5.2 5.6 5.8 6.4
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 60% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0%Corporate 40% 97% 100% 100% 100% 100% 100% 100% 100% 100% 100%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 49.2 15.6 8.6 5.8 4.3 3.4 2.7 2.2 1.8 1.4
Duration: Normative Condition
A
BC
DE
FG
HI
JK
43.50
44.00
44.50
45.00
45.50
46.00
46.50
47.00
47.50
48.00
48.50
8.40 8.60 8.80 9.00 9.20 9.40 9.60
Rew
ard
($bi
llion
s)
Risk ($billions)
Source: Conning FIRM® analysis.
26CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.1 3.5 3.8 4.0 4.3 4.6 5.0 5.4 5.7 6.0 6.4
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 44% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0%Corporate 46% 87% 90% 90% 90% 90% 90% 90% 90% 90% 90%TIPS 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 60.0 15.4 8.5 5.8 4.4 3.3 2.7 2.2 1.8 1.4
Impact of Inflation Risk
A
BC
DE
FG
HI
JK
43.50
44.00
44.50
45.00
45.50
46.00
46.50
47.00
47.50
48.00
48.50
8.25 8.45 8.65 8.85 9.05 9.25 9.45 9.65
Rew
ard
($bi
llion
s)
Risk ($billions)
Source: Conning FIRM® analysis.
10
27CAS CLRS – Boston, MA – 9/17/2013
Tax-advantaged Municipal Bond
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Jan-
50Ja
n-52
Jan-
54Ja
n-56
Jan-
58Ja
n-60
Jan-
62Ja
n-64
Jan-
66Ja
n-68
Jan-
70Ja
n-72
Jan-
74Ja
n-76
Jan-
78Ja
n-80
Jan-
82Ja
n-84
Jan-
86Ja
n-88
Jan-
90Ja
n-92
Jan-
94Ja
n-96
Jan-
98Ja
n-00
Jan-
02Ja
n-04
Jan-
06Ja
n-08
Jan-
10Ja
n-12
Rat
io
As of Date
Historical 10-Year Muni to Gov't Yield Ratio
Source: Global Financial Database; Bloomberg.
Historically muniyields had beenlower than USTreasury yields dueto tax-exemptstatus.
Currently muniyields are above USTreasury yields.
28CAS CLRS – Boston, MA – 9/17/2013
Tax-advantaged Municipal Bond
A
BC
DE
F GH
IJ
K
43.00
44.00
45.00
46.00
47.00
48.00
49.00
8.25 8.45 8.65 8.85 9.05 9.25 9.45 9.65 9.85
Rew
ard
($bi
llion
s)
Risk ($billions)A B C D E F G H I J K
Duration 3.4 3.5 3.8 4.0 4.2 4.5 4.8 5.2 5.7 6.0 6.7
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 39% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0%Corporate 51% 87% 90% 87% 84% 78% 76% 74% 71% 69% 59%Municipal 0% 0% 0% 3% 6% 12% 14% 16% 19% 21% 31%TIPS 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 53.3 15.8 8.5 5.9 4.3 3.3 2.7 2.2 1.8 1.4
Source: Conning FIRM® analysis.
29CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.0 3.3 3.5 3.8 4.0 4.3 4.6 5.0 5.4 5.9 7.1
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 72% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0%Corporate 13% 73% 68% 61% 57% 55% 47% 45% 40% 37% 24%Municipal 5% 16% 22% 29% 33% 35% 43% 45% 50% 53% 66%TIPS 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 53.7 14.9 8.5 6.0 4.3 3.3 2.7 2.2 1.8 1.4
Tax-advantaged Municipal Bond – more profitable underwriting
Source: Conning FIRM® analysis.
A
BC
D EF G
HI
J
K
54.00
55.00
56.00
57.00
58.00
59.00
60.00
61.00
62.00
7.50 8.00 8.50 9.00 9.50 10.00
Rew
ard
($bi
llion
s)
Risk ($billions)
Efficient Frontier withMuniEfficient Frontierwithout Muni
11
30CAS CLRS – Boston, MA – 9/17/2013
A B C D E F G H I J K
Duration 3.2 3.5 3.8 4.1 4.4 4.7 5.2 5.7 6.6 7.2 7.8
Cash 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Government 33% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0%Corporate 47% 87% 89% 85% 79% 70% 66% 62% 52% 38% 12%Municipal 0% 0% 0% 3% 8% 15% 18% 20% 27% 37% 55%TIPS 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%Common Stock 0% 0% 1% 2% 3% 5% 6% 8% 11% 14% 21%Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 2%Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
ΔReward / ΔRisk 95.7 16.5 9.0 6.1 4.4 3.3 2.6 2.0 1.4 0.9
Equity and Alternative Investments
A
BC
D EF G
HI
JK
40.00
42.00
44.00
46.00
48.00
50.00
52.00
54.00
8.25 8.75 9.25 9.75 10.25 10.75 11.25 11.75 12.25
Rew
ard
($bi
llion
s)
Risk ($billions)
Source: Conning FIRM® analysis.
31CAS CLRS – Boston, MA – 9/17/2013
What else to consider
What would happen to the other key financials?
What is the risk tolerance and what metrics to use?
What would happen in the extreme scenarios?
What if the key assumptions are wrong?
Should we move to the strategic targets quickly?
To what extend can we tolerate the investment portfolio deviatingfrom the strategic targets?
32CAS CLRS – Boston, MA – 9/17/2013
Conclusion
As a tool to develop strategy, an ESG is necessary but notsufficient.
There is no one-size-fits-all solution and there is no silver bulletsolution.
Interest rate is just one risk factor and has to be consideredtogether with other risk factors.
For an insurance company’s investment strategy, liability mattersand it has to manage underwriting and investment strategiestogether in a coordinative fashion to perform well.
The strategy development also needs to consider both likely andunanticipated future events.
The key is to find the right balance of risk and reward, avoidoverreaction, and diversify.
12
Conning & Company is the parent of Conning, Inc., Goodwin Capital Advisers, Inc. and Conning Investment Products, Inc., a FINRA-registered broker dealer,and an affiliate of Conning Asset Management Limited, and Cathay Conning Asset Management Limited (CCAM) (together, “Conning”). Conning is a portfoliocompany of the funds managed by Aquiline Capital Partners LLC (a New York-based private equity firm,) with offices in Hartford, Purchase, London, Cologne,and Hong Kong.
Conning, Inc. and Goodwin Capital Advisers, Inc. are registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of1940. Conning, Inc. is also registered with the Ontario Securities Commission. Conning Asset Management Limited is authorized and regulated by the UnitedKingdom's Financial Conduct Authority, and Cathay Conning Asset Management Limited is regulated by Hong Kong’s Securities and Futures Commission.Conning primarily provides asset management services for third-party assets. Conning predominantly invests client portfolios in fixed income strategies inaccordance with guidelines supplied by its institutional clients.
Conning, Inc. is registered as an Investment Adviser with the SEC and has noticed other jurisdictions it is conducting securities advisory business when requiredby law. In any other jurisdictions where it has not provided notice and is not exempt or excluded from those laws, it cannot transact business as an investmentadviser and may not be able to respond to individual inquiries if the response could potentially lead to a transaction in securities.
All investment performance information included within this material is historical. Past performance is not indicative of future results. Any tax related informationcontained within this presentation is for informational purposes only and should not be considered tax advice. You should consult a tax professional with anyquestions.
For complete details regarding Conning and its services, you should refer to our Form ADV Part 2, which may be obtained by calling us.
Legal Disclaimer
Copyright 2013 Conning, Inc. This document and the software described within are copyrighted with all rights reserved. No part of this document may bereproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any language in any form by any means without the prior writtenpermission of Conning. Conning does not make any warranties, express or implied, in this document. In no event shall Conning be liable for damages of anykind arising out of the use of this document or the information contained within it.
This document contains information that is confidential or proprietary to Conning (or their direct and indirect subsidiaries). By accepting this document you agreethat: (1) if there is any pre-existing contract containing disclosure and use restrictions between your company and Conning, you and your company will use thisinformation in reliance on and subject to the terms of any such pre-existing contract; or (2) if there is no contractual relationship between you and your companyand Conning, you and your company agree to protect this information and not to reproduce, disclose or use the information in any way, except as may berequired by law.
ADVISE®, FIRM®, and GEMS® are registered trademarks of Conning, Inc.
This material is for informational purposes only and should not be interpreted as an offer to sell, or a solicitation or recommendation of an offer to buy anysecurity, product or service, or retain Conning for investment advisory services. This information is not intended to be nor should it be used as investment adviceand should not be copied or distributed without the prior consent of Conning.
Disclosure C11#1412415