The 2016 Executive Education Roundtable Series #IASACINVO

Questions to be addressed How do asset allocations vary across the insurance industry? Why do these asset allocations vary? What are cost and benefits associated with different asset allocations? How will potential RBC changes impact life insurance allocations? #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Background on industry Data Data we show is based on YE2011-YE2015 statutory financials Format for industry data slides: We show separate slides for P&C and life At left is a composite of 5 large insurers Each insurer here today is identified by stat invested assets at YE2015 Five year trends are shown from left to right (2011-2015) Many insurers invest in: Extended fixed income sectors Illiquid assets Other alternative assets #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life overall asset allocation at YE2015 Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Private bonds are determined based on non-standard CUSIPs and are indicated by “Pvt”. These include investment grade and high yield as shown. NAIC 3-6 bank loans and direct lending held on Schedule D would be included in Pvt Other or Pvt HY Corp depending on the issuer classification. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C overall asset allocation at YE2015 Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Private bonds are determined based on non-standard CUSIPs and are indicated by “Pvt”. These include investment grade and high yield as shown. NAIC 3-6 bank loans and direct lending held on Schedule D would be included in Pvt Other or Pvt HY Corp depending on the issuer classification. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Notes on overall allocations Privates are “true” private placements and not 144A Real estate shown is Schedule A Mortgage loans are from Schedule B Schedule BA affiliated assets are included—all other affiliated is excluded HY Corp only includes corporates—there are other NAIC 3-6 bonds #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life yield enhancing fixed income trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Private bonds are determined based on non-standard CUSIPs and are indicated by “Pvt”. These include investment grade and high yield as shown. NAIC 3-6 bank loans and direct lending held on Schedule D would be included in Pvt Other or Pvt HY Corp depending on the issuer classification. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C yield enhancing fixed income trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Private bonds are determined based on non-standard CUSIPs and are indicated by “Pvt”. These include investment grade and high yield as shown. NAIC 3-6 bank loans and direct lending held on Schedule D would be included in Pvt Other or Pvt HY Corp depending on the issuer classification. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Comments on yield enhancing fixed income We include assets with high all-in yields or attractive spreads Most non-agency RMBS and CLOs are NAIC 1 Life specific: CLOs are extremely capital efficient relative to spreads Most large life insurers have significant private placement allocations Some private high yield is senior direct lending on Schedule D P&C specific: Those with CMLs are often associated with a life insurer High yield allocations are small even though they are very capital efficient #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life risk asset allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Risk assets consist of common and preferred stock (shown as public equity), bonds rated NAIC 3 through 6, and schedule BA alternative investments. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C risk asset allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. Risk assets consist of common and preferred stock (shown as public equity), bonds rated NAIC 3 through 6, and schedule BA alternative investments. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life public equity allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C public equity allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Comments on risk assets and public equity Risk asset allocations have been fairly steady over the past five years The category Sch BA Alts excludes non-alternative assets from Sch BA Most insurers in this audience do not allocate to Schedule BA alternatives This audience has much larger allocations to public equity than our large company composites Potential GAAP accounting changes may make public equity less attractive for public insurers #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life commercial real estate exposure trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C commercial real estate exposure trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Life illiquid asset allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

P&C illiquid asset allocation trend Source: SNL Financial. All data is based on U.S. statutory filings and excludes insurance companies and assets domiciled outside of the US. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Comments on CRE and illiquid assets Most commercial real estate exposure is through debt Real estate equity is RBC inefficient for life insurers Large insurers have much larger exposures to illiquid assets than small insurers Private and illiquid equity allocations have remained relatively flat Commitments have increased in recent years #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Proposed changes to Life RBC Under current RBC: A-rated credit is quite capital efficient HY is not very capital efficient Under new RBC: HY capital charges will go down in many cases Commercial mortgage loan (CML) capital charges will remain unchanged RBC efficient portfolios will be very different in the future Investment Grade RBC Charges (%) AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Current Charge 0.30 0.96 Proposed Charge 0.25 0.53 0.86 1.10 1.24 1.48 Change -0.05 0.23 0.56 0.14 0.28 0.52   High Yield RBC Charges (%) BB+ BB BB- B+ B B- CCC+ CCC CCC- < CCC- 3.39 7.38 16.96 19.50 2.62 3.24 4.14 4.42 5.80 7.60 12.77 -0.77 -0.15 0.75 -2.96 -1.58 0.22 -4.19 0.00 #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

Wrap up Despite what may be in the news, industry asset allocations just aren’t changing that much Relative to large insurers, the insurers in this audience: Invest much less in capital efficient extended fixed income sectors Allocate more to public equity and less to alternatives Have smaller allocations to illiquid assets Changing RBC charges could result in very different portfolios over time Companies may reduce A-rated credit for a mix of BBB or lower corporates, Treasuries & Agencies, and CMLs. #IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

#IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES

#IASACINVO THE 2016 EXECUTIVE EDUCATION ROUNDTABLE SERIES