INSIGHT FOR INSURANCE

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1 FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE DISTRIBUTED TO RETAIL CLIENTS. FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE DISTRIBUTED TO RETAIL CLIENTS. INSIGHT FOR INSURANCE BALANCING INVESTMENT RETURNS WITH CAPITAL REQUIREMENTS MAY 2016

2 With traditional lower-risk investments such as cash and government bonds offering very low or negative yields, the insurance industry faces a difficult choice: accept significantly reduced investment return potential, or take on more risk and accommodate higher regulatory capital requirements. At Insight, we understand the challenges the insurance industry faces. And we re committed to using our marketleading investment expertise alongside robust insurance capital management to help overcome them. We take an outcome-oriented approach to managing your assets, leveraging our liability driven investment platform. We were early pioneers of this approach, which we tailor for insurers, taking into account the nature of the liabilities and the regulatory restrictions, including the insurance capital requirements for investment in different asset classes. With our broad range of specialist investment capabilities in liability-driven investment, fixed income, absolute return, multi-asset and derivative risk management, we believe that we have all the relevant building blocks to achieve our clients desired outcomes. Please note the value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested.

3 WHY INSIGHT FOR INSURANCE? AT INSIGHT, WE WORK CLOSELY WITH OUR CLIENTS TO ENSURE WE CATER FOR THEIR SPECIFIC NEEDS, REGARDLESS OF WHETHER WE MANAGE ALL OR PART OF THEIR INVESTMENT PORTFOLIO. Market leading investment expertise: you ll have access to the full range of specialist investments managed by Insight including liability-driven investment, fixed income, cash management, absolute return and diversified growth, tailored to your specific needs. Specialist reporting: designed to help you monitor and model your investment risks, including populating regulatory templates. Tailored commentary: we ll provide communications designed to meet the needs of your investment committee. Compliance with insurance regulations: directly-held segregated mandates and transparent pooled funds ensure consistency with insurance requirements. Clear risk statistics: we ll provide detailed, transparent reporting for both segregated and pooled vehicles which clearly shows the level of risk being taken and enables the population of capital management and risk modelling tools. Actuarial support: our actuarial capability delivers the insurance support you need, from developing a full investment strategy to helping you understand the treatment of individual holdings. HOW WE APPROACH THE INSURANCE MARKET Insight s approach to managing assets for an insurance company follows a similar process to that employed with pension funds using our specialist LDI capabilities. Our approach is focused on controlling risks, aiming to ensure that an insurance company can meet its commitments to policyholders and shareholders with a high degree of certainty. Any subsequent investment risk that is introduced to the portfolio must be both intentional and offer sufficient upside to justify both the risk involved and the regulatory capital charge arising. To achieve this objective, we will: model assets and liabilities to determine the nature and size of the investment risks in the portfolio, aiming to ensure that guaranteed liabilities are met in as capital efficient a manner as possible hedge unrewarded risks when there is an efficient market to do so consider the remaining risk budget in conjunction with the investment objectives and then invest assets with the intention of maximising returns, subject to the required liquidity and risk budget constraints draw assets from a broad opportunity set and dynamically manage them to ensure positions remain consistent with investment objectives and exploit appropriate return opportunities incorporate additional restrictions that ring-fenced funds may face based on previous policyholder communications consider shareholder investment income and return objectives alongside the appetite and capacity for risk in structuring the portfolio Our clients investment funds are typically divided into three key sub-components, each reflecting the different investment objectives and risks involved. 1. Liability matching: manage assets to match cashflow requirements within prescribed market risk limits 2. Return seeking: manage assets with the aim of generating long-term growth in a client s portfolio whilst minimising unrewarded risk and consistent with the regulatory capital risk budget 3. Hedging: manage assets to hedge specific unintended or unrewarded risk in a way that also minimises counterparty exposure

4 OUTCOME DRIVEN SOLUTIONS FOR INSURANCE STARTING WITH THE CLIENT S INVESTMENT OBJECTIVES, WE DEVELOP A SOLUTION THAT TARGETS CAPITAL EFFICIENT MANAGEMENT OF THE LIABILITIES. USING THIS LIABILITY-DRIVEN INVESTMENT APPROACH, WE AIM TO MEET SPECIFIC CASH FLOW REQUIREMENTS UTILISING A RANGE OF SPECIALIST INVESTMENT PRODUCTS. LIABILITY MATCHING An LDI solution is designed to take account of the liabilities faced by insurance companies. It can take many forms depending on the risk appetite of the insurer, their capital position and the nature of the liability to be matched. LDI solutions are, by definition, bespoke as no two insurers will have the same liability profile or capital position. Taking an LDI approach does not necessarily mean exactly matching liabilities with risk-free assets, as there is the option to use higher risk assets to try and generate additional returns. However, any such risks must be both intentional and adequately rewarded. Previously, a majority of insurance companies would hold an asset portfolio that did not precisely match their liabilities. In many jurisdictions, new regulations are imposing higher capital charges on insurers for any market risk incurred as a result of mismatches between assets and liabilities. The lowest capital charge would be achieved using low-risk instruments such as cash and government bonds to match expected liabilities. However, this approach could struggle to meet the return objectives of both insurers and their customers and therefore actively taking market risk is often necessary. Depending on their risk tolerance and capital budget, an insurance company can achieve matching in a number of different ways: the lowest risk approach is typically to select supranational or government bonds to match the liabilities, which can often be done without having to set aside additional capital an intermediate approach would use a variety of fixed income assets, incorporating credit exposure to match liabilities. Using certain illiquid credit assets can enhance returns without increasing capital requirements a more aggressive approach would be to use short and medium-dated bonds in conjunction with a mix of growth strategies and interest rate swaps to match longer dated liabilities There may be regulatory restrictions that affect the approach taken to matching assets and liabilities. Regardless of a client s risk appetite, the management style of the fixed income portfolio will follow a buy and maintain approach. The main objective of this approach is to maintain the credit quality of the portfolio and realise the credit premium over time. Money put aside to meet regulatory capital requirements and short-term liquidity needs can be invested in money market funds. RETURN SEEKING Balancing the return objectives of an insurance company with regulatory capital considerations should be at the forefront of any strategy that is seeking to deliver growth. By taking a liabilitydriven approach, we believe we offer clients a lower risk proposition and a smoother path to generating returns which corresponds to lower capital requirements. Strategies used would include our innovative absolute return, fixed income and multiasset solutions. For a segregated mandate, we integrate the assessment of insurance capital considerations into the security selection process. This ensures that the assets selected have both a compelling investment rationale and an efficient capital treatment, tailored to the specific investment income and risk requirements for each client. HEDGING For some insurers, it may be desirable to utilise a proportion of the assets to purchase derivative investments to hedge specific, unrewarded risks in the fund. As well as reducing economic risk, this can also help to reduce regulatory capital requirements. Chart 1: Insight s outcome orientated approach to investment Return Outcome oriented approach For illustrative purposes only Traditional approach Desired outcome Time

5 INVESTMENT CAPABILITIES INSIGHT COMBINES EXPERTISE, STRENGTH AND DEPTH OF KNOWLEDGE WITH INNOVATION. WE HAVE DEVELOPED EXPERTISE IN ASSET CLASSES THAT ARE HIGHLY RELEVANT FOR INSURERS ACROSS A WIDE RISK/ RETURN SPECTRUM. THIS MEANS WE CAN OFFER OUR CLIENTS COMPLETE FLEXIBILITY. At the heart of our philosophy is a desire to work in partnership with clients and their advisers to develop and evolve innovative yet practical solutions that meet their changing needs. Following this philosophy, we have grown into a leading provider of investment solutions. Our business is strong and growing rapidly, generating year-on-year growth of our assets under management since launch in We offer a range of solutions to suit investors, including pooled funds and segregated mandates. Our core capabilities cover a broad range of investment disciplines. LIABILITY DRIVEN INVESTMENT An early pioneer of LDI solutions in the pension fund market, insight has significant experience in designing and implementing investment solutions for insurance companies. Insight s solutions take into account both the nature of the liabilities and the insurance capital requirements that accompany investment in different asset classes. We are able to implement flexible and capital efficient solutions, using our investment expertise and strong derivatives management capability, tailored to each client s objectives and constraints. Our knowledge of regulatory frameworks and understanding of clients liabilities allows us to work in partnership with our clients to evolve the strategy in the event that their objectives or the investment and regulatory conditions change. DERIVATIVES AND RISK MANAGEMENT Our extensive derivatives capabilities seek to pinpoint what we consider to be the most attractive opportunities while minimising unrewarded risks. We also construct and manage tailored hedging solutions to match clients liability profiles, aiming to mitigate specific economic risks and accommodating regulatory capital requirements. Insight s access to major counterparties in the markets, combined with a robust collateral management process, aims to ensure that counterparty risks are minimised. Derivatives are used in compliance with insurance regulatory requirements. Past performance is not a guide to future performance. 1 GIPS-compliant composites available on request. FIXED INCOME We have a well resourced and highly experienced fixed income teams based in London and New York. The team is built on specialist knowledge and experience which has generated strong historic performance 1 and which is highly rated by independent consultants. The key strength of our process lies in its ability to be consistently and continually applied across fixed income markets. We incorporate insurance capital considerations within our fixed income security selection process for insurance clients. Where clients have illiquid liabilities, we can provide specialist capabilities that utilise illiquid fixed income assets seeking to provide higher returns without increased regulatory capital charges and often with the potential for increased security. CASH MANAGEMENT We offer traditional cash management expertise across a broad and innovative fund range designed to meet our clients needs, whether they require a segregated portfolio or pooled funds. Our range of cash funds aims to provide liquidity, low risk and consistent returns in excess of a cash benchmark. Typically, such strategies are much more capital efficient than cash deposits as we provide full look-through reporting for insurers. ABSOLUTE RETURN We offer an extensive range of strategies which target returns over cash to accommodate varying client needs. As an experienced absolute return fund manager, we seek to produce positive returns irrespective of market conditions, aiming to provide our clients with a more predictable and less volatile route to generating returns. We support our absolute return strategies with fully transparent reporting capabilities, to enable insurers to model and realise capital efficiencies. MULTI-ASSET (DIVERSIFIED GROWTH) Our diversified growth team combines a best-of-breed approach to selecting investments across a broad range of geographies and asset classes within a disciplined risk/return framework. The team is responsible for defining the overarching asset allocation as well as actively managing a range of multi-asset strategies. We employ dynamic asset allocation frameworks around our strategies to improve risk-adjusted returns and looking to ensure that our insurance clients only hold capital where the risk is fully rewarded by upside potential.

6 BUILDING A CAPITAL EFFICIENT PORTFOLIO AN INSURANCE PORTFOLIO DESIGNED TO MEET OUR CLIENTS INVESTMENT OBJECTIVES WITHIN REGULATORY CAPITAL REQUIREMENTS. As interest rate and inflation risk are typically unrewarded over the long term, we look to mitigate these risks as much as possible by holding appropriate assets to match the interest rate and inflation sensitivity of the liabilities, usually through the use of government or corporate bonds combined with derivative instruments. Credit risk, if appropriately managed, can provide an efficient way of enhancing returns without excessive capital requirements. There are a variety of ways this can be added ranging from exposure to investment grade credit and high yield bonds through to asset- backed securities and secured loans. For insurers with longer term liabilities, absolute return and multi-asset strategies can often become a capital efficient component of the return seeking portfolio. Such strategies have to be delivered in transparent funds, enabling the insurer to monitor underlying risk exposures and model associated capital requirements. At insight, we provide full look through for our insurance clients, in conjunction with appropriate actuarial support. Table 1 gives an illustration of how a liability- matching portfolio might look, depending on the level of risk the client wishes to take. The portfolio can be broken down broadly into three different categories ranging from lower to higher risk. Table 1: Liability-matching portfolio Assets mainly invested in cash, government bonds and Lower risk supranational bonds Could include investment grade credit, asset-backed Medium risk securities and high quality loans Could include investment grade credit and assetbacked securities, as well as emerging market debt, Higher risk high yield bonds, loans, private debt and absolute return strategies A return seeking portfolio will be composed of a variety of asset classes and investment style: Active fixed income Equity based strategies Integrated multi-asset strategies Absolute return strategies Specialist credit (e.g. loans, real-estate debt) An active asset allocation approach across these different categories ensures that capital is only held against return-seeking assets where we believe their outlook is positive given prevailing market conditions. Lower risk: a lower risk approach where capital requirements are minimised as far as possible Medium risk: a more balanced approach taking on some market risk with a view to achieving higher returns, but where matching liabilities is still a high priority of the solution Higher risk: a higher risk approach with some deliberate mismatch between assets and liabilities, where excess assets are invested in funds with the potential for attractive long-term returns after allowing for capital costs

7 ABOUT INSIGHT INVESTMENT Insight Investment has over the past decade built a unique investment platform that delivers to clients outcome-oriented investment solutions. We currently manage 440bn ( 555bn) 2. Our clients are among the most sophisticated institutional investors in the world and include leading pension funds, sovereign wealth funds, corporations and insurers. We build portfolios aimed at an outcome, in partnership with clients. Our investment strategies are designed to evolve to meet changing needs and stay ahead of market developments. We were among the first asset managers to bring institutionalquality processes and transparency to absolute return investing. Insight is at the forefront of developing new ways of investing, providing institutional investors with access to innovative investment strategies, coupled with robust risk management techniques. We were a pioneer in recognising the unrewarded nature of currency risk and the importance of liabilities. Liability driven investment (LDI) has been a significant contributor to protecting funding levels for pension funds over the past decade. KEY PERSONNEL OUR DEDICATED INSURANCE TEAM FOCUSES ON IMPLEMENTING SOLUTIONS TO MANAGE OVERALL RISK AND SUPPORT YOUR COMMITMENTS TO POLICYHOLDERS AND SHAREHOLDERS. WE LL WORK CLOSELY WITH YOU TO CATER FOR YOUR SPECIFIC NEEDS, REGARDLESS OF WHETHER WE MANAGE ALL OR PART OF YOUR PORTFOLIO. Heneg Parthenay Head of Insurance Heneg joined Insight in January 2015, as Head of Insurance. Before joining Insight, Heneg was Head of Insurance at BNY Mellon Investment Management EMEA Limited. He also sat on BNY IM EMEA s executive committee. Prior to joining BNY Mellon, Heneg spent eight years at Aviva, holding a range of corporate development and capital management positions. His last assignment at Aviva was on the executive committee of their global asset management arm as M&A and Strategy Director. Prior to joining Aviva, Heneg worked in the Insurance Division of Renault and was asset liability manager for the Global Corporate Insurance Division of AXA. He holds a Masters in Finance, Banking and Insurance and a Masters in Risk Management from Paris Dauphine University. Heneg also holds a Masters in Actuarial Science and is a Fellow of the French Institute of Actuaries. Simon Richards Head of Insurance Solutions Simon joined Insight s Financial Solutions Group in June He is now Head of Insurance Solutions in the Client Solutions Group and has overall responsibility for the design, implementation and monitoring of investment strategies for insurance clients. Simon works closely with the relevant portfolio managers to ensure that the investment solutions are tailored to the needs of each client and remain efficient and appropriate given changing market conditions and evolving regulatory requirements. He began his career in 1994 and has held actuarial positions at NPI, Pearl Group and at JPMorgan, where he was responsible for structuring derivative solutions to UK and European insurance companies. Simon holds a BSc (Hons) in Mathematics from the University of Exeter and is a Fellow of the Institute of Actuaries in the UK. 2 As at 31 March Reflects the AUM of Insight, the corporate brand for certain companies operated by Insight Investment Management Limited (IIML). Insight includes, among others, Insight Investment Management (Global) Limited (IIMG), Pareto Investment Management Limited (PIML), Cutwater Asset Management Corp (CAMC), Cutwater Investor Services Corp (CISC) and Pareto New York LLC (PNY), each of which provides asset management services. Insight s assets under management are represented by the value of cash securities and other economic exposure managed for clients.

8 FIND OUT MORE Heneg Parthenay Head of Insurance Simon Richards Head of Insurance Solutions Consultant Relationship Management Client Relationship Management company/insight-investment Telephone calls may be recorded. Call charges may vary by provider. The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance. Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Issued by Insight Investment Management (Global) Limited. Registered office 160 Queen Victoria Street, London EC4V 4LA. Registered in England and Wales. Registered number Authorised and regulated by the Financial Conduct Authority. FCA Firm reference number Insight Investment. All rights reserved