Low Yields. Expense Pressure. Asset Complexity. Outsourcing. Data Insights. Cloud Hosting.

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1 Low Yields. Expense Pressure. Asset Complexity. Outsourcing. Data Insights. Cloud Hosting. November 12, 2014 SS&C Insurance Outlook 2015 Webinar Trends in Insurance Investment Operations & Technology Moderator Thank you for joining us today for our webinar, SS&C Insurance Outlook The webinar will be focused on trends and insurance investment operations and technologies. Just a few items before we get started. If you are having any problems viewing the presentation, please hover your mouse at the top center of your screen to view the drop down tools, click on the downward arrow on the right, select view, then fit in viewer. All attendees will be on mute for the duration of the webinar. To submit questions at any time, simply click the chat icon in the drop down tool at the top center of your screen. If we run out of time, any questions that are not answered will be followed up after the webinar. This event is being recorded and we will send you a link to the recording in a few days. Today s webinar will be presented by Jack Quinn, a Vice President responsible for sales of SS&C s insurance software products, consulting and outsourcing services. He has more than 20 years of experience in working with US and global insurance companies and has an in depth understanding of investment systems and operations. Jim Ramenda is Senior Vice President of SS&C s enterprise risk business, which provides comprehensive portfolio risk modeling and reporting services to our clients. He has 30 years of experience in the investment insurance industries and is a fellow of the Society of Actuaries. Christopher Brown serves as Vice President in the institutional team with responsibility for SS&C s institutional cloud hosting and technology services. Chris joined SS&C in 2014 following over 20 years of industry experience in insurance and investment technologies. And finally, to start us off today, David Reid, is a Senior Vice President of investment management outsourcing division. Prior to his current role, Dave served as a managing director of SS&C s international business based in London and served as co-head of SS&C s global hedge fund administration business. Without further ado, Dave, let s get started.

2 Dave Reid Thank you very much Jennifer. Good afternoon and welcome again to SS&C s Insurance Outlook 2015 webinar. In an environment of low investment returns, rising costs, regulatory change and increased operational complexity, there certainly are a number of challenges facing insurance companies today. Some of these are old, some of these are new. First, interest rates continue to remain significantly below long-term averages, creating pressure to maximize value for both shareholders and policy holders. Second, implementation of many new regulations covering USA and European insurers continues to create challenges. As with all facets of financial services, the insurance industry is working through a raft of regulation, ORSA, Dodd-Frank, EMIR, FATCA, Solvency II, just to name a few. All of these changes in regulations must be complied with now and ongoing. This is simply the cost of doing business. Third, many insurers are looking to reduce risks, increase cost efficiencies and ensure timely data and reporting required to manage their business, all while meeting these new regulatory requirements. The infrastructure has to be robust to support the business but flexible enough to adapt to new asset classes and regulatory requirements. And finally, to remain competitive, insurers are forced to review their operational infrastructure and how reserves are managed, and therefore they often consider outsourcing parts of the insurance investment functions, particularly middle and back office functions. With the low interest rate environment, the requirement to enhance returns with new asset classes is becoming a must. This brings its own challenges. Should you build an internal investment team for asset class diversification? Or potentially outsource the investment management function to a specialist? How do you gather, aggregate, deliver all key data points on a timely basis? We continue to see more insurance companies outsourcing investment management to gain access to the experts of these specialty managers and therefore the investment teams in the insurance group are acting more like managers of managers. With that, I am pleased to present today s agenda, Trends in Insurance Investment Operations and Technologies. Our speakers today will cover the three main trends we see entering into Many insurers are moving towards more complex investments. Secondly, the regulatory treadmill. How will this impact your business and are you ready? And then, finally, The Power in the Cloud. Technology change continues to advance and affect how insurers will do business. I am pleased to introduce our first speaker, Jack Quinn, to talk more on the complex investments. Jack Quinn Great, thank you, Dave. Because of the continued low interest rates overall and the extremely low yields on traditional insurance company investments, many companies are increasing their investment allocation into less liquid and more complex investments in search of higher yields and higher investment returns. In working with our clients, some of the investment categories that we re seeing as increasing in importance include bank loans, investments in private equity, commercial mortgages and residential whole loans. Also, in addition to what we ve observed, there are several surveys of insurance CIOs and their expected investment focus. The conclusion of these surveys is that the level of investment into these more complex asset classes is expected to continue. Because these types of investments are not traditional investments for most insurers, companies lack the processing systems and the operational expertise that is required to handle these complex instruments. And what we re seeing is that individual insurance companies are finding that these asset classes are causing both operational and system challenges. 2

3 The initial approach that we see many insurance companies take is to use their existing staff and systems along with manual processes and spreadsheets to limp along and really provide minimal support for the more complex asset classes. A better, more sustainable approach is to leverage a software and service partner to support these asset classes with accurate and robust systems and the operational expertise. That partner should understand the detailed accounting and statutory reporting requirements, and really the nuances of those types of investments. A variation on that approach that we refer to as component outsourcing provides a great solution for many insurance companies, both large and small. Component outsourcing comes in several different flavors, and really could be in support of, for example, specific asset classes, things like bank loans, things like private equity, BA assets, or can be operational areas such as independent performance measurement, investment risk our middle office services. Under such an arrangement, the service provider has the specialized skills and systems to support the new or complex investment types properly and works in conjunction with your existing staff and systems. A few key attributes that the component outsourcer needs to be skilled in includes really in understanding and support for all the various investment types beyond the one or two types that you may have originally hired them to support. And the reason being is that you really want to put yourselves in a position where you can quickly expand the arrangement to support any future investment types as well. Another key attribute really is having an understanding of the overall reporting and accounting process that insurance companies have to provide. Support for all of the various applicable NAIC investment schedules, and this certainly goes far beyond Scheduled Ds, for example, some of the investment types might require Schedule B, Schedule BA, Schedule D, etc. Another important thing is really having a clear appreciation of the fact that when we talk about components that those really cannot be viewed as standalone. Ultimately to do your reporting, you need to consolidate that information, whether it is for accounting purposes or for statutory purposes. So really understanding how all the pieces fit together is very important. Really, the overall objective of expanding your use of service providers is to expand your capabilities. And really to remove or take away any operational or system limitations that might prevent the CIO from pursuing any investment opportunities that they want. Some additional benefits of component outsourcing that we have seen include It can be quickly deployed, because the service provider already has the infrastructure and can, like I said, just deploy very quickly. The next is that it really is a total solution. So it is the people, it is the systems, it is the processes around that. The next is really that it is very scalable. So as volumes increase or decrease for investment decisions to allocate more or less to different asset classes, expand or contract, the service is very scalable. The next is that there really is a variable cost structure that is tied directly to that investment program. So, when investment decisions are made of getting into different asset classes or expanding, you can clearly understand the cost impact on those. And really the last one that we see is very attractive to a number of people is that it really is a first step of outsourcing. And I think this is especially important to organizations that may be have not done so in the past, so it is really a good starting point. With that, I would now like to introduce Jim Ramenda, who is going to talk about the regulatory treadmill. 3

4 Jim Ramenda Thanks, Jack. As Jack and Dave both described, there are new strategies out there, new asset classes, and more companies using specialist managers. I am in charge of Enterprise Risk here at SS&C, which includes performance, regulation and compliance, and risk modeling. I want to talk about some of the specific challenges for those areas in light of what is going on in the market. The first thing, of course, is that the senior managements and boards of these companies that are embarking on these new strategies have to monitor and validate their decisions. They do this through increased focus on performance attribution and risk analysis. And because they have new types of risks, they need to get more detailed information in terms of performance and attribution to validate those decisions. The risk reward trade-offs are not as simple as they were with traditional asset classes. At the same time, regulators are looking at these issues, trying to root out both company and systemic risks. They are requiring more data and more metrics from companies and this seems to increase every year. They are also requiring more capital per unit of risk, so measuring the risk reward trade-off is more important than ever. Let me get into some of the specifics of the challenges. The assets being more complex means the models have to be more complex. They take up more runtime, require more computing power and they require more specialized employees to build, maintain and run the models. All the while, the information needed is getting more granular and more precise in order to meet the demands of management, boards of directors, regulators, and the rating agencies. A new requirement that has come up is that insurance companies following best practices will use GIPS for measuring and presenting performance. This is a significant ramp up in the requirements for performance. It is important to remember that the demands that are coming through regulators, rating agencies, and managements may have similarities but they are not necessarily the same. These audiences each have different interests and they have different ways of looking at risk, requiring different formats, different metrics, different aggregation schemes, different frequency. You just have to look at the two major initiatives now in the insurance regulatory world, which are the US Solvency Modernization Initiative and Solvency II, for European companies. One specific requirement that is common to both is the ORSA, Own Risk and Solvency Assessment. ORSA is going to be required for US insurers of a certain size beginning in A lot of companies have already done test filings, and the NAIC Guidance Manualshows what is required for quantifying risk exposure at a very general level. For example, it mentions stress tests, risk factor sensitivities and stochastic modeling. But it also leaves open exactly how companies will apply these and what other metrics will be used to support their market risk calculations. 4

5 The NAIC has also made it clear that in addition to the numbers that are filed, they will be looking at the processes and the framework involved. And so this means asking: Have companies used reliable data? Have they reconciled the data? Have they provided an audit trail for regulators? Have they dealt with model risks in terms of showing that the models are comprehensive? Transparent? Have the models used independent assumptions and processes? And so I think this environment is going to force companies to ask do they really have the core competencies for all aspects of this process and where are they willing to invest their resources in this regard. They are already in the insurance and investment businesses, and these are complex businesses to start with, so companies must decide whether they want to commit to building to a much larger footprint in the data management and technology businesses. An alternative solution is to have access to systems that were built to manage and aggregate large and diverse data sets and perform analytics on a large scale. Andaggregation means the systemhas to aggregate across multiple managers who each have their own reporting systems, as well as different lines of businesses that have their own metrics. plus legal entities that may have their own legacy systems in place. And there must be a recognition that all of this data will be coming in different formats to the system. It all has to be normalized before any analytic system can digest it and produce results. Then the data is scrubbed, enriched, and the models crunch the numbers. Finally, the systems have to be flexible enough to report in multiple formats. And these multiple formats can change at any time, and probably will change and become more complex in the future. So the system has to be able to adapt and scale to growth in the business, but also scale for growth in regulation and any other external demands. In terms of planning for the future, I have to stress that anticipating and tracking changes in regulation is a very big job. We have over 100 people in our group are growing every day. It is very hard to hire and retain these people because they have such highly specialized skills. I think this is a major reason why we are seeing companies streamlining. They increasingly are deciding that, yes, their core competencies really are in insurance and investments and they don t want to be in the data management business or the reporting technology business because it is so difficult to find scalability in those areas with internal solutions. So I m going to stop there and turn it over to my colleague, Chris Brown, who will cover the technology that goes into creating flexible and scalable solutions. Chris Brown Thank you, Jim. Today I want to talk a little bit about cloud technology and how it is powering some of the innovations that we have heard about from Jim and from Jack, and talk a little bit about how you answer the question, how can the cloud help me. Strategies that we have heard the most about recently and that we anticipate being a big driver going into 2015 are as follows: you should understand where your infrastructure as a service options may lie, also known as IAAS, this speaks to outsourcing your data center servers, storage and processing to a provider and connecting through the network. This, for some organizations, can be a huge win in the sense that it can allow you pay as you go cost structures, by using only what you need. It can also help a lot with simplifying your environments. Some of the management of disaster recovery, upgrades and things of that sort become the burden of the provider as opposed to the burden of your own internal staff. This does require a certain level of expertise to utilize effectively as you will need people on staff to manage their side of the equation. 5

6 So in some cases, it is more appropriate to go down the path of the second item, software as a service, or SAAS. This is a familiar term, I am sure, to most of the folks on the webinar today. This is how software is delivered over the network as a functional capability. So, our kids are all using Facebook and Twitter and Instagram, that is a consumer side of it, but increasingly we see for commercial interest that the software that we were installing just a few years ago is now almost always available over the cloud, over the internet. And we think this is a huge driver for people to gain serious agility as they go forward. In fact, we re seeing more discussions about purchasing software this way than traditional license models and industry statistics bare that out in terms of the overall rate of growth for each sector. So, in the end, SAAS can be the fastest way to deploy new capabilities for your organization and though it does require some installation and understanding about how to get your data over to the provider, it is definitely quicker than it would be to configure the environment yourself. The next item on here, understand and exploit component outsourcing as an approach to further increase SAAS value. Jack spoke a little bit about that. I would highlight that this really is a convergence that we see driving significant additional value from SAAS strategies by leveraging your provider and their outsourcing options in a more surgical way that makes use of the hosting capabilities that they provide and at the same time more targeted outsourcing, if you will. So whether it is a complex asset class or a functional capability, doing that as opposed to walking down the path of full outsourcing for some can be an advantageous strategy. And last on here, data aggregation in the cloud is becoming increasingly topical and we believe it is going to be a driver of both conversation and investment going into As more of your data lives in the cloud, through SAAS sorts of arrangements, it becomes increasingly important to have a good integration strategy to support your business needs. In the end, we think this is really going to become an area where rapid business intelligence capabilities and analytical dashboards will become easier to deploy and use and that is behind products such as SS&C s investment intelligence strategy. So the impact to your business of going down the cloud path, first and foremost, and the early driver of most cloud plays, is cost savings. Being able to pay as you go and use what you need is hugely advantageous. It allows you more flexibility in the way you budget, it also means that you don t have to know whether you need to servers or three servers in order to get your new application up and running. You simply pay for what you need and if you need to grow, you do it when you need to. Agility, faster time to market, in the end the ability to turn on capabilities and bring on products and takeoff products as your business environment dictates is ultimately a huge enabler. In addition to that, we think that for some organizations the ability to get these software capabilities running in the cloud can significantly outpace internal capabilities, which sometimes can become rather lengthy, depending on the level of integration within your environments. Scale of course, mentioned earlier, the ability to go up and down as your needs dictate is a huge win here for anybody going down the path of cloud capabilities. And we absolutely think of this as a driver for a lot of folks and will be more so in the future. And last, but by no means least, it allows you to focus on your core competencies. Long cited as a reason for doing outsourcing in general, this is something that, you know, is increasingly more practical for people to use as they reduce complexity in their environments and really make sure that they are leveraging their partners as effectively as they can. And I guess I will conclude by just pointing out the sentiment underneath all of this, which is pick the right partners. Make sure that as you go forward in advancing your cloud strategies that you are working with someone that knows your business and can also grow as your needs mature. With that, I am going to turn it back over to Dave Reid. 6

7 Dave Thank you very much, Chris. In conclusion, we advise insurance companies to consider the following: First, to increase yield and returns in the current low interest rate environment, we believe insurers should embrace asset class diversification and move into more complex and less liquid investments. Like private equities, bank debt, commercial mortgage loans, derivatives and the like. Second, streamlining and implementing of GIBS performance standards and best practices can be accomplished internally leveraging custom technology or via component outsourcing with a specialty service provider. Third, look to expand and invest in regulatory technology solutions and expertise while minimizing cost can be achieved via licensing and or hosting software or via outsourcing to specialty providers. And finally, it is important that all insurers look to keep pace with the latest advancements in technology, included but not limited to cloud hosting, outsourcing and mobility to support market growth and improve access to critical data. In the simplest sense, you need correct data, you need the data in the correct location and you need it at the correct time. Anything, anytime, anywhere as we say. Many thanks for your attendance today. I would like to also thank the presenters, Jack, Jim and Chris. We hope that you found that our panel of experts were informative and helpful and we appreciate your feedback and welcome a few questions as we wrap up. Moderator Thank you, Dave. At this time, we d like to open it up for questions. As a reminder, to submit your questions simply click the chat icon in the drop-down tool at the top center of your screen. If we run out of time today, any questions that are not answered will be followed up after the webinar. Chris, this looks like it might be directed to what you spoke about today. What are some of the biggest challenges in getting started with the cloud? Chris So, the cloud is a big space and a big term. You know, fundamentally I think that people need to look at what they would like to get from it. So if agility is the play, understanding who has capabilities that can be deployed quickly. If cost savings is the bigger play, it is worth spending some time doing your homework, understanding your current and total cost of ownership and setting the stage for what you really would look for in an outsourced provider relationship. For software as a service, I think the barrier of entry is lower because you can simply select based on features. For infrastructure as a service, as I mentioned earlier, it does require a certain degree of internal expertise to leverage. And for the folks heading down that path, it is worth spending a little bit of time working with your providers to understand really what people need to know in order to go there successfully. Moderator Thank you, Chris. Another question came through. Jim mentioned the NAIC requirements for market risk. Can you provide some detail on the measures you are seeing used to address this? Jim Ramenda Sure. I think I mentioned in the NAIC Guidelines, they referred to stress testing, risk factor sensitivity and stochastic modeling. And then some of the ways that those are being interpreted, that we see both for regulators and for management who are assessing, managers, sensitivity to changes in the yield curve and credit spread is probably the biggest item. So DB01, CS01, effective duration and convexity. When we talk about stress test, what we see are shocks in interest rate, shocks in equity values, shocks in market volatility would be probably the most common. In terms of stochastic modeling, it centers around value at risk, both Solvency II and the NAIC Guidelines. I mentioned value at risk, simulation capabilities, stochastic simulation capabilities also used for random scenarios as well as historical stress tests, historical value at risk. It goes on and on but I would say in general the other dimension to that is aggregation and drill down, the ability to aggregate those across different entities and then the ability to drill down to what number is it that is standing out and drill down through the asset class to the sector down to the individual holding and then aggregate all the way back up is a critical component to it. 7

8 Moderator Another one. Am I able to outsource my private equity or bank loans processing and reporting to SS&C, even if I do not outsource the rest of my investment accounting? Jack Well, why don t I take that. This is Jack. Yes, when we talk about component outsourcing, that is really the idea behind it, that in addition to being able to satisfy or support all of the investments, or the investment types, for organizations that are looking to really supplement what they are doing internally, we are able to and we are willing and able to provide that service for specific asset classes or the specific functions, as we mentioned. We do understand that ultimately that information has to feedback into your ledger and into your statutory reporting, and so we have the processes and things to do that. But yes, absolutely. Moderator We did get a question as to whether the presentation and the webinar would be available after today. And, yes, we will be sending out a link to that. At this point, that s all the time we have for today. We thank you again for joining us. As I did mention, this is being recorded and we will send a link to you in a few days. This concludes today s webinar, SS&C Insurance Outlook 2015 Trends in Insurance Investment Operations and Technology. We thank you for joining us and have a great day. 8