Analysing Allocation Trends in the Global Insurance Industry

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1 This communication is intended for investment professionals only and must not be relied on by anyone else. Analysing Allocation Trends in the Global Insurance Industry Bruce Porteous Investment Director - Insurance Solutions Owen McCrossan Investment Director Multi-asset Investing FT Managing Assets for Insurers Conference 24 February 2015

2 The Importance of a Liability Aware Outlook Powerful and Irreversible Drivers of Global Insurance Asset Allocation Trends Regulatory change Market consistent balance sheet and risk-based capital requirement Global and pensions Very high degree of technical complexity Market volatility Alternative assets and use of diversification Enhanced ALM To stabilise the balance sheet Low interest rate environment Alternative assets and use of diversification Enhanced ALM To generate capital efficient yield 2

3 The Drivers of Insurance Liability Aware Asset Management Markets are Volatile - Spreads on Euro Corporate Bonds Source: Bank of America Merrill Lynch. Note: Spreads (in basis points) over German government bonds for both plain vanilla bonds and bonds with embedded options (for which the value of the option is stripped using proprietary models). ESRB Risk Dashboard, December

4 The Drivers of Insurance Liability Aware Asset Management Insurer Asset-Liability Duration Mismatches Source: EIOPA Insurance Stress Test

5 The Drivers of Insurance Liability Aware Asset Management Low Interest Rates - Global 10-year Government Bond Yields Source: FT, 19 February

6 The Drivers of Insurance Liability Aware Asset Management European Insurer Guarantees Source: EIOPA Insurance Stress Test

7 Risk premia nice to have, but Excess return over cash 10 years (p.a) 25 years (p.a.) 50 years (p.a.) Equities 5.9% 6.4% 4.7% Treasuries 3.5% 3.8% 2.1% Corporate Bonds 6.0% 6.1% 2.8% Property 3.9% 2.5% 3.4% Deutcsche Bank Long Term Asset Study, Standard Life Investments US markets except UK Property 7

8 ... are volatile Source: CRSP, Barclays Research 8

9 Unstable risk characteristics Correlation of Global Equities with other market sectors 90% 80% % 60% 50% 40% 30% 20% 10% 0% Property FX Basket Commodities Corporate Bonds Emerging High Yield Market Bonds Bonds Source: IPD UK Monthly Property Index, All Property; Federal Reserve Trade-Weighted Exchange Value of US Dollar vs 6 Countries; Dow Jones UBS Commodity Index; Barclays Capital Global Corporate Index, Excess Returns; Barclays Capital Emerging Markets Index, Excess Returns; Barclays Capital US High Yield Index, Excess Returns; Standard Life Investments, 31 December

10 Buy portfolio insurance? S&P 500 Total Return Index Cash Return Index (3m rates) Protected index, no cost Protected index allowing for cost Tail risk protection as many imagine it would be. Fantastic if it was affordable % p.a Historically you would have needed to pay 1.7% per quarter, on average, to cap losses at 5% 10

11 Portfolio construction - a strategy with good protection Source: Standard Life Investments, Bloomberg 11

12 But not systematically paying for it Source: Standard Life Investments, Bloomberg 12

13 Bringing it together Stand Alone risks Correlations Position removal Source: APT, Standard Life Investments, February

14 Risk Comparison Up months*** 75/103 vs 63/103 (GARS vs Global Equities) Upside capture 32.7% Downside capture -2.5% Volatility: GARS 5.4% Global Equities 14.2% (annualised, using monthly data from 01/07/2006 to 31/01/2015) Maximum Drawdown: GARS -13.9% Global Equities -37.8% (using daily data to 31/01/2015) VaR (95%, weekly): GARS -1.3% Global Equities -3.6% (using weekly data to 31/01/2015) * Source: FactSet, MSCI World ( ) net of tracker fund fee. ** Source: Standard Life Investments, net performance. *** Source: Standard Life Investments, gross performance from 01 July 2006 to 31 January 2015 Source: Standard Life Investments, gross performance from 12 June 2006 to 31 January Portfolio performance is based on the, institutional pooled pension portfolio Delivering returns with less risk 14

15 Questions? 15

16 The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up. For full details of the fund's objective, policy, investment and borrowing powers and details of the risks investors need to be aware of please refer to the full prospectus which can be found on Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the Owner ) and is licensed for use by Standard Life**. Third Party Data may not be copied or distributed. Third Party Data is provided as is and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Standard Life** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates. **Standard Life means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time." Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training Standard Life, images reproduced under licence 16