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© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.

Presented by:

March 4th, 2018

Dan Smereck, Managing Director & Principal

Pool Investment Strategies for Today and Tomorrow

Investment income: Is a cornerstone to the risk transfer business model, and maximizing investment income can mean the difference between remaining competitive or losing members to aggressive pricing.

1) How much can you expect to earn?

2) How much risk are you willing to prudently take?

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Session Introduction

Session Introduction - Investment Performance Objectives

Where do you fall on this objective continuum and why?

Book yield ‘or’

Income Only

Total return

Constrained total return

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Most Risk Pools & Insurers

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SETTING THE STAGE

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Current Yields – The World is Flat

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Q4-2017 U.S. Fixed Income Sector/Duration - Yields

Source: Bloomberg, Barclays

New money and reinvestment yields for U.S. investment grade fixed income

range from 2% to 3.5%

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World Economic Momentum - Manufacturing

Source: Markit, J.P. Morgan Asset Management

• SAA BOTTOMLINE: Global growth continues to strengthen and remains synchronized across the world’s regions. While the U.S. has been growing for over eight years, other regions are in much earlier phases of their cycles, suggesting there is further room to run but with a heightened focus on inflationary factors.

Heatmap colors are based on PMI relative to the 50 level, which indicates acceleration or deceleration of the sector, for the time period shown

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Unemployment & Wage Inflation – Concern?

Source: J.P. Morgan Asset Management

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Global Monetary Policy – From “QE” to “QT” but slowly…

Source: BlackRock

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U.S. Fiscal Policy

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Market Volatility – The “VIX”

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U.S. Financial Conditions Index – So Far So Good

-12 STD

-2 STD

0 STD

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LOOKING AHEAD

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Business Cycle – More Room to Run?

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Tough to Make A Buck

6%

4%

Source: Research Affiliates

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Allocation to Achieve - 7.5% Annualized Expected Return

Source: BlackRock

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Expected Volatility – 7.5% Annualized Expected Return

Source: BlackRock

How much surplus does your organization need to:

o Meet its members’ needs;

o Manage the risk exposures it is comfortable taking;

o Maintain a cushion for contingencies.

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Investments – One of the Cornerstones…

Operational Risk Underwriting Risk

Reinsurance, Reserving Risk

Investment Risk

Surplus

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Investment Grade Fixed Income

o Government & Agency

o Structured Securities

MBS/ABS/CMBS

o Corporates

Risk Assets

o Non-Investment Grade Fixed Income

o U.S. and International Equities

o Real Estate

o Alternatives

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Public Entity Risk Pooling – Investment Options

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Strategic Asset Allocation

Explains 90%+ of investment returns over time

Some Approaches…

o The Endowment Model

(Alternatives, Alternative, Alternatives…)

o The Risk Parity Approach

o Liability-Driven Investment

Basic Philosophies

o Traditional Diversification

o Risk Budgeting

o Goal Driven

Current Issues

HOW ARE OTHER POOLS INVESTING?

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SAA Governmental Pooling Clients

Data as of 9/30/2017

18 Clients

25 Portfolios (19 Primary / 6 Reinsurance)

$3.00B In Assets

$2.54B Core Fixed Income (84.6%)

$0.46B Risk Assets (15.4%)

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Peer Analysis Overview

CORE FIXED INCOME ALLOCATION

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Fixed Income Portfolio Book Yield & Duration

Duration (Yrs) Book Yield (%)

Max 7.33 3.63

Median 4.03 2.56

Average 4.31 2.49

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Fixed Income Allocation By Sector

Sorted by largest exposures to corporate and structured securities.

ST/ MMF (%) UST & US Agency (%) Agency MBS (%) ABS/ CMBS (%)Corporate & Taxable

Muni (%)

Max 26.0% 68.2% 52.0% 30.9% 61.2%

Median 1.5% 15.0% 19.0% 12.9% 45.5%

Average 4.1% 21.5% 20.3% 14.2% 39.8%

RISK ASSET ALLOCATION

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Risk Asset Allocation - % of Total Portfolio

Risk Assets %

Max 36.7%

Median 17.3%

Average 15.6%

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Risk Asset Allocation - % of Surplus / Net Position

RA % of Surplus

Max 57.5%

Median 26.4%

Average 24.9%

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Risk Asset Allocation – Sorted by Largest Risk Asset Allocation

U.S. Equity % Intl. Equity % HY % Other %

Max 100.0% 23.5% 37.9% 13.1%

Median 81.8% 9.7% 10.0% 0.0%

Average 77.7% 9.0% 12.2% 1.1%

Sorted high-to-low by risk assets as a % of surplus.

INVESTMENT LEVERAGE

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• Invested Assets / Surplus “or” Net Assets = Investment Leverage

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Investment Leverage

Inv Assets/ Surplus

Max 393.8%

Median 140.6%

Average 173.7%

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Total Portfolio Performance - 3 Years Ending 9/30/2017

3Yr

Max 4.4%

Min 1.4%

Median 3.3%

Average 3.2%

Net of fees; return median/average calculated by portfolio not asset-weighted

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Total Portfolio Performance - 5 Years Ending 9/30/2017

5Yr

Max 4.7%

Min 1.1%

Median 2.8%

Average 2.8%

Net of fees; return median/average calculated by portfolio not asset-weighted

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Fixed Income Investment Management Fees

Annual Fees (%)

Max 0.29%

Min 0.07%

Median 0.15%

Average 0.16%

Median/average calculated by portfolio not asset-weighted

1) How much can you expect to earn?

o Realistic risk/return expectations

2) How much risk are you willing to prudently take?

o Approaches to strategic asset allocation

o Risk assets as a percentage of surplus

Downside risk tolerance

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Conclusion & Issues to Consider