Unique Investment Solutions for an Insurance …...Your Global Investment Authority Unique Investment Solutions for an Insurance Company Rehabilitation 25 February 2016 For professional

Your Global Investment Authority

Unique Investment Solutions for an Insurance Company Rehabilitation

25 February 2016

For professional use only–not for public distribution.

The solutions contained herein are intended to provide you a sample representation as to the type of custom analysis we can provide and is not intended to be a recommendation for your particular needs. Performance data contained herein may be dated and should not be relied upon for investment decisions.

pg 1Your Global Investment AuthorityYour Global Investment Authority

Disclosures

PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P.

and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

CMR2015-1209-150109


Biographical information

Peter Miller

Mr. Miller is a senior vice president in the New York office and an account manager focusing on

insurance clients. Prior to joining PIMCO in 2010, he was with The Hartford for nine years, working in a

variety of actuarial and investment roles including asset-liability management, portfolio management,

and variable annuity hedging. He has 14 years of investment experience and holds an undergraduate

degree in actuarial science from the University of Nebraska. He is also a Fellow of the Society of

Actuaries (FSA).

Scott Millimet

Mr. Millimet is an executive vice president and account manager in the New York office, heading

insurance company client service. His primary responsibilities include management oversight and

growth of PIMCO’s insurance (general account) group, with a focus on client servicing of both

domestic and Bermuda-based insurance clients. Prior to joining PIMCO in 1999, he managed U.S.

government mutual funds and insurance company separate account assets at Boston-based Back Bay

Advisors. Prior to that, Mr. Millimet worked for CM&M Inc. in Tokyo as Asia regional manager, as well

as a senior trader and floor manager for CM&M Futures Inc. at the Chicago Board of Trade. He has 34

years of investment experience and holds a master's degree in agricultural economics, as well as a

bachelor of science degree in economics, both from Texas A&M University.

Matthew Tracey

Mr. Tracey is a vice president and account manager in the New York office, focusing on institutional

client servicing. Prior to joining PIMCO in 2014, he was at Stifel, Nicolaus & Co. as an investment

banker working with municipalities and public infrastructure authorities. He has six years of investment

and financial services experience and holds a bachelor's degree from Vassar College and an MBA from

the University of Chicago’s Booth School of Business, where he specialized in economics and finance.

pg 3Your Global Investment AuthorityYour Global Investment AuthorityIns_asset_mgmt

Executive Summary

Sample insurance company in rehabilitation required out-of-the-box solutions for its investment

portfolio

� Objective: generate higher portfolio term returns and current income to maximize the longevity of the

portfolio and thus the company’s ability to continue paying claims

� Constraints:

– Higher returns come with higher risks – duration, credit, liquidity, structural complexity, etc.

– While giving up liquidity can be a source of additional return, this must be balanced by the company’s specific need for

sufficient liquidity to pay near-term claims

– Most guideline limits typical of insurance companies apply (overall high credit quality, sector and issuer concentration,

etc.).

� Solution: restructure from a low-returning, excessively conservative portfolio to a higher-return portfolio

that:

– Diversifies across previously unused sectors – emerging markets, bank capital securities, and alternative assets

– Generates high current income to address near-term claims needs

– Utilizes a variety of investment vehicle structures to obtain exposures as efficiently as possible

– At client’s request – harvest and realize sizable gains during initial phase of restructuring process

For Illustrative Purposes OnlyRefer to Appendix for additional investment strategy and risk information.


Initial Conditions

� Very high quality – and low-yielding – investment portfolio

� Significant emphasis on government-related securities and high-quality corporate bonds

� Mismatch between asset duration (~7 yrs) and liability duration (~5 yrs)

As of April 2014For Illustrative Purposes OnlyRefer to Appendix for additional credit quality and risk information.

Sector Market

value %

Spread to

Treasuries

(bps)

Duration Spread

Duration

Yield (%) Rating

Agency debt 3.2 40 9.0 0.5 2.95 AA+

Cash Equivalents 0.2 - - - 0.12 AAA

CMBS 5.6 94 3.6 3.7 2.38 AA

Agency MBS 5.2 8 4.6 - 2.98 AAA

Investment grade corporates 61.8 124 7.9 13.5 3.82 A-

Emerging Markets 2.1 156 6.8 14.3 4.01 A-

High Yield corporates 4.9 228 5.4 17.6 4.57 BB

Municipals 15.8 133 6.7 13.4 3.51 AA-

Non-agency MBS 0.2 97 8.0 9.8 3.85 AAA

US Treasuries 1.1 (12) 2.5 - 0.76 AAA

Total 100.0 119 7.1 11.8 3.62 A


PIMCO’s customized investment approach

PIMCO’s Model Portfolio

(Unconstrained)

PIMCO’s Investment

Strategy results in a

broad set of alpha

opportunity generating

strategies

PIMCO_Insurance_model

ViableSolutionSet of

Opportunities

PIMCO structures a portfolio that implements its best investment strategies within the context of unique investment objectives and guideline constraints.

* Asset/ Liability managementRefer to Appendix for additional investment strategy and risk information.

Client-specific constraintsInvestment constraints requirespecific considerations:

� Limits on Derivative Use

� Quality Constraints

� Capital considerations

� Gain/Loss constraints

� ALM* considerations

� Industry/sector limits


Unique Considerations & Action Items

� Capital considerations: Is there appetite for non-traditional assets / vehicles – for example, hedge funds

and / or private equity structures?

– Yes – the company’s financial distress meant the usual risk-based capital constraints did not apply.

� Liquidity: Is there flexibility to structure a “barbell” at both ends of the liquidity spectrum?

– Yes – understanding the anticipated claim flows allowed us to refine the portfolio’s liquidity profile to include a

meaningful percentage of illiquid but higher yielding assets

� How do we judge investment performance?

– Construct a custom benchmark taking into account the liability duration, liquidity needs, credit quality, risk tolerance of

the company, etc.

– Compare actual portfolio returns relative to this custom benchmark

� How do we balance the desire for best investment ideas in portfolio vs. risk governance?

– Create clear, quantifiable guidelines that reflect the company’s risk tolerance and allow portfolio managers the discretion

to invest as they see fit within those guidelines and manage against the agreed upon custom benchmark

For Illustrative Purposes OnlyRefer to Appendix for additional investment strategy and risk information.


Investment portfolio – Before & After

� Highlights:

– Spread to treasuries increased without

lowering credit quality

– Portfolio yield only slightly decreased

despite a substantial duration

reduction (1.5 years)

– New portfolio is more diversified – less

reliance on corporates, more structured

credit and alternatives

– Use of mutual fund and hedge fund-

like vehicles allow for greater diversity

and liquidity than investing directly in

underlying securities

As of April 2014For Illustrative Purposes Only. The above portfolio allocations are being provided as an example and is not intended to reflect the current properties of any existing portfolio managed by PIMCO. The results shown should not be construed as an investable product and the underlying data is as of the date shown and would differ if calculated on a different date or under different market conditions. All investments contain risks and may lose value.

Before

Sector Market

value %

Spread to

Treasuries

(bps)

Duration Spread

Duration

Yield (%) Rating

Agency debt 3.2 40 9.0 0.5 2.95 AA+

Cash Equivalents 0.2 - - - 0.12 AAA

CMBS 5.6 94 3.6 3.7 2.38 AA

Agency MBS 5.2 8 4.6 0.0 2.98 AAA


Emerging Markets 2.1 156 6.8 14.3 4.01 A-

High Yield corporates 4.9 228 5.4 17.6 4.57 BB

Municipals 15.8 133 6.7 13.4 3.51 AA-


U.S. Treasuries 1.1 -12 2.5 - 0.76 AAA

Total 100.0 119 7.1 11.8 3.62 A

After

Sector Market

value %

Spread to

Treasuries

(bps)

Duration Spread

Duration

Yield (%) Rating

Agency debt 0.2 43 9.6 6.8 3.08 AAA

Cash Equivalents 0.3 -3 0.0 - 0.10 AAA

CMBS 9.1 87 4.0 4.2 2.48 AA+

Agency MBS 4.4 7 4.3 0.0 2.92 AAA


Emerging Markets 6.0 197 2.9 10.8 3.05 BBB+

High Yield corporates 7.3 193 3.0 10.3 3.09 BB-

Municipals 13.4 126 6.4 12.1 3.36 AA-


U.S. Treasuries 0.6 -15 1.2 - 0.20 AAA

ABS 2.6 117 0.2 4.0 2.13 AAA

Opportunities Credit strategy 3.7 N/A N/A N/A 5.00 N/A

Diversified Income strategy 2.9 300 4.8 19.5 5.25 BB-

Grand Total 100.0 131 5.6 10.8 3.49 A

Change 0.0 12 -1.5 -1.1 -0.13 unch


Practical Considerations (Challenges?)

� With no new business being written, cash flows only go in one direction (out of the portfolio!)

– This means portfolio managers have one less critical tool available to rebalance portfolio exposures; result may be

increased transaction costs

– Credit selection and liquidity become even more important than usual

� As the company’s assets shrink, investment concentrations will emerge

– Requires a very thoughtful approach to investment sales when cash is needed

– Guideline compliance must also take this into account

– Utilizing pooled vehicles (i.e. mutual funds) can be a helpful way to maintain diversified exposure to preferred sectors and

daily liquidity

– A large manager with substantial resources, market access, and 2-way client flows can be an incredible advantage to

managing a portfolio with the noted constraints

Refer to Appendix for additional investment strategy and risk information.


Diversified Income Strategy

� Fund type: public, open-end mutual fund with income focus (daily liquidity)

� Comprehensive, “one stop shop” global credit strategy (typically ‘BBB’ average quality)

� Seeks to generate steady stream of income from portfolio diversified across global investment grade

credit, high yield corporate credit, emerging market debt, and other tactical strategies

� Potential benefits include higher yield than core fixed income, low correlation to U.S. interest rates, and

ability to shift investments among global fixed income sectors most attractive at a given time

� Distribution yield of approximately 5.25% vs. Barclays aggregate index yield of approximately 2.20%

As of April 2014For Illustrative Purposes Only. The above portfolio information is being provided as an example and is not intended to reflect the current properties of any existing portfolio managed by PIMCO. The results shown should not be construed as an investable product and the underlying data is as of the date shown and would differ if calculated on a different date or under different market conditions. All investments contain risks and may lose value.


Opportunistic Credit Strategy

� Strategy type: tactical, opportunistic

– Middle ground (“hybrid”) between hedge fund and private-equity-style fund, in terms of liquidity (semi-annual)

– By design, this allows the strategy to buy assets that are not widely followed by either the hedge fund or PE community

� Invests globally across public and private residential, commercial, and corporate credit markets

� Target annual net return: Typically in the 10% - 12% range

� Strategy can shift its investments to whichever sectors present best opportunities at a given time

– Focus has historically been real estate credit but future opportunities may lie more in corporate credit given energy

market stress

For Illustrative Purposes Only. The above portfolio information is being provided as an example and is not intended to reflect the current properties of any existing portfolio managed by PIMCO. The results shown should not be construed as an investable product and the underlying data is as of the date shown and would differ if calculated on a different date or under different market conditions. All investments contain risks and may lose value.


Summary

� Insurance companies facing financial difficulty must address a number of unique investment challenges

� While prudent interest rate and credit risk management are necessary in any insurance portfolio, liquidity

and diversification become particularly important when faced with a rapidly declining asset portfolio

� Solutions exist to manage and mitigate these risks:

– Work with an investment manager with a substantial toolkit and deep resources

– Utilize a variety of vehicles to obtain exposures as efficiently as possible

– Consider a liquidity barbell to balance near-term cash needs with longer-term investment opportunities

– Diversify exposures across a number of sectors, geographies, and maturities



Additional information

PARS_tab_02


Portfolio reporting: Market outlook, risk analysis, and performance

Mosaic approach to communicating to stakeholders

� Market outlook

– Forward looking outlook of global economy, technical flows in capital markets, and relative value differentials

– Reconcile with how portfolios are positioned

� Risk analysis

– Detailed risk attribution — where is duration risk coming from? Where is credit risk coming from?

– Changes — what were they, and why? Reconcile to market outlook.

� Performance measurement/attribution

– Did we generate total return alpha?

– Did we generate book yield (income) alpha?

– Attribution of both

� Everything should hold together — necessary tradeoffs are illuminated for key stakeholders — highlights

potential overreach for yield



Assets under management� $1.47 trillion1

Global resources� 13 offices across five continents� Nearly 2,400 total employees:

– 250+ portfolio managers– 125+ credit and quantitative analysts

Comprehensive investment solutions � Alternatives� Asset allocation� Equities� Fixed income

Diversified global business� Over 80% of AUM in non-core strategies� One of largest alternatives platforms � Over 45 funds with positive inflows YTD2

Time-tested investment philosophy� Diversified set of alpha engines

– Top down– Bottom up– Structural tilts

Long-term investment results� Over 85% of AUM outperformed benchmark over five-

year period3

Client-focused culture� Client education� Solutions capabilities

Thought leadership� Global market dynamics� Economic analysis� Central bank policy� Industry trends

Access to our latest views: BLOG.PIMCO.COM

Recent hires� Joachim Fels: MD, Global Economics� Geraldine Sundstrom: MD, Asset Allocation� Senior Advisors:

Ben Bernanke, Michael Spence, Gene Sperling

Cyclical forum conclusions� Muted global growth driven by EM weakness� Headwinds: Global savings glut, China

slowdown� Tailwinds: Oil’s effect on consumption,

continued monetary stimulus

New product launches� Capital Securities Strategy� Opportunistic credit “follow-on” PE-style

vehicle� Expanded Research Affiliates relationship –

RAE Fundamental strategies

PIMCO: Focused on managing risks and delivering returns

3cs_pimco_org_1

Firm snapshot PIMCO’s value proposition “What’s new?”

As of 30 September 20151 Effective 31, March 2012, PIMCO began reporting the assets managed on behalf of its parent’s affiliated companies as part of its assets under management. 2 Based on PIMCO U.S. open-end 1940 act funds with positive inflows YTD excluding exchange traded funds and funds exclusively available via managed accounts3 Based on 30 September 2015 data of PIMCO managed portfolios with at least a 5-years history. The gross-of-fees performance of each portfolio was compared to the portfolio’s primary

benchmark. If the gross-of-fees portfolio performance was greater than the benchmark performance for a given period, the assets in that portfolio were included in the outperforming data. Benchmark outperformance indicates the performance of a portfolio as compared to its benchmark. As such, it does not indicate that a portfolio’s performance was positive during any given period. For example, if a portfolio declined 3% during a given period, and its benchmark declined 4%, the portfolio would have outperformed its benchmark, even though it lost value during the period. Certain absolute return oriented portfolios contained within the data may inflate the data either positively or negatively due to the low return/volatility characteristics of the primary benchmark. For example a portfolio measured against 3-month USD Libor would be more likely to out- or underperform its benchmark. No measure of past performance should be understood to ensure that future performance will be positive, whether on a relative or absolute basis.

pg 15Your Global Investment AuthorityYour Global Investment AuthorityIns_asst_02_v1

� Life, P&C, Reinsurance, Health, Multiline

� Assignments that have insurance-specific investment objectives

– Seeking to optimize book yield for a given liability duration target

– Gain/loss sensitivity

– Liability matching

– Capital constraints, etc.

PIMCO manages $82 B in global unaffiliated general account assets

As of 30 September 20151 Alts strategies include absolute return, credit absolute return, global credit opportunity, multi-asset volatility, PARS III, PARS IV, and unconstrained bond. Credit strategies include bank loans,

credit income-focused, diversified income, high yield, and investment grade credit. Inflation-related strategies include asset allocation real, commodities, and inflation linked bonds. MBS/ABS strategies include asset backed securities and covered bonds. Other strategies include active equity, asset allocation, convertible bond, global advantage, global multi-asset, governments (developed), and StocksPLUS.Refer to appendix for additional investment strategy information.

Option 1

52%

48%

Unaffiliated Global GA Assets Total AUM by

Strategy Designation

Core

Non-Core

$82 B

$43 B

$39 B

$1 B (3%)

$5 B (13%)

$1 B (3%)

$3 B (7%)

$25 B (64%)$1 B (3%)

Credit

LDI

EM

Alts

MBS/ABS

Inflation-related

Other

$39 B

Non-core details1

$3 B (7%)

62%28%

General Account Unaffiliated AUM by

business line

PC

LIFE

HEALTH

$82 B

$23 B

$51 B

$8 B

10%


Appendix

Past performance is not a guarantee or reliable indicator of future results.

CREDIT QUALITYThe credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

INVESTMENT STRATEGYThere is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown.

RISKThe following disclosures may not include all risks related to investing in private equity and hedge fund strategies. Additionally, this material is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. You should consult your tax or legal advisor regarding such matters.

General risks about private equity and hedge fund strategies: The strategies involve a high degree of risk and prospective investors are advised that these strategies are suitable only for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment. All investments contain risk and may lose value. The strategies will not be subject to the same regulatory requirements as registered investment vehicles. The strategies may beleveraged and may engage in speculative investment practices that may increase the risk of investment loss. The strategies are not expected be restricted to track a particular benchmark. A strategy’s fees and expenses may offset its trading profits. The portfolio manager(s) are expected to have broad trading authority over a particular strategy. The use of a single adviser applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. The strategies generally involve complex tax structures and there may be delays in distributing important tax information. A substantial portion of the trades executed for certain strategies may be in non-U.S. securities and take place on non-U.S. exchanges. Certain strategies may invest in non-publicly traded securities which may be subject to illiquidity risk. Performance could be volatile; an investor could lose all or a substantial amount of its investments. Past performance is not a guarantee or a reliable indicator of future results.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2015, PIMCO

Documents

Unique Investment Solutions for an Insurance …...Your Global Investment Authority Unique Investment Solutions for an Insurance Company Rehabilitation 25 February 2016 For professional