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Presentation Title: Arial Bold 28pt

TM Insurance Investing: A Bond Monoculture? AASCIF Annual Conference July 25, 2016 CONNING | One Financial Plaza Hartford, CT 06103 | www.conning.com | 2016 Conning, Inc. Introduction Evaluate workers compensation investment portfolios Peer groups Asset allocation Investment strategy drivers Results for the industry GAAP portfolios Closing observations AASCIF Conference | July 2016 2 Peer Groups and Composites AASCIF state funds 20 competitive state funds Workers compensation specialists 16 insurers , >$100 mn of premiums; work comp 40% of total Multi-line insurers 10 largest multi-line work comp writers

Funds using GAAP or IFRS reporting 3 non-competitive U.S. state funds 2 Canadian provincial funds A. M. Best industry composites Workers compensation composite Total U.S. property/casualty industry AASCIF Conference | July 2016 3 AASCIF Peer Group Beacon Mutual (RI) Montana State Fund Chesapeake Employers (MD) New Mexico Mutual CompSource Mutual (OK) Pinnacol Assurance (CO) CopperPoint Mutual (AZ) SAIF Corp (OR) Hawaii Employers' Mutual SFM Mutual (MN) Idaho State Insurance Fund SCIF (CA) Kentucky Employers' Mutual State Insurance Fund (NY) Louisiana Workers' Comp State Workers Insurance Fund (PA) MEMIC Group (ME) Texas Mutual Missouri Employers Mutual Workers Comp Fund (UT) AASCIF Conference | July 2016

4 Workers Comp Specialists Peer Group Accident Fund Employers Group Alaska National FFVA Mutual AmeriHealth Casualty Insurance Co of the West Amerisafe Group Lackawanna Group Amerisure Group Old Republic Group AmTrust Group RetailFirst Group A.I.M. Mutual BrickStreet Mutual Builders Insurance Group Builders Mutual AASCIF Conference | July 2016 5 Multi-line Peer Group ACE/Chubb Group American International Group CNA Group Fairfax Financial Group Great American Group Hartford Insurance Group Liberty Mutual Group Travelers Group W. R. Berkley Group Zurich Group AASCIF Conference | July 2016 6 GAAP/IFRS Peer Group Non-competitive state funds: Canadian funds:

Bureau of Workers Compensation (OH) Workers Compensation Board, Alberta Labor & Industries (WA) Worksafe BC, British Columbia Workforce Safety and Insurance (ND) AASCIF Conference | July 2016 7 Peer Groups Averages: Net Written Premium Invested Assets Loss & LAE Reserves Statutory Surplus AASCIF 459,054 3,257,164 2,021,990 1,074,717 Specialists 618,995 1,774,133 967,618 676,557 11,320,872 37,752,240 21,419,789

12,640,709 1,332,699 13,191,021 10,160,327 3,565,865 AASCIF 9,181,071 65,143,279 21,494,338 40,439,791 Specialists 9,903,912 28,386,120 10,824,918 15,481,887 113,208,722 377,522,398 126,407,091 214,197,888 6,663,496 65,955,104 17,829,324 50,801,637 22,968,222 114,588,695 67,581,230 41,210,047 524,417,903

1,565,920,555 621,245,531 705,499,104 Multi-Line GAAP/IFRS Totals: Multi-Line GAAP/IFRS Workers' Comp P/C Industry All figures in 000s of USD, and cover all lines of business unless otherwise noted. Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 8 Net Earned Premiums by Line Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 9 Loss Reserves by Line Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 10 Factors Driving Investment Strategy Company specific: Industry-wide: Objectives Statutory Accounting Principles Risk tolerance

State regulations Capital adequacy A. M. Best ratings Underwriting results BCAR and RBC ratio Liabilities Taxes Inflation risks Time horizon AASCIF Conference | July 2016 11 Investment Portfolios Asset Allocation Short Term A-AAA Bonds BBB Bonds IG Fixed Income Stock

Schedule BA High Yield AASCIF 1% 75% 11% Specialists 2% 64% Multi-Line 1% GAAP/IFRS Inv. Real Mortgage Estate Loans 87% 9% 1% 1% 0% 0% 3% 18% 84% 11% 1% 2% 0%

0% 4% 69% 13% 84% 3% 6% 4% 1% 2% 13% 1% 33% 12% 47% 37% 6% 1% 10% 0% 17% Workers' Comp 2% 72% 11% 84% 11% 1%

2% 0% 1% 4% P/C Industry 1% 63% 10% 75% 19% 2% 3% 0% 1% 6% Other Outliers: Bonds GAAP/IFRS Stocks GAAP/IFRS, P/C industry* Alternatives Multi-line, GAAP/IFRS Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 12 Bond Portfolios Bond Sector Allocation Treasury Credit

Muni Total Credit MBS CMBS ABS Total Structure AASCIF 10% 45% 15% 60% 21% 6% 3% 29% Specialists 9% 51% 26% 77% 10% 3% 2% 14% Multi-Line 5% 35%

37% 73% 11% 4% 7% 22% GAAP/IFRS 9% 74% 0% 74% 16% 0% 0% 16% Workers' Comp 14% 39% 22% 62% 16% 4% 4% 24% P/C Industry 12% 35% 34%

69% 9% 4% 5% 18% Biggest differences are in muni allocations, but total exposures to credit risk are similar Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 13 Bond Credit Ratings Bond Quality Distribution NAIC 1 A-AAA NAIC 2 BBB Total Inv Grade NAIC 3 BB NAIC 4 B NAIC 5 CCC NAIC 6 C-CC Average SVO Total BIG Rating AASCIF 86% 13% 98% 1.1%

0.5% 0.1% 0% 2% 1.2 Specialists 76% 21% 97% 2.0% 0.7% 0.1% 0% 3% 1.3 Multi-Line 80% 16% 96% 2.1% 1.7% 0.4% 0.1% 4% 1.3 GAAP/IFRS 71% 26%

97% 2.2% 0.5% 0.1% 0% 3% 1.3 Workers' Comp 85% 13% 98% 1.4% 0.7% 0.2% 0% 2% 1.2 P/C Industry 83% 14% 96% 2.0% 1.3% 0.2% 0.2% 4% 1.2 Underweight BBBs, compared to the corporate market

Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 14 Very Similar Strategies IG Fixed Income Stocks Non-core Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 15 Surplus Exposures Market Valued Assets as a % of Surplus Stock High Yield Sched. BA Total AASCIF 28% 4% 4% 36% Specialists 29% 6% 4% 38% Multi-Line 9% 10% 16%

35% GAAP/IFRS 121% 4% 19% 144% Workers' Comp 31% 5% 4% 40% P/C Industry 37% 5% 4% 47% Again, 5 of 6 are very similar Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 16 Insurer Objectives Typical investment objectives for insurers: Cash flows to pay future obligations Investment income Investment income provides much of the industrys profits Stakeholders give little credit for capital gains Stable / growing capital (i.e., limits on investment risks)

Portfolio total returns (income plus price appreciation) Constraints often limit active management Bonds are ideal for the first three objectives. Returns are typically evaluated by asset class, with the asset allocation considered fixed. AASCIF Conference | July 2016 17 Underwriting and Operating Results Loss Ratio Expense LAE Ratio Ratio PH Div. Ratio Combined Ratio Inv. Inc. Ratio Operating Ratio AASCIF 63% 14% 19% 10% 106% 21% 85% Specialists 54% 13% 24% 1%

92% 8% 84% Multi-Line 55% 13% 30% 0% 98% 12% 86% GAAP/IFRS 82% 13% 13% 23% 131% 44% 87% Workers' Comp 56% 14% 24% 4% 98% 14% 84% P/C Industry

57% 12% 28% 1% 98% 9% 89% Investment income ratio drivers: Invested asset to premium leverage Allocations to stocks and municipal bonds Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 18 Combined, Investment Income, and Operating Ratios 131% 106% 98% 98% 98% 92% Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements AASCIF Conference | July 2016 19 Insurer Risk Tolerance Varies with an insurers financial strength; more capital allows more risk Insurance operations use up much of the typical insurers risk budget

Low volatility investments become the default choice Some allocation to equities and other asset classes helps diversify insurance and fixed income risks Much of this diversification is a long term economic benefit; different accounting treatments for assets and liabilities reduce the short term benefit Bonds are a safe choice to support inherently risky underwriting and reserving activities AASCIF Conference | July 2016 20 Insurer Time Horizon In theory, insurers are long term institutional investors, except: Quarterly and annual financial statements filed with state regulators Annual financial strength review by A.M. Best (for rated insurers) Quarterly earnings announcements for stock companies Annual premium rate cycle Annual employee compensation Monthly or quarterly investment performance evaluation Shorter time horizon makes bonds relatively more attractive, and higher risk/higher reward investments relatively less attractive AASCIF Conference | July 2016 21 Bond Maturity Distribution >20 Yrs Average

Maturity 9% 11% 7.3 40% 6% 2% 5.5 30% 34% 15% 9% 7.8 3% 33% 25% 39% NA 8.6 Workers' Comp 15% 38% 29% 9% 9% 6.9 P/C Industry 16%

37% 33% 9% 5% 6.1 <1 Yr 1-5 Yrs 5-10 Yrs 10-20 Yrs AASCIF 12% 40% 28% Specialists 14% 38% Multi-Line 12% GAAP/IFRS Specialists are the outlier, with moderately shorter portfolios Managing interest rate risk? Shorter tail? Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements AASCIF Conference | July 2016 22 Bond Maturity Distribution Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements AASCIF Conference | July 2016

23 U. S. Insurance Accounting U.S. insurers prepare financial statements for state regulators using Statutory Accounting Principles (SAP) Developed by the National Association of Insurance Commissioners (NAIC), and approved by state legislatures Several key differences from GAAP accounting Investment grade bonds are reported at cost Only realize a gain or loss if a bond is sold prior to maturity Makes investment grade bonds seem almost risk-free Equities and most alternative investments are reported at fair value High yield bonds are reported at lower of cost or market NAIC focuses on the safety of policyholders and claimants. Accounting rules are designed to encourage lower risk, bond-heavy portfolios. AASCIF Conference | July 2016 24 U.S. Insurance Regulations Each state creates its own insurance regulations, with guidance from the NAIC State regulations address insurer investments Require minimum allocations to lower risk investments Limit allocations to higher risk investments Lag behind evolving capital markets Typical state regulations include limits on: BBB-rated and high yield bonds Common stocks Investment real estate Securities issued outside the U.S. or Canada Non-USD securities (limited to hedging non-USD liabilities) Investment grade bonds are again the default choice, with few state limits AASCIF Conference | July 2016

25 U.S. Insurer Rating Agencies A.M. Best is the pre-eminent insurance rating agency Although ratings are not required, lack of a rating can be a problem Most commercial insurers, including workers comp, have to maintain at least an Arating Most state funds are not rated A.M. Best evaluates insurers investment strategies in light of their operating results, reserves, and capital adequacy Insurers need to justify any departures from the standard portfolio to their A.M. Best analyst. AASCIF Conference | July 2016 26 U.S. Insurer Capital Adequacy Testing A.M. Best and the NAIC have capital adequacy tests Actual capital is compared to a required capital, calculated by applying risk charges to investment and insurance risks. Riskier activities receive higher risk charges. Historically, investments did not impact the average p/c companys capital adequacy tests A.M. Best and the NAIC are substantially revising their tests, and increasing risk charges for many investments We do not expect wholesale changes as a result, but higher risk investments public equity, high yield bonds, and most alternatives may come under greater scrutiny Investment grade bonds receive the lowest risk charges. AASCIF Conference | July 2016 27 Capital Adequacy Leverage Ratios

Surplus Leverage Premium Reserve Total RBC Ratio AASCIF 0.4 1.8 2.2 Specialists 0.9 1.4 Multi-Line 0.9 GAAP/IFRS Investment Leverage Surplus Premium 838% 2.9 7.1 2.3 925% 2.5 2.8 1.7 2.6 512% 2.7

3.0 0.4 2.8 3.2 NA 3.7 9.9 Workers' Comp 0.6 1.6 2.2 NA 2.7 4.9 P/C Industry 0.7 0.9 1.6 620% 2.0 2.6 Prepared by Conning, Inc. Sources: 2015 A. M. Best Company used by permission and publically available company financial statements. AASCIF Conference | July 2016 28 The Results for U.S. Insurers Overweight: Underweight:

Total credit exposure BBB-rated bonds (extra yield, still IG) Interest rate risk High yield bonds (market weight ~5%) Inflation risk Mortgage loans (core asset for life) Reinvestment risk Tangible assets (inflation hedge) Tax risk Sch. BA assets (diversifying assets) Liquidity AASCIF Conference | July 2016 29 Without Industry Constraints Report all assets at fair value No state regulations

Exempt from income tax No A.M. Best rating, RBC or BCAR Results portfolios look more like pension assets than insurance portfolios IG Fixed Income Stocks Non-core Prepared by Conning, Inc. Source: Publically available company financial statements. AASCIF Conference | July 2016 30 Canadian Funds 2014 Asset Allocations Bonds Stocks Real Estate Portfolio, CAD bns Tangible Other Alberta $10.0 35% 38% 17% 10% - British Columbia $14.6

22% 48% 20% 10% - Manitoba $1.5 42% 43% 12% 3% - New Brunswick $1.3 27% 52% 15% 1% 5% Newfoundland $1.1 27% 65% 8% - - Northwest Territory $0.3

38% 48% 14% - - Nova Scotia $1.5 30% 60% 10% - - $20.0 43% 43% 7% - 7% $0.2 29% 55% 15% 1% - $12.1 38% 46% 12%

2% 2% Saskatchewan $2.0 32% 58% 10% - - Yukon $0.2 46% 54% - - - $64.9 34% 51% 12% 2% 1% Ontario Prince Edward Island Quebec Total/average Prepared by Conning, Inc. Source: Publically available company financial statements. AASCIF Conference | July 2016 31

Implications of the GAAP/IFRS Allocations Advantages: Costs: Higher expected long term returns Better diversification of investment and insurance risks Investment income and capital have much more volatility Requires either more capital, or the ability to continue operations with impaired capital Non-core assets classes have higher fees, require more oversight Adds complexity to ERM and ALM work Better protection against inflation AASCIF Conference | July 2016 32 Conclusions P/C insurers face material risks due to concentration in one subclass of assets Their ability to reduce that concentration is partly constrained by outside factors However, insurers can still: Monitor and manage those risks Take advantage of opportunities at the margin BBB-rated bonds Mortgage loans

Low beta stocks CLOs/CDOs Market valued assets with sticky prices Illiquid securities, such as private placements AASCIF Conference | July 2016 33 Notes Data sources are 2015 A. M. Best Company (A.M. Best) - used with permission and publically available company financial statements Unless otherwise noted, data is as of year end 2015 (calendar year end for all but the three non-competitive state funds, which report on a fiscal year basis and are as of June 30, 2015) Unless otherwise noted, all figures are in thousands of U.S. dollars, and represent an insurers entire book of business Both individual companies and consolidated groups are included in the peer analysis; the latter are labelled as such Since RBC is not reported on a consolidated basis, we used the ratio of the largest company in the group Only unaffiliated investments are included in the analysis The Pennsylvania state fund had a deficit at year end 2015, and so is excluded from all AASCIF peer calculations involving PHS Stock includes public common and preferred stocks; the latter makes up less than 5% of total stock holdings The GAAP/IFRS peer group may not be directly comparable to the other peer groups that use SAP The GAAP/IFRS financial statements do not include the same level of investment detail as U.S. SAP financials AASCIF Conference | July 2016 34 Disclosures Conning, Inc., Goodwin Capital Advisers, Inc., Conning Investment Products, Inc., a FINRA-registered broker dealer, Conning Asset Management Limited, Conning Asia Pacific Limited and Octagon Credit Investors,

LLC are all direct or indirect subsidiaries of Conning Holdings Limited (collectively, Conning) which is one of the family of companies owned by Cathay Financial Holding Co., Ltd., a Taiwan-based company. Conning has offices in Boston, Cologne, Hartford, Hong Kong, London, New York, and Tokyo. Conning, Inc., Conning Investment Products, Inc., Goodwin Capital Advisers, Inc., and Octagon Credit Investors, LLC are registered with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 and have noticed other jurisdictions they are conducting securities advisory business when required by law. In any other jurisdictions where they have not provided notice and are not exempt or excluded from those laws, they cannot transact business as an investment adviser and may not be able to respond to individual inquiries if the response could potentially lead to a transaction in securities. Conning Investment Products, Inc. is also registered with the Ontario Securities Commission. Conning Asset Management Limited is Authorised and regulated by the United Kingdom's Financial Conduct Authority (FCA#189316), and Conning Asia Pacific Limited is regulated by Hong Kongs Securities and Futures Commission for Types 1, 4 and 9 regulated activities. Conning primarily provides asset management services for third-party assets. Conning predominantly invests client portfolios in fixed income strategies in accordance with guidelines supplied by its institutional clients. All investment performance information included within this material is historical. Past performance is not indicative of future results. Any tax related information contained within this presentation is for informational purposes only and should not be considered tax advice. You should consult a tax professional with any questions. For complete details regarding Conning and its services, you should refer to our Form ADV Part 2, which may be obtained by calling us. Legal Disclaimer 2016 Conning, Inc. This document and the software described within are copyrighted with all rights reserved. No part of this document may be distributed, reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any language in any form by any means without the prior written permission of Conning. Conning does not make any warranties, express or implied, in this document. In no event shall Conning be liable for damages of any kind arising out of the use of this document or the information contained within it. This document is not intended to be complete, and we do not guarantee its accuracy. This document contains information that is confidential or proprietary to Conning (or their direct and indirect subsidiaries). By accepting this document you agree that: (1) if there is any pre-existing contract containing disclosure and use restrictions between your company and Conning, you and your company will use this information in reliance on and subject to the terms of any such pre-existing contract; or (2) if there is no contractual relationship between you and your company and Conning, you and your company agree to protect this information and not to reproduce, disclose or use the information in any way, except as may be required by law. This material is for informational purposes only and should not be interpreted as an offer to sell, or a solicitation or recommendation of an offer to buy any security, product or service, or retain Conning for investment advisory services. This information is not intended to be nor should it be used as investment advice. CTech ID 4810088 AASCIF Conference | July 2016 35

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