1 Beyond the Low Interest Rate Environment INSURANCE SUMMIT 2016 Presented by: Dan Byrnes, CFA Principal & Senior Portfolio Manager AAM - Insurance Investment Management Reproduction or use of these materials for any other purpose or by or for any individuals is strictly prohibited. The information contained in this presentation has been obtained from sources that AAM believes to be reliable, but AAM does not represent or warrant that it is accurate or complete. The views in this presentation are those of AAM and are subject to change, and AAM has no obligation to update its opinions or the information in this presentation. Neither AAM, nor any of their respective officers, directors, members, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents. The securities discussed in this presentation may not be suitable for all investors. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information in this presentation is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.

What We Will Discuss  Brief Overview of the Economic Landscape  Some Key Dos and Don’ts in Investing  Current Investment Considerations

What We Will Discuss: Part 1 Brief Overview of the Economic Landscape

Economic Landscape: Central Banks  Fed words have become a key monetary policy tool  The Fed continues to look at incoming data and guide lower  Now expecting 2 rate hikes this year, down from 4  Other Central Banks remain much more accommodative  What’s the Fed seeing?

Economic Landscape: Inflation and Jobs Source: Bureau of Labor Statistics  Inflation expectations remain well below 2%  Unemployment has come down, but labor market signals are mixed  Moderate wage growth  Low participation Source: Federal Reserve

Economic Landscape: China and Commodities  Can China engineer a soft landing?  There are implications for oil and metals demand  Impacts for mining/oil-based economies Source: BloombergSource: National Bureau of Statistics of China

Now what  US GDP forecast grew to 2.4% in 2015, world growth expected to be 3.4%  1Q 2016 grew 0.5%  We believe 2016 growth will fall short of expectations  Inflation is not likely to rise meaningfully  The Fed’s messaging remains crucial  Treasury rates are not expected to rise meaningfully  Oil prices will likely remain volatile, but are expected to rise modestly later this year  China remains a question mark Source: Bureau of Economic Analysis, Bloomberg, AAM

What We Will Discuss: Part 2 Key Dos and Don’ts  Duration  Risk Asset Allocation

Duration: Stick to Your Knitting  Develop a duration target based on your liabilities and surplus position  We are often asked: With rates so low, should we shorten duration and wait for a better day?  Short Answer = “No” Source: AAM, CMS BondEdge

The Right Amount of Risk Assets  Risk Asset decisions should be viewed in the context of underwriting decisions and capital strength  Amount of leverage  Frequency and severity of losses  Expansion of new business  Always considered as a % of surplus Impact of Common Stock on Surplus

What We Will Discuss: Part 3 Current Investment Considerations  High Quality Tax Exempt Municipals  Corporate Bonds  High Yield  Convertible Bonds

Investment Considerations: High Quality Tax Exempt Municipals Ten year tax equivalent municipal yields reflect the Prime Municipal Yield Curve adjusted to a pre-tax equivalent using a tax adjustment factor of Source: Bloomberg, Thomson Municipal Market Data as of 04/28/16.  Low correlation in tax-exempt munis provides opportunities to add value 10 Year Tax-Exempt Municipal Yield Spread Relative to Treasuries (tax-adjusted)

Investment Considerations: Investment Grade Corporate Bonds  Company credit metrics are weakening and investors are not being compensated for extra volatility  Be defensive in posturing Source: CapitalIQ (universe includes 340 credits, excluding financials, utilities and commodities), AAM

Investment Considerations: High Yield Corporate Bonds  The B/BB rated market offered opportunities in February  Yields have fallen too, too fast in this sector  Low quality (CCC rated) bonds remain illiquid and volatile  We expect defaults to rise, mostly in Energy and CCC rated bonds Source: Bank of America Merrill Lynch AAM through 4/26/2016

Investment Considerations: Convertible Bonds  What are these?  A bond that offers the investor the opportunity to exchange it for common stock of the issuer  Has a maturity date, coupon and seniority in the capital structure  Benefits of owning  Provides exposure to the stock market with less volatility  Favorable accounting treatment  Carried as bonds not stock  Less surplus volatility  Smaller RBC impact relative to stocks

That’s All Questions?