13-1524 in depth the role of equities and alternative assets in p c insu

8/12/2019 13-1524 in Depth the Role of Equities and Alternative Assets in P C Insu

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2 JANUARY 2014 | IN DEPTH

as security duration and regulatory capital charges. In this

paper, we utilize CUSIP-level investment portfolio holdings as

of June 2013 for all property and casualty insurance companies

with over ten billion dollars in cash and investments.1The

resulting sample consists of 25 large insurance firm

portfolios, which account for nearly two-thirds of the entire

industrys unaffiliated investment holdings.2

To analyze the P&C industry as a whole, we aggregate security-

level data from these 25 portfolios into representative asset

classes. The market-value weighted asset allocation for the

property and casualty sector is shown in Figure 1.

FIGURE 1: AVERAGE ASSET ALLOCATION FOR TOP 25 PROPERTY AND

CASUALTY INSURERS

Source: PIMCO, SNL Financial

Municipal33%

Corporate bonds25%

Equities and alternatives14%

Agency/Agency MBS9%

Non-Agencystructured

8%

Treasuries

and TIPS7%

International3%

Other0%

P&C Universe

Regulatory capital cost calculation for U.S. P&C

insurance companies

Insurance companies in the United States are regulated by the

National Association of Insurance Commissioners (NAIC). Firms

are required to hold a certain amount of regulatory capital

(risk-based capital or RBC) that is based on a supervisory

assessment of the risks within their investment portfolio, their

insurance underwriting practices, as well as several other

factors. Insurance companies often hold capital well in excess

of the regulatory minimums to account for potential outflows.

The NAIC proscribes an algorithm to determine total capital

requirements as well as capital thresholds that trigger specific

regulatory interventions. For property and casualty (P&C)

insurers, the final RBC formula calculates total required capital

as a combination of six subcategories of risk:

(1

Where R0is the applicable charge for investments in affiliatesand subsidiaries,R

1is the charge for the fixed income portion

of the investment portfolio, R2is the charge for the equities

and alternatives portion of the investment portfolio, R3is for

the credit risk in receivables such as reinsurance, R4is for

their underwriting risk reserves and R5for underwriting risk

on net written premiums. The marginal effect of changes in

any single charge on a firms total capital requirements is

related to the other regulatory capital charges, as follows:

(2)

Each of these categories (from R1toR

5) has its own calculation

methodology and associated exceptions and adjustments. The

fixed income portfolio (R1)base charges for P&C insurers by

NAIC rating are shown in the following table:3


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IN DEPTH | JANUARY 2014 3

TABLE 1: BASELINE RBC CHARGES: P&C INSURERS

NAIC ratingEquivalent

ratingRBC

charge

Federal government bonds or bonds explicitly

guaranteed by the federal government- 0.0%

Cash, non-government money

market funds- 0.3%

NAIC 1 A 0.3%

NAIC 2 BBB 1.0%

NAIC 3 BB 2.0%

NAIC 4 B 4.5%

NAIC 5 C 10.0%

NAIC 6/default D 30.0%

Source: NAIC

For P&C companies, the baseline R2charge, which covers

common stocks, ETFs, mutual funds and many alternatives

(equity/alts for short) is 15%: higher than the charge for

any non-defaulted bond. This base charge has led many in

the insurance industry to maintain a very low allocation in

these investments or to avoid them altogether.

However, our analysis shows that the marginal or effectiveequities and alternatives charge is lower oftensubstantially

lower than the 15% baseline, as the regulatory covariance

adjustment (Equation 1) implicitly assumes the risk categories

(R1to R

5) are uncorrelated.

Empirical findings on regulatory cost calculations

In this section, we estimate the marginal change in RBC

requirements from incremental changes in the allocation

to equities and alternatives for every insurer in our sample:

We first calculate the R1and R2charges for each P&Ccompany in our universe from the security level holdings

in their investment portfolio.

We then assume that a fraction of the total regulatory

capital is due to affiliates (R0). NAIC research (Property &

Casualty Industry RBC Results for 2011) shows that R0

charges typically fluctuate between 10% and 15%. For

simplicity we assume that 10% of the total RBC charge

comes from affiliates (this assumption does not materially

impact subsequent calculations).

Given an R0 charge, we then use Equation 1 along with

the total reported RBC for each firm, to infer the total

unadjusted regulatory capital due to underwriting and

receivables 23

24

25(R ).R R+ +

We then estimate the total effect of additional investments

in equities and alternatives on RBC assuming that they

are funded evenly from the existing fixed income portfolio.We call the total change in RBC due to a marginal increase

in the equities and alternatives allocation the net effective

equity charge.4

Figure 2 contains the distribution of estimated net effective

equity charges for the firms in our sample.

FIGURE 2: DISTRIBUTION OF NET EFFECTIVE EQUITY CHARGES FOR

TOP P&C FIRMS

00% 2% 4% 6% 8% 10% 12% 14% 16%

5

10

15

20

2530

Percentofcompanies

Net effective equity charge

Frequency of net effective equity charges vs. baseline charge

Source: PIMCO

All firms in the sample have a net effective equity charge that

is notablylower than the baseline charge (15%), and the

modal firms effective equity charge is only two percent. This

translates to an effective capital discount of 87% from the

baseline charges.

Asset allocation with additional equities and alternatives

The substantial discounts provided by the covariance

adjustment suggest that insurers may benefit from incremental


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investments in equities and alternatives without significant

additional capital costs. In this section, we allow our

representative insurer to make a five percentage point

investment in the equities and alternatives portfolio funded

from the fixed income portion of the portfolio and we optimize

the portfolios asset allocation maintaining the increased

allocation to equities and alternatives. For this optimization,

we specify the following parameters and constraints:

We employ PIMCOs forward-looking assumptions

governing asset level returns;

We impose constraints on investment allocations, duration

(to maintain an assumed duration-match with the

liabilities) and regulatory capital;

We minimize tail risk (measured by the 95thpercentile CVaR)5.

We evaluate the optimal asset allocations with and without

this additional investment in alternatives. The appendix

contains the details of the optimization process, including

all return assumptions and constraints.

FIGURE 3: OPTIMAL ALLOCATIONS WITH INCREMENTALEQUITIES AND ALTERNATIVES

0

2

4

6

8

10

0% 2% 4% 6% 8% 10% 12%

E

xpectedreturn(%)

Conditional value at risk (95%)

Optimal allocations

All constraints With 5% more equities and alternatives

Current allocation

Optimal allocation

Optimal (5% more equities and alternatives)

Source: PIMCO

Hypothetical example for illustrative purposes only. Current allocation as well asoptimal allocations are detailed in Appendix, Table A2. Optimal allocation is based on PIMCOcalculations using Appendix, Table A2 and A3. "Optimal (5% more equities and alternatives)"allows for a reallocation of 5% of the portfolio into equities and alternatives from fixedincome products. Portfolio estimated returns were calculated using the median estimatedreturn assigned to each index in Appendix, Table A2. To calculate the estimated volatility andCVAR, we proxy each asset class using the portfolio holdings of the indexes provided in TableA2. To calculate the estimated volatility we employed a block bootstrap methodology. Westart by computing historical factor returns that underlie each asset class proxy from January1997 through the present date. We then draw a set of 12 monthly returns within the datasetto come up with an annual return number. This process is repeated 15,000 times to have areturn series with 15,000 annualized returns. The standard deviation of these annual returnis used to model the volatility for each factor. We then use the same return series for eachfactor to compute covariance between factors. Finally, volatility of each asset class proxy iscalculated as the sum of variances and covariance of factors that underlie that particulaproxy. CVaR is an estimate of the minimum expected loss at a desired level of significance.Transaction costs (such as commissions or other fees) are not included in the calculation ofreturns reflected. If these fees and charges were included the performance results wouldbe lower. Figure is for illustrative purposes and is not indicative of the past or futureperformance of any PIMCO product.

The attainable efficient frontier realized by increasing the

allocation to alternatives and equities can be found in Figure 3.

In the chart, the black point represents the current allocation of

the market-value weighted representative insurance portfolio;

the light blue point indicates the risk-adjusted optimal portfolio

holding the equities and alternatives allocation constant; and

the dark-blue point displays the optimal portfolio allowing

additional investments into equities and alternatives.

The optimal allocations with additional alternatives

investments are shown in Table 2.

In the optimal portfolio, we estimate that P&C insurers would

decreasetheir allocation to Agency MBS and international

bonds, and increaseit for corporates, municipals and non-

Agency structured finance securities. The new portfolio is

estimated to yield 69 bps in additional returns, holding the

tail risk constant. Given the size of the unaffiliated investment

portfolios across the P&C insurance industry, this translates,

based on the modeling of our hypothetical insurer portfolio,

to an additional $7.8 billion in industry-wide annual returns.

We find that alternatives are heavily favored due to increased

diversification benefits in the representative P&C insurance

portfolio relative to equities alone. Our results suggest

increasing the combined weight of alternatives from 3% to

10%, and actually reducing the plain equity exposure in the

portfolio, despite an overall increase in the total allocation to

equities and alternatives as a category.


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TABLE 2: OPTIMAL ASSET ALLOCATIONS WITH ADDITIONAL

INVESTMENTS IN EQUITIES AND ALTERNATIVES:

Corporate bondsMunicipal Equities and alternatives

Agency/Agency MBS Non-Agency structured

Other

Treasuries and TIPS

International

33%

25%

13%

9%

8%

7%

3% 0%0%0%

Current allocation +5% Equities and alternatives

34%

30%

18%

4%

2%

11%

Asset class CurrentOptimal w/+5%

equities andalternatives

Estimated return 3.4% 4.1%

Estimated 95% CVaR 7.9% 7.9%

Estimated YTM 3.3% 3.8%

Estimated duration 5.0 5.2

Alternatives 3.0% 10.0%

Equities 11.0% 8.0%

Capital ratio 315.0% 309.0%

Source: PIMCO, SNL FinancialHypothetical example for illustrative purposes only.Current allocation aswell as optimal allocations are detailed in Appendix, Table A2. Optimal allocation is based onPIMCO calculations using Appendix, Table A2 and A3. "Optimal (5% more equities andalternatives)" allows for a reallocation of 5% of the portfolio into equities and alternativesfrom fixed income products. Differences in the displayed 5% equities and alternativesallocation is due to rounding. Portfolio estimated returns were calculated using the medianestimated return assigned to each index in Appendix, Table A2. To calculate the estimatedvolatility and CVAR, we proxy each asset class using the portfolio holdings of the indexes

provided in Table A2. To calculate the estimated volatility we employed a block bootstrapmethodology. We start by computing historical factor returns that underlie each asset classproxy from January 1997 through the present date. We then draw a set of 12 monthly returnswithin the dataset to come up with an annual return number. This process is repeated 15,000times to have a return series with 15,000 annualized returns. The standard deviation of theseannual returns is used to model the volatility for each factor. We then use the same returnseries for each factor to compute covariance between factors. Finally, volatility of each assetclass proxy is calculated as the sum of variances and covariance of factors that underlie thatparticular proxy. CVaR is an estimate of the minimum expected loss at a desired level ofsignificance. Transaction costs (such as commissions or other fees) are not included in thecalculation of returns reflected. If these fees and charges were included the performanceresults would be lower. Figure is for illustrative purposes and is not indicative of the pastor future performance of any PIMCO product.

As alternatives have higher capital charges, one would

expect that increasing the alternatives allocation increases

total RBC6charges slightly. We estimate that the total capital

ratio, which is inversely related to RBC7, would decline from

315% to 309% for the average firm in the analysis and that

the median firm would have to increase capital by 0.9% to

retain their original capital ratio.

Of course, these are only summary estimates. The firms with

the largest covariance benefits in our sample only require

0.13%0.30% additional capital (as opposed to 0.90% for the

median firm) to retain the same capital ratio: we estimate that

these firms would potentially experience a tail-risk-adjusted

increase of 2022 bps in net returns (assuming a cost of

capital in the 6%12% range) by reallocating 5% of their

fixed income portfolio to alternatives. Once the covariance

adjustment is taken into account, firms in our sample are

likely to see increases in risk and regulatory capital-adjusted

estimated returns by increasing their allocation to alternatives

Conclusion

In this paper, we analyze the P&C Insurance industryinvestment portfolio using market-value weighted security-leve

holdings of the largest P&C Insurance firms (with assets in

excess of $10 billion).

Examining the regulatory capital charges for the firms in the

sample, we observe that:

The insurance companies in the sample face effective

charges for equities and alternatives that are notably

lower than the baseline value,

This discount increases for firms with portfolios that haverelatively higher non-investment portfolio regulatory

capital charges,

By adding or increasing exposure to equities and alternatives

P&C insurers can potentially realize non-negligible

enhancements in expected portfolio returns net of

additional capital costs for a reasonable range of cost

of capital.


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Appendix

A.1 List of firms included in the analysis

The following firms are included in the P&C firm universe.

According to year-end 2012 regulatory filings, this represents

all P&C firms with investment portfolios greater than

$10 billion, excluding Berkshire Hathaway. These firms

represent over 60% of the total unaffiliated assets of the P&C

industry excluding Berkshire Hathaway. Every firm is analyzed

at the group level.

TABLE A1: LIST OF FIRMS INCLUDED IN THE ANALYSIS

Firm

ACE Ltd. (SNL P&C Group)

Alleghany Corp. (SNL P&C Group)

Allianz Group (SNL P&C Group)

Allstate Corp. (SNL P&C Group)

American Family Mutual (SNL P&C Group)

American International Group (SNL P&C Group)

Auto-Owners Insurance Co. (SNL P&C Group)

Chubb Corp. (SNL P&C Group)

CNA Financial Corp. (SNL P&C Group)

Erie Insurance Group (SNL P&C Group)

Fairfax Financial Holdings (SNL P&C Group)

Farmers Insurance Group of Cos (SNL P&C Group)

FM Global (SNL P&C Group)

Hartford Financial Services (SNL P&C Group)

Liberty Mutual (SNL P&C Group)

Munich-American Holding Corp. (SNL P&C Group)

Nationwide Mutual Group (SNL P&C Group)

Progressive Corp. (SNL P&C Group)

State Farm Mutl Automobile Ins (SNL P&C Group)

Swiss Re Ltd. (SNL P&C Group)

Tokio Marine Group (SNL P&C Group)

Travelers Companies Inc. (SNL P&C Group)

USAA Insurance Group (SNL P&C Group)

W. R. Berkley Corp. (SNL P&C Group)

Zurich Insurance Group Ltd. (SNL P&C Group)

Source: SNL Financial

A.2 Optimization in a risk factor based framework

PIMCO has developed a platform to analyze and optimize

portfolios in the presence of investment constraints and

assumptions regarding future returns, volatilities and

correlations. Given any investment portfolio and corresponding

benchmark indices, PIMCO generates regime-based estimates

of volatilities and correlations for underlying risk factors,

alongside forward-looking estimates of expected returns

from their internal capital markets assumption process. This

framework is discussed in detail in a previous paper (Portfolio

Optimization in an Evolving Regulatory Environment: An

Application to U.S. Bank Available for Sale Portfolios, PIMCO

Quantitative Research, June 2013). The relevant aspects of

the analysis are the following:

Optimization and Tail Risk:Typical portfolio optimization

routines generate mean-variance efficient portfolio

allocations. However, capital requirements and investment risks

at financial institutions such as P&C insurers are generally

based on periods of extreme loss. To this end, we calculate

a series of mean-tail risk efficient portfolios that minimize

tail losses as defined by the conditional value at risk (CVaR)at the 95thpercentile.

Asset return assumptions:On a biannual basis, PIMCO

reviews its views on expected returns for a wide range of

global asset classes. This process is based on a combination

of historical data, valuations, model-based forecasts and

trade desk views by specialists. We map the market-

weighted P&C insurance allocation portfolio to benchmark

indices based on security-level information on asset class

and estimated duration. The mapping of the market

weighted average insurance portfolio to asset specificbenchmarks and the corresponding return assumptions

can be found below (as of Q3 2013):


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TABLE A2: RETURN ASSUMPTIONS AND ASSET MAPPING

Index Assigned asset classRange of estimated

10Y returns (pre-tax)Current al location Optimal

Optimal + 5% equitiesand alternatives

Barclays Fixed-Rate MBS Index Agency/Agency MBS 2.1% to 2.5% 6.69% 3.93% 3.93%

Barclays Long-Term Treasury Index Treasuries and TIPS 2.3% to 3.5% 1.17% 0.00% 0.00%

Barclays U.S. Treasury Index Treasuries and TIPS 1.9% to 2.3% 0.40% 0.00% 0.00%

JPMorgan GBI Global ex-US USD Hedged International/EM 2.1% to 2.5% 2.16% 0.00% 0.00%

Barclays U.S. TIPS:1-10 Yr Index Treasuries and TIPS 2.5% to 2.9% 0.23% 8.42% 2.01%

Barclays 1 Yr Muni Index Municipal 1.6% to 2.0% 9.83% 0.00% 0.00%

CSFB Leveraged Loan Index High yield/bank loans 3.1% to 3.5% 0.55% 0.00% 0.00%3 Month USD Libor Index Other 1.1% to 1.5% 0.27% 0.00% 0.00%

Barclays Asset-Backed Securities Index ABS 2.3% to 2.7% 2.74% 0.00% 0.00%

Barclays Long Muni Index Municipal 2.8% to 3.6% 11.99% 30.03% 34.48%

Barclays US TIPS Index > 10 yrs Treasuries and TIPS 3.0% to 3.8% 0.67% 0.00% 0.00%

JPMorgan EMBI Global International/EM 4.0% to 4.8% 1.32% 0.00% 0.00%

Barclays Municipal Bond 1-10 Year Blend Municipal 2.3% to 2.7% 11.39% 0.00% 0.00%

Barclays Capital Long Corp Index Corporate Bonds 3.1% to 4.7% 11.12% 0.00% 0.00%

BofA ML 1-5 Year US TIPS Treasuries and TIPS 2.1% to 2.5% 0.21% 0.00% 0.00%

6 Month US T-bill Treasuries and TIPS 1.1% to 1.5% 4.33% 0.00% 0.00%

Barclays US Corporate 3-5 Yrs Corporate Bonds 2.8% to 3.2% 11.53% 27.65% 25.86%

MARKIT PRIMEX.ARM.1 6/36 Non-Agency structured 3.9% to 4.7% 2.29% 2.53% 2.96%

Barclays US High Yield 1-3 Yr High yield/bank loans 3.5% to 3.9% 0.00% 0.00% 0.00%

Barclays US High Yield 5-10 Yr High yield/bank loans 4.1% to 5.3% 0.31% 0.00% 0.00%

Barclays US High Yield 10+ Yr High yield/bank loans 5.3% to 6.9% 1.70% 5.58% 3.90%

Barclays CMBS 1 - 3.5 Yr Non-Agency structured 3.2% to 3.6% 0.00% 8.39% 8.39%

Barclays US Agency 1-5 years Agency/Agency MBS 1.8% to 2.2% 2.25% 0.00% 0.00%

Barclays Global Agg Covered 1-3 Yrs International/EM 0.0% to 0.4% 0.00% 0.00% 0.00%

Barclays CMBS 3.5 - 6 Yr CMBS 3.1% to 3.9% 3.39% 0.00% 0.00%

S&P 500 Index with constituents Equity 4.8% to 6.4% 10.63% 10.63% 8.47%

HFRI Fund Weighted Comp Index/Cambridge

Associates US Private Equity Index (50%/50%)Alts 6.4% to 7.6% 2.84% 2.84% 10.00%

Source: PIMCOCurrent allocation is the average asset allocation (in unaffiliated investments) for P&C companies. Estimated return range assigned to each index based on a combination of methodsof pulling together historical data, valuation metrics and qualitative inputs based on PIMCO's secular views. Transaction costs (such as commissions or other fees) are not included inthe calculation of returns reflected. If these fees and charges were included the performance results would be lower. Figure is for illustrative purposes and is not indicative of the pastor future performance of any PIMCO product.


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TABLE A3: FIXED INCOME ASSET ALLOCATION CONSTRAINTS

Assigned asset class Minimum Current Maximum

ABS 0.0% 2.7% 7.7%

Agency/Agency MBS 3.9% 8.9% 13.9%

CMBS 0.0% 3.4% 8.4%

High yield/bank loans 0.0% 2.6% 7.6%

Corporate bonds 17.7% 22.7% 27.7%

International/EM 0.0% 3.5% 8.5%

Municipal 28.2% 33.2% 38.2%

Non-Agency structured 0.0% 2.3% 7.3%

Treasuries and TIPS 2.0% 7.0% 12.0%

Equities and alternatives 13.5% 13.5% 18.5%

Other 0.0% 0.3% 5.3%

Source: PIMCOMinimum and maximum allocations are Intended for study purposes only and should not be considered a recommendation

Note that municipal bonds are a prominent portion of P&C

insurance portfolios, which is partially driven by the tax benefits

offered by this asset class. To account for the tax advantage

in the optimization process, estimated municipal bond total

returns (1.6%2% for the Barclays 1 Yr. Muni Index) are

adjusted to incorporate their favorable tax treatment. The price

appreciation component of the total return is left untouched

(as they are subject to capital gains taxes), whereas the yield

portion of municipal bond returns (obtained from benchmark

returns) is tax-adjusted based on the 2013 estimate of effective

corporate tax rates as estimated by the United StatesGovernment Accountability Office (For more information on

this estimate, please consult GAO Publication 13-520).

Investment constraints:Investment committees and

boards of directors often provide guidelines that restrict

excessive allocations to particular asset classes in an attempt

to manage risk. Moreover, absent dramatic changes in the

marketplace, it is prohibitively expensive to conduct large

rebalancing exercises year to year with each incremental

reassessment of future risks. In this analysis, we incorporate

this reality by restricting optimal portfolio allocations tolie within a relatively compact neighborhood of the initial

allocation. In particular, we require each asset class to

fluctuate within +/- 5 percentage points of the current

allocation, and do not allow short exposures. The expanded

list of asset classes, the current allocation, and minimum

and maximum permissible allocations are shown in Table 2

In addition to investment limits on their asset allocation,

insurance portfolios are typically managed to match certain

risk characteristics. These are often related to the drivers

of the discounted value of projected liability and policy

payments, such as total portfolio duration. To ensure that

we retain desirable risk characteristics, and assuming that

their current durations are near their target durations we

require the total estimated duration to remain within three

months of the current value.8

Regulatory Capital:We estimate a baseline fixed income

regulatory capital charge for each benchmark index, and

require that the optimal portfolio does not require more capital

than the current allocation. As total RBC is monotonic with

respect to the R1charge, a linear constraint on the asset

allocation based on the baseline RBC charges for each asset

class is sufficient to implement this constraint.


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Fallen angels are added to the index subject to the new loan criteria. | The 3-Month LIBOR(London Interbank Offered Rate) Index is an average interest rate, determined by the BritishBankers Association, that banks charge one another for the use of short-term money (3 months) in Englands Eurodollar market. | Barclays Asset-Backed SecuritiesIndex has 5subsectors: credit and charge cards, autos, home equity loans, utility, and manufactured housing. The index includes pass-through, bullet, and controlled amortization structures. Itincludes only the senior class of each ABS issue; subordinate tranches are not included. | Barclays Long Municipal Bond Indexis a rules-based, market-value-weighted indexengineered for the long-term tax-exempt bond market. | Barclays U.S. TIPS Indexis an unmanaged market index comprised of all U.S. Treasury Inflation Protected Securities ratedinvestment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. Performance data for this index prior to 10/97represents returns of the Barclays Inflation Notes Index. | The JPMorgan Emerging Markets Bond Index Globalis an unmanaged index which tracks the total return ofU.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady Bonds, loans, Eurobonds, and local market instruments. | TheBarclays 1-10 Year Municipal Bond Index is an unmanaged index considered to be generally representative of investment-grade municipal issues having remaining maturitiesfrom 1-10 years and a national scope. | The Barclays Long Corporate Indexis a component of the Barclays U.S. Long Credit index. Barclays U.S. Long Credit Index is the creditcomponent of the Barclays US Government/Credit Index, a widely recognized index that features a blend of US Treasury, government-sponsored (US Agency and supranational), and

corporate securities limited to a maturity of more than ten years. | The BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury IndexSMis an unmanaged index comprised ofU.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 1 year and less than 5 years.| TheBarclays U.S. Corporate Indexcovers USD-denominated, investment-grade, fixed-rate, taxable securities sold by industrial, utility and financial issuers. It includes publicly issuedU.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Securities in the index roll up to the U.S. Credit and U.S.Aggregate indices. The U.S. Corporate Index was launched on January 1, 1973. | The Markit PrimeX Indextracks non-agency prime U.S. residential mortgage-backed securities. Theindex has four sub-indices comprised of 20 deals each, referencing fixed rate or hybrid ARM non-agency prime loans from 2005, 2006, and 2007. | The Barclays High Yield Index isan unmanaged market-weighted index including only SEC registered and 144(a) securities with fixed (non-variable) coupons. All bonds must have an outstanding principal of $100million or greater, a remaining maturity of at least one year, a rating of below investment grade and a U.S. Dollar denomination. | The Barclays Commercial Mortgage-BackedSecurities Indexis an unmanaged index comprised of the CMBS Investment-Grade Index, CMBS High-Yield Index, CMBS Interest-Only Index, and Commercial Conduit Whole LoanIndex (all bond classes and interest-only classes). | The Barclays U.S. Agency Indexincludes native currency agency debentures (Fannie Mae, Freddie Mac, and Federal Home LoanBank), and includes both callable and non-callable agency securities issued by U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by theU.S. government. | Barclays Global Aggregate Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of thisindex are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, CanadianGovernment securities, and USD investment grade 144A securities. | The S&P 500 Indexis an unmanaged market index generally considered representative of the stock market as awhole. The index focuses on the Large-Cap segment of the U.S. equities market. | The HFRI Equity Hedge indexis an unmanaged index that consists of a core holding of long equitieshedged at all times with short sales of stocks and/or stock index options. Some managers maintain a substantial portion of assets within a hedged structure and commonly employleverage. Where short sales are used, hedged assets may be comprised of an equal dollar value of long and short stock positions. Other variations use short sales unrelated to long

holdings and/or puts on the S&P 500 index and put spreads. Conservative funds mitigate market risk by maintaining market exposure from zero to 100 percent. Aggressive funds maymagnify market risk by exceeding 100 percent exposure and, in some instances, maintain a short exposure. In addition to equities, some funds may have limited assets invested inother types of securities. | It is not possible to invest directly in an unmanaged index.

This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject tochange without notice. This material is distributed for informational purposes only and should not be considered as investmentadvice or a recommendation of any particular security, strategy or investment product. Information contained herein has beenobtained from sources believed to be reliable, but not guaranteed.

PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction whereunlawful or unauthorized. | Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach,CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd(Company No.2604517), PIMCO Europe, Ltd Munich Branch (Company No. 157591), PIMCO Europe, Ltd Amsterdam Branch (Company No.24319743), and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial ConductAuthority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Amsterdam, Italy and Munich Branches areadditionally regulated by the AFM, CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act, and BaFinin accordance with Section 53b of the German Banking Act, respectively. PIMCO Europe Ltd services and products are availableonly to professional clients as defined in the Financial Conduct Authority's Handbook and are not available to individual

investors, who should not rely on this communication. | PIMCO Deutschland GmbH(Company No. 192083, Seidlstr. 24-24a,80335 Munich, Germany) is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie-Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG).The services and products provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely onthis communication. | PIMCO Asia Pte Ltd(501 Orchard Road #09-03, Wheelock Place, Singapore 238880, RegistrationNo. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licenceand an exempt financial adviser. The asset management services and investment products are not available to persons whereprovision of such services and products is unauthorised. | PIMCO Asia Limited(24th Floor, Units 2402, 2403 & 2405 NineQueens Road Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activitiesunder the Securities and Futures Ordinance. The asset management services and investment products are not available topersons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd(Level 19, 363 GeorgeStreet, Sydney, NSW 2000, Australia), AFSL 246862 and ABN 54084280508, offers services to wholesale clients as defined inthe Corporations Act 2001. | PIMCO Japan Ltd(Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial InstrumentsFirm) No.382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and Investment Trusts Association.Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective

jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assetswill fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interestrates, and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchangerates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will berealized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts andcalculation methodologies of each type of fee and expense and their total amounts will vary depending on the investmentstrategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees andexpenses cannot be set forth herein. | PIMCO Canada Corp.(199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada andonly through dealers authorized for that purpose. | PIMCO Latin America Edifcio Internacional Rio Praia do Flamengo, 1541o andar, Rio de Janeiro RJ Brasil 22210-906. | No part of this publication may be reproduced in any form, or referred to in anyother publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarksor 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. 2013, PIMCO.

13-1524 in depth the role of equities and alternative assets in p c insu

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