This communication is intended for investment professionals only and must not be relied on by anyone else.

Bruce Porteous

Investment Director - Insurance Solutions

Owen McCrossan

Investment Director – Multi-asset Investing

FT

Managing Assets for Insurers Conference

24 February 2015

Analysing Allocation Trends in the Global Insurance Industry

The Importance of a Liability Aware Outlook Powerful and Irreversible Drivers of Global Insurance Asset Allocation Trends

• Regulatory change

Market consistent balance sheet and risk-based capital requirement

Global and pensions

Very high degree of technical complexity

• Market volatility

Alternative assets and use of diversification

Enhanced ALM

To stabilise the balance sheet

• Low interest rate environment

Alternative assets and use of diversification

Enhanced ALM

To generate capital efficient yield

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The Drivers of Insurance Liability Aware Asset Management Markets are Volatile - Spreads on Euro Corporate Bonds

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Source: Bank of America Merrill Lynch.Note: Spreads (in basis points) over German government bonds for both plain vanilla bonds and bonds with embedded options (for which the value of the option is stripped using proprietary models). ESRB Risk Dashboard, December 2014

The Drivers of Insurance Liability Aware Asset Management Insurer Asset-Liability Duration Mismatches

4Source: EIOPA Insurance Stress Test 2014

The Drivers of Insurance Liability Aware Asset Management Low Interest Rates - Global 10-year Government Bond Yields

5Source: FT, 19 February 2015

The Drivers of Insurance Liability Aware Asset Management European Insurer Guarantees

6Source: EIOPA Insurance Stress Test 2014

Risk premia – nice to have, but

10 years (p.a) 25 years (p.a.) 50 years (p.a.)Equities 5.9% 6.4% 4.7%Treasuries 3.5% 3.8% 2.1%Corporate Bonds 6.0% 6.1% 2.8%Property 3.9% 2.5% 3.4%

7Deutcsche Bank Long Term Asset Study, Standard Life InvestmentsUS markets except UK Property

Excess return over cash

... are volatile

8Source: CRSP, Barclays Research

Source: IPD UK Monthly Property Index, All Property; Federal Reserve Trade-Weighted Exchange Value of US Dollar vs 6 Countries; Dow Jones UBS – Commodity Index; Barclays Capital Global Corporate Index, Excess Returns; Barclays Capital Emerging Markets Index, Excess Returns; Barclays Capital US High Yield Index, Excess Returns; Standard Life Investments, 31 December 2011

Unstable risk characteristics

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Property FX Basket CommoditiesCorporate

BondsEmerging

Market BondsHigh Yield

Bonds

2000-2007 2008-2011

Correlation of Global Equities with other market sectors

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Buy portfolio insurance?

Historically you would have needed to pay 1.7% per quarter, on average, to cap losses at 5%

0

200

400

600

800

1000

1200

1400

1600S&P 500 Total Return Index Protected index, no cost

Protected index allowing for costCash Return Index (3m rates)

Tail risk protection as many imagine it would be. Fantastic if it was affordable

2.2% p.a.

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Portfolio construction - a strategy with good protection

11Source: Standard Life Investments, Bloomberg

But not systematically paying for it

12Source: Standard Life Investments, Bloomberg

Bringing it together

13Source: APT, Standard Life Investments, February 2015

Stand Alone risks Correlations Position removal

Risk Comparison

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* Source: FactSet, MSCI World (£) net of tracker fund fee. ** Source: Standard Life Investments, net performance. *** Source: Standard Life Investments, gross performance from 01 July 2006 to 31 January 2015Source: Standard Life Investments, gross performance from 12 June 2006 to 31 January 2015. Portfolio performance is based on the £, institutional pooled pension portfolio

Delivering returns with less risk

• Volatility: GARS 5.4% Global Equities 14.2%

(annualised, using monthly data from 01/07/2006 to 31/01/2015)

• Maximum Drawdown: GARS -13.9% Global Equities -37.8%(using daily data to 31/01/2015)

• VaR (95%, weekly): GARS -1.3% Global Equities -3.6% (using weekly data to 31/01/2015)

Up months*** 75/103 vs 63/103(GARS vs Global Equities)

Upside capture 32.7% Downside capture -2.5%

Questions?

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The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up.

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