Risk Management and Your Investment Portfolio Nick Sargen Chief Investment Officer

1. Risk Management and Your Investment Portfolio Nick Sargen Chief Investment Officer November 15, 2011

2. Fort Washington Founded in 1990 $39.2 billion in assets under management1 74 investment professionals 85% hold a CFA and/or advanced degree Strong parent company What Makes Us Different? Strong capital base creates long-term thinking and patience Investment-driven business model providing a strong alignment with clients’ interests Investment teams compensated for performance over the long-term; free of short-term distractions Stability of the firm and team Firm Overview 1Assets as of 09/30/11. Includes commitments under management by Fort Washington Capital Partners Group (FW Capital), the private equity division of Fort Washington, and Peppertree Partners LLC, a subsidiary. Past performance is not indicative of future results.

3. Risk Management as an Evolving Discipline • How perceptions of risk management have changed • How portfolio managers incorporate it • How firms use it • How you can use it

4. Risk Management in its Early Days…… What, Me Worry? Source: forum.theopenmat.com

5. The 1980s-1990s Boom Era • On equities, risk management was second fiddle to returns • On fixed income, it became more prominent as derivatives and complex instruments were used • At the portfolio level, tracking error supplanted “loss of capital” as the measure most managers used • At the enterprise level, the VaR concept was deployed

6. The Pre-financial Crisis Era • Increased need to identify and control risk after the tech bubble burst and market volatility spiked • “Sophistication” and reliance on quantitative techniques won out as the way to proceed • “Heat maps” were used to identify risks with complex products • CIOs face challenges in deciding which types of securities to bless • Financial institutions hired risk managers and ERM came into being

7. Traditional Risk Analytics – Individual Securities • Market risk (interest rate, exchange rate) • Beta (for sensitivity to market changes) • Credit risk (spreads vs. treasuries) • Prepayment risk or extension risk (RMBS) • Structural risk (embedded leverage) • Illiquidity risk

8. Traditional Risk Analytics–Portfolio Considerations • Individual security limits • Guidelines based on ratings • Permissible sector bets • Correlations • Overall tracking error

9. Surprises During the Financial Crisis • Correlations of risk assets spiked when money markets broke the buck • Ratings for RMBS proved to be deeply flawed, making it very difficult to value them • High quality corporate bonds became very illiquid • Markets became bi-polar: “Risk On” vs. “Risk Off” • Macro forces dominated micro considerations

10. The Post-financial Crisis Era • Reliance on quantitative tools –VaR and others – is being challenged • New focus is on incorporating tail risk and identifying “black swans” • Counter-party risk now more important, as well as risk of illiquidity • European debt crisis gives rise to sovereign risk assessment for developed economies • Systemic risk becomes critical for regulators and investors alike

11. Is Traditional Mean-Variance Analysis Irrelevant? • Criticisms have proliferated, especially the concept that returns are normally distributed. • Critics contend there should be greater consideration of “tail risks” • There is some validity to these claims, but there is also need to distinguish between “orderly” markets and “disorderly” markets • Need to assess how individual securities and the overall portfolio will perform in each of these environments

12. Evolution of Risk Control at Fort Washington • Development of the “Risk Budget” for fixed income • Creation of the Dashboard • Reduced reliance on credit ratings • Core Philosophy: Are we paid for the risk we are taking? • Conclusion: Opt for pragmatic approach over “rocket science”

13. Tactical Risk Allocation (Time Horizon = 3 Months) Current as of 09/30/11 Source: Fort Washington. Return projections are based on FWIA expected changes in Risk Driver figures. Past performance is not indicative of future results. Maximum and Expected Risk reflect potential movement in risk drivers over the next 3 months based on one standard deviation of historical changes.  13

14. Projected Risk Budget Volatility vs. Actual 3-Month Average Performance 14 Source: Fort Washington. Past performance is not indicative of future results

15. Enterprise Risk Management During the Financial Crisis • Prior to the 2008 financial crisis banks were thought to have the most sophisticated risk management systems • Yet they were hit much harder than most. What went wrong? • Three characteristics of troubled financial institutions • Significant mismatch of assets and liabilities • Significant concentration of troubled assets • Significant leverage • Bottom line: this resulted in a backlash against quantitative techniques

16. Criticism of Reliance on VaR and Quantitative Models “These simple models should have been regarded as no more than starting points for serious thinking. Instead, those responsible for making key decisions took them literally… Reducing risk to a single number encouraged the belief it could be mastered. It also made it easier to leave early for the weekend in the Hamptons.” - Barry Eichengreen, “The Last Temptation of Risk”

17. Risk Management at Western & Southern • The over-riding objectives of our ERM process are to ascertain whether the firm has: • Adequate Liquidity • Adequate Capital • Earnings Sustainability • Stress tests are conducted using Monte Carlo simulations and Scenario Analyses for each of these areas. • These are reviewed at monthly ERM meetings along with “tear sheets” to go over positioning and strategy of the various portfolios

18. A Current Example: How Much of a Threat from Sustained Low Interest Rates? • Traditionally, our firm has been concerned about a spike in interest rates • However, several studies have identified sustained low interest rates to be an even greater threat for insurers. • Our stress tests indicate hits to our capital and operating income would not pose a serious threat to our firm. • Nonetheless, we are examining ways to mitigate the potential damage.

19. Importance of Risk Management in Assessing Outside Managers • Traditionally the investment process receives much greater attention than risk management • Yet success or failure hinges on how effective firms are in managing risk • A critical component of our due diligence process is to assess how well they have managed downside risk. • We are also cognizant of whether their styles are in or out of favor

20. Conclusions • Perspectives on risk management have changed over time • Sophistication does not necessarily mean processes are better • But measurement and use of quantitative techniques are important tools in assessing risk • The greatest challenge is identifying how risks in disorderly periods will differ from those during normal periods • Risk management works best when it is integral throughout an organization

21. Webinar: Insurance Investment Edge 4Q11 Register at: Insurance.FortWashington.com Scott WestonManaging Director Senior Portfolio Manager Timothy J. Policinski, CFAManaging Director, Strategic and Tactical Allocation Roger M. Lanham, CFAManaging Director Fixed Income Nicholas (Nick) P. Sargen, PhDChief Investment Officer