SUSTAINABLE INVESTMENT CONFERENCE

OCTOBER 13,2011

AGENDA

• Knights of Columbus Sustainable Investment Philosophy

• Our Process

• Church Loan Strategy

After the most recent World Economic Forum we had a discussion about the growth and formalization of Sustainable Investing as an investment philosophygrowth and formalization of Sustainable Investing as an investment philosophy

We always viewed that our goal was to build on the historical successes of the Knights of Columbus and continue to grow and fortify our business.

In our view sustainability is built around the cornerstone of the fraternal bond we have with our members.

Insurance and annuity products built for our members.Insurance and annuity products built for our members.

We view it as really not having a choice, we need to sustain our company to meet the financial promises we have made to our members and their families.

We never thought of our strategy under a particular label, but the more we focused on the principles of sustainable investing the more it sounded like our native language.

This led us to focus on the practices we employ to ensure the sustainability of our businessour business.

I will focus on the investment related factors of investing for long term viability.

Fairly simple concepts, not necessarily simple to execute:

• Manage our assets in the highest yielding securities with thebest risk adjusted returns.best risk adjusted returns.

• Manage our liquidity to meet the needs of the Order and ourmembers.

• Do so to maintain the highest ratings available so we canprovide safety and security so our members know that we willbe there in their time of need.

Ultimately, for one to focus on long term sustainability you need d d l d i k lto understand your goals and risk tolerance.

You must also accept that there are certain investments, no matter how compelling from a potential return standpoint that simply dohow compelling from a potential return standpoint that simply do not fit your philosophy.

We have avoided high yield and derivatives.

Not because they are inherently evil, but because the credit risk and financial leverage are not part of the long term safety we feel is in the best interest of our members.

Our general approach had elements of ESG or Sustainable Investing as partg pp g pof our basic principles

• We look for investments in companies that exhibited strong operatingprocedures.

• In many cases this is focused on clean operating records and governancepolicies.

The basic view is that a company that complies with their regulatory regime• The basic view is that a company that complies with their regulatory regimeand is not encumbered by lawsuits from outside is likely to be able to focusmore energy on their operations.

• We many times focus on top competitors in a given industry because theirWe many times focus on top competitors in a given industry because theirdominance is often due to managing their business in a way to avoid thepitfalls of their sector and sustainability becomes a focus of how they makelonger term, decisions.

• If by investing in companies with solid operating records we can generatehigher returns we are able to more successfully meet our long term goal.

• As we invest primarily in debt securities, we are often holders from 10 to30 i di i l i i i h h i h i30 years indicating a long association with those companies where we invest.

Shareholder Friendly versus Stakeholder Friendly

We accept our biased view as we are significantly focused on bonds!p g y

During the last economic expansion, companies did many things to bolster the stock price.

In some cases debt was issued with the sole use of proceeds to enact a share buyback programprogram

As investors, there are times that cash on hand at a company may find its most productive use to be to return to shareholders as a dividend either through direct cash payout or a share buyback.

In general, we prefer management to realize that they are finding a lack of accretive expansion options rather than engage in a folly that only serves to wreck the financial stability of their organization.

However, we have often rejected debt deals that were for the sole purpose of stock buybacks.

WHY?

Is management enacting this buyback because it is the most optimal use of cash or are they trying to reward stockholders and ultimately themselves?

At the same time, is making a company more in debt really in the best interest of long term shareholders? We know this certainly does not help long term debt holdersshareholders? We know this certainly does not help long term debt holders.

Sustainability from asset allocation

One of the key items we focus on is credit quality.

The National Association of Insurance Commissioners (NAIC) rates securities from1 through 6.

A “1” rated security is a bond rated “A” or higher, a rating of “2” is for BBB rated issues.

Ratings 3 through 6 cover everything from junk bonds, to equities to hedge funds.

In order to preserve liquidity and ratings our focus has been on a focus of 1 and 2 rated securities.

We currently only have 2.6% of our fixed income holdings rated below a 2 because webelieve that high credit quality allows us to make promises that are measured in decadesbelieve that high credit quality allows us to make promises that are measured in decades.

The typical life insurance company of our size generally has about 7 to 8% in lower rated holdings.

hA choice ?

Perhaps, but we believe the high quality is an attractive feature for our members to entrust their financial futures to us.

Sustainability of our Business Partners

We currently manage about 95% of our assets in-house.

As a prudently managed firm we have many times made the buy versus build decision.

In some cases, the infrastructure needed to manage certain asset classes is better outsourced because we would simply not have enough exposure to the asset class to effectively build the expertise in houseexpertise in house.

Also, the strategy may be something we are interested in for a period of time, but not something that would be a permanent allocation within our asset allocation.

What do you look for?

f f d h lWe focus on trying to find the classic 4 Ps.

People: Intelligent, capable with integrity and verified backgrounds.

Performance: Is the performance record verifiable, and repeatable?Performance: Is the performance record verifiable, and repeatable?

• Avoid the one trick pony.

• Understand the level of risk undertaken in order to generatethe long term track recordthe long term track record.

• Does this level of risk meet with your own risk tolerance?

Process: Is the strategy employed by the manager a reasonable way to make moneygy p y y g y yor is it dependent on a single person or an exorbitant amount of risk?

Philosophy: Does the risk orientation and investment strategy match your core goals?

• Everybody loves a winner• Everybody loves a winner.

• It is much easier to maintain a relationship with an externalinvestment manager during a time of underperformance if youunderstand and believe in their philosophy.

As a significant part of our Catholic identity we invest all asserts in compliance with Catholic teachings:compliance with Catholic teachings:

We avoid:

• Pornographyg p y

• Abortifascient

• Embryonic stem cell researchy

• Human cloning

• For Profit Health Care that covers any of theyprevious items.

• As a more societal view we have recently startedto restrict alcohol and tobacco as well.

We are not marginalists:We are not marginalists:

• If a company is at all engaged in a business on our restricted list wedo not invest.

• If we are invested and a company becomes non compliant, we developan action plan to divest.

We heard from MSCI this morning about their screening capabilities• We heard from MSCI this morning about their screening capabilities.

• They have been an important business partner for the Order in helpingus effectively screen companies out of our investable universe.

• All of our external managers utilize the screens as well.

• We have implemented these screens as “front end” meaning that securities are verified through our trading system for compliancesecurities are verified through our trading system for compliancebefore they are put into portfolios.

• How have we performed?

COMPARATIVE INVESTMENT RESULTS* COMPARATIVE INVESTMENT RESULTS* -- U.S.U.S.PERIODS ENDING 6/30/11PERIODS ENDING 6/30/11

11 YrYr 3 Yrs3 Yrs 5 Yrs5 Yrs 10 Yrs10 Yrs

KnightsKnights of Columbus Equitiesof Columbus Equities 32.6%32.6% 4.2%4.2% 2.6%2.6% 3.8%3.8%

St d d & P ’ 500 I dSt d d & P ’ 500 I d 30 7%30 7% 3 3%3 3% 2 9%2 9% 2 7%2 7%Standard & Poor’s 500 IndexStandard & Poor’s 500 Index 30.7%30.7% 3.3%3.3% 2.9%2.9% 2.7%2.7%

Russell 3000 IndexRussell 3000 Index 32.4%32.4% 4.0%4.0% 3.4%3.4% 3.4%3.4%

* f* Includes income: annualized rates of return

• Th d iti d b th O d h f l i• The underwriting used by the Order has proven successful giventhe current economic environment – No delinquent loans atDecember 31, 2010

• First Mortgage lien or negative pledge (unsecured)First Mortgage lien or negative pledge (unsecured)

75% maximum LTVAppraisal

• Guarantee of loan by Diocese or Order

• Application RequirementsFinancial statements from borrower and DioceseP j i f i dProjection of income and expensesCapital Campaign Plans

• Detailed inquiries of borrower and Diocese

• Committee approval

RELIGIOUS MORTGAGE LOAN PRODUCTIONRELIGIOUS MORTGAGE LOAN PRODUCTION

(Dollars in Millions)*2011 – includes loan commitments

AVERAGE NEW LOAN SIZEAVERAGE NEW LOAN SIZEAVERAGE NEW LOAN SIZEAVERAGE NEW LOAN SIZE

(Dollars in Millions)(Dollars in Millions)*2011 – Includes loan commitments

BALANCESBALANCESBALANCESBALANCES

(Dollars in Millions)*2011 Includes loan commitments*2011 – Includes loan commitments

Conclusions:

• We have managed our business philosophically for longterm sustainability

• As a result, no insurance company is more highly ratedthan the Knights of Columbus.

• We have focused on high credit quality believing that theWe have focused on high credit quality believing that the acceptance of slightly lower yield is better because you donot have to make up for credit related losses.

• Our equity performance indicates that you can manageOur equity performance indicates that you can manageaccording to ethical, social and regulatory constraints andstill generate compelling rates of return.

• We believe that our Churchloan program is an importantWe believe that our Churchloan program is an important financing tool for assisting the Catholic Church with their

financing needs allowing the Order to do well while doing good.