Below are PSERS comments and an explanation from investment staff on how PSERS investment in Nephila works within

our portfolio. Hope this helps.

The investment in Nephilas Palmetto Fund is part of the PSERS Absolute Return program. The Nephila Palmetto Fund has performed very well since its inception in 2001 and had an annualized net return of 6.7%. In addition, Nephila Capitals funds have attractive risk/return profiles.

Over the past few years PSERS has focused on reducing the overall risk profile of the portfolio by looking for uncorrelated return streams. The reinsurance market is one new area where we have found the risk/return/correlation profile to be attractive.

The Palmetto Fund has been in existence since January 1, 2001. During this 11 year period, the Palmetto Fund had two down years (-14.1% in 2005 and -2.9% in 2011). During this 11 year period, the Fund returned 80.8% with the largest peak-to-trough loss of 18.8%. The S&P 500 Index during this same period was up 17.5% with the largest peak-to-trough loss of 50.9%. As evidence of diversification, the Palmetto Fund was up 2.4% in 2008 while the S&P 500 Total Return Index was down 37.0%. Conversely, when the Palmetto Fund was down 14.1% in 2005 due to losses incurred as a result of three major hurricanes that year (including Katrina), the S&P 500 Total Return Index was up 4.9%.

Warren Buffet, arguably one of the worlds most successful investors, owns two of the largest reinsurers in the world, General Re and Berkshire Hathaway Reinsurance Group, through his company, Berkshire Hathaway Inc. In addition, other investors, such as the Oregon Retirement System, are starting to recognize the attractive risk/return and diversification benefits of a diversified reinsurance fund such as Palmetto.

This is a very important pointthe Palmetto Fund is a diversified reinsurance Fund both by attachment point as well as geography. Ill quickly provide an example of each. The Palmetto Fund may enter into a reinsurance agreement (reinsurance is insurance for insurance companies) where Palmetto Fund will indemnify the insurance company for U.S. hurricane losses in the amount of $150 million in excess of $1 billion in claims to the insurance company for the next year. The first $1 billion of losses are incurred by the insurance company before this contract suffers a single dollar of loss (the first $1 billion is called the attachment point). The next $150

million in losses would be covered by the Palmetto Fund and anything above $1.15 billion in losses would then be covered either by insurance company or another reinsurer. So, if there is a hurricane and there is $900 million in insured losses to this insurance company, then Palmetto will incur no losses and keep the premium it was paid. Reinsurance funds generally are insuring insurance companies against catastrophic events, or tail risk, and get paid a premium to do so.

The Palmetto Fund has a very geographically diversified portfolio of very remote catastrophe risk (low expected losses, very high industry loss events). The portfolio generally has exposure to the four peak peril risks (U.S. Wind, California Quake, European Wind, and Japanese Quake) as well as other perils such as U.S. Quake ex. California, Japanese Wind, etc. In any one year, a catastrophe may happen in one of these areas causing a loss. In Palmettos worst year, 2005, they had a loss of 14.1% due to three major hurricanes hitting the U.S. that year (Katrina, Rita, and Wilma). In fact, 2008 was the most active Atlantic hurricane season in recorded history. In 2011, they had a modest loss of 2.4% in a year when natural disasters across the globe (Japanese quake and tsunami in March, New Zealand quake in February, and Hurricane Irene in August and September) caused record property damage of $366 billion according to the UNISDR (United Nations Disaster Risk Reduction Agency). This provides evidence of their diversification of reinsurance by peril, attachment point, and region.

One other area of diversification to consider is regarding U.S. Wind (commonly known as hurricane) exposure. Hurricanes can generally cause damage due to wind and due to heavy rain. The coverage reinsurance funds generally have covers wind damage. So, if a hurricane comes ashore as a Category 1, caused minimal wind damage, but caused significant flooding damage, reinsurance funds generally dont reinsure these risks and have no exposure. In addition, lets say a Category 5 hurricane hits the gulf coast and the Palmetto Fund has 40% of their risk in U.S. Wind. This doesnt mean that they will lose 40% of their capital. Keep in mind that they are generally insuring risks for the Texas/Mexico Border all the way up to the tip of Maine. So the losses tend to be more localized and, depending on the reinsurance contract, may not even result in a loss depending on where the insurer had exposure.

As of February 29, 2012, PSERS investment in the reinsurance market amounted to $255 million, or 0.55% (less than a percent) of the funds total assets, in the Palmetto Fund managed by Nephila Capital Ltd. The returns generated from the insurance linked securities market are generally not correlated with returns of the broader financial markets.

The Palmetto Fund is a diversified portfolio of catastrophe exposures with a relative value overlay and a target return in the high single digits to low double digits over rolling 3- to 5-year periods. Exposures are diversified globally primarily in the various peak perils (California

quake, Japanese quake, U.S. wind, and European wind) as well as other markets. Losses occur when the lower layers of coverage typically retained by insurance companies are eroded by major catastrophes such as a significant earthquake or a powerful hurricane. However, given the geographic diversity of the portfolio, those losses may only consume a small portion of the total reinsurance portfolio.