Transcript Document

Institutional Products:
Diversity, Flexibility and Leverage
Vic Gallo
Senior Vice President
Group Pension Institutional Business
Institutional Products:
Spread-Based Business
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Raise funds at AA rates, reinvest at
A/BBB rates
Different from debt
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–
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Use of funds: Reinvest to match liabilities,
not for general corporate purposes or as
capital
Issuance vehicle is insurance contract
Rating agencies view as operational
leverage, not financial leverage
Economics of Spread Business
SAMPLE ASSET ALLOCATION
BONDS / SECURITIES
A
30%
BBB
48%
BB
6%
B
2%
COMM'L MORTGAGES
12%
EQUITIES
2%
Required Capital:
Assets
Asset Liability Management Risk
Total
Times 300%
AFIT Return on Equity Target:
Required Profit (Net of Expenses)
Regulatory
Capital
0.3%
1.0%
3.4%
7.4%
1.0%
30.0%
1.64%
0.50%
2.14%
6.43%
12.0%
0.74%
Products and Customers
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Guaranteed Investment Contracts (GICs)
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Defined contribution pension plans
Guarantees plan participants’ principal plus interest
Distributed directly to fund managers by JNL staff
Funding Agreements
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Money market funds, securities lenders, Short-term
Investment Funds, and other institutions who can
hold insurance contracts
Primarily 1-year and shorter, but typically renews
Distributed directly and through brokers
Products & Customers (cont’d)
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Medium-Term Notes (MTNs)
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Institutional buyers of less liquid MTN securities
(fund managers, banks, insurance companies)
• Some overlap with GIC and Funding
Agreement buyers
Notes issued by Single Purpose Company
• Buys funding agreement from JNL to service
the notes
Notes are on JNL balance sheet, but are same
as GICs and Funding Agreements
Spread-based business, not debt
Distributed by investment banks
MTN Program Structure
Principal/Interest
on Funding Agmt.
TRUSTEE
Principal/Interest
on Notes
Funding
Agreement
Jackson
National Life
Funding
Agreement
Issuance
Proceeds
NOTE ISSUER
JNL Funding, LLC
or
JNL Global Funding
Notes
INVESTORS
Issuance
Proceeds
GIC Backed MTN Issuance
Through June 2002
Period
Total
AIG/SunAmerica
John Hancock
Monumental Life
Jackson National
Principal
Allstate
Pacific Life
Nationwide
Travelers
Massachusetts Mutual
Allmerica
Protective (Premiere)
Sun Life
New York Life
Metropolitan Life
Combined Life
Total
25,404
10,767
7,788
6,443
5,563
5,416
5,032
4,007
3,720
2,572
1,913
1,568
1,398
1,396
500
82
83,569
2002
5,533
1,487
1,987
1,313
1,574
1,679
949
875
916
615
119
464
398
556
500
18,965
2001
2000
1999
1998
7,337
3,170
2,928
2,165
1,634
2,035
1,112
1,470
1,529
1,216
1,164
618
435
840
4,766
2,464
1,668
1,956
1,372
1,125
893
1,066
220
441
548
486
565
5,038
2,141
1,205
1,009
983
577
975
596
755
300
82
2,730
1,505
13,661
5,638
27,653
Source: JNL research as collected from Bloomberg and industry publications
Unlikely that private, unlisted issues are fully reflected.
82
17,652
1,103
300
Evolution of Product
Distribution
Market
Registered
MTN
Global MTN
Public Securities
Buyers
All
Institutions
European MTN
Non-US
Institutions
Funding Agreement
US Short
Term Funds
Guaranteed Investment Contract
US
Pension
Plans
IPG: Immediate Participation
Guarantee
50's
60's
70's
80's
90's
2000
2001
2002
Industry General Account
Institutional Sales
Sales ($ billions)
Market Share
$70
100%
90%
$60
80%
$50
70%
60%
$40
50%
$30
40%
30%
$20
20%
$10
10%
$0
0%
1995
1996
1997
1998
1999
General Acct Sales
Funding Agmt Share
Source: LIMRA/SVIA
2000
GIC Share
MTN Share
2001
2Q02
Institutional Products
Business Growth
In-Force
$12,000
Sales*
$3,000
$2,500
$10,000
450
1697
476
837
$8,000
805
475
344
$2,000
138
966
1,009
$1,500
$6,000
1,079
884
$4,000
2,972
4,399
236
4324
$2,000
3,683
215
$1,000
1,019
3,579
3,320
2,178
100
1995
412
1893
1177
$500
2,858
1085
100
1998
1999
2000
2001
1158
106
103
189
$0
1997
1,690
2960
1,249
1996
1210
1,957
593
$0
364
Jun'02
Funding Agreements
* Net Premiums, excluding renewals of maturing contracts
107
300
1995 1996 1997 1998 1999 2000 2001 Jun'02
EMTN
GICs
GMTN
Industry General Account
Institutional Sales, YTD June 2002
Company
GIC
Sales
Rankings
MTN / Fund.
Agreement
MTN / Fund.
Agreement
AEGON
Travelers
New York Life
ING
Principal Financial
John Hancock
GE Financial
MetLife
$
$
$
$
$
$
$
$
564
528
573
372
709
567
719
684
$
$
$
$
$
$
$
$
4,167
3,068
1,810
1,978
1,565
1,587
1,220
1,169
Jackson National
$
107
$
1,613
Allstate
Pacific Life
MassMutual
Hartford Life
Prudential of America
AIG Life (U.S.)
$
$
$
$
$
$
39
244
125
218
472
-
$
$
$
$
$
$
1,554
1,262
765
551
25
485
Source: LIMRA
Total
$
$
$
$
$
$
$
$
4,731
3,596
2,382
2,350
2,274
2,154
1,939
1,854
GIC
6
7
4
9
2
5
1
3
$ 1,720
15
$
$
$
$
$
$
17
10
13
11
8
20
1,592
1,506
890
769
497
485
1
2
4
3
7
6
10
11
5
8
9
12
13
17
14
Total
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Strategic Fit of Institutional
Business
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Diversify mix of business
Adds flexibility in adjusting general account
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Large issuance size allows opportunistic deployment of
capital at attractive Return On Equity
Easier to control pace of sales than in retail markets
Possibility of shrinking portfolio by allowing contracts to
mature, exercising call option, or buying back MTNs
Leverage core competencies
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Asset generation
Good ratings
Expense control
Risk management
Risk Management
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Assets
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Liabilities
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Consistent pricing using models recognizing options
Asset/Liability Mismatch
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Portfolio similar to rest of general account
• Less tolerance for call and prepayment risk
Asset class/issuer limits
Interest rate risk limits
Liquidity minimums
Measure weekly, more frequently if large transaction
Liquidity Monitoring
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Monthly stress testing of available liquidity vs. potential
cash needs
Interest Rate Risk Management:
Asset minus Liability Duration
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
Jan-00
-0.2
Jul-00
Jan-01
Jul-01
Jan-02
-0.3
-0.4
Target Mismatch
Actual Mismatch
Policy Max
Policy Min
JNL Internal Liquidity Model:
Institutional Portfolio Excess Liquid Assets*
$6,000
$Millions Excess Assets
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Dec-00
Mar-01
Jun-01
Sep-01
30 Day Horizon
Dec-01
Mar-02
1 Year
Excess Assets: Cash that could be raised under stress market conditions minus cash needed to pay all
liabilities that can contractually leave (surrender or mature) within the given time horizon.
Jun-02
Institutional Products:
Comparison to Individual
Spread Business
Characteristic
Source of Funds
Contract Size
Distribution
Crediting Rates
Optionality
Liquidity
Definition of Liability
Cash Flows
Pricing Environment
Fixed
Annuities
Retail
Small (usually <$1mm)
Independent Agents
Broker/Dealers
Bank Reps
Generally, JNL can reset
annually
Many with BV surrender
Sticky, especially during
surrender charge period
Surrender assumptions
needed in varying rate
environments
Subject to behavior of
competitors
Institutional
Products
Institutional Investors
Large ($3 to $500mm)
JNL staff
Brokers
Investment Banks
Fixed for contract life.
Generally none. Some with MV
surrender.
Large sizes and some MV options imply
higher need to control risk
Very well defined
Largely defined by financial markets
Institutional Products:
Comparison to Individual
Spread Business
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Interest rate risk
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Spread risk
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Liability spread known at time of pricing given lack of
options
Expense risk is relatively low
Liquidity risk
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Tighter matching needed, given lack of ability to
reset crediting rates
Larger sizes implies need to more carefully monitor
Credit risk
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Same as individual business
Institutional Products:
Summary
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Provides diversification value to JNL
Allows opportunistic deployment of
capital when Return On Equity is
attractive
Not for everyone…need certain core
competencies
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JNL well-suited for this business