Institutional Products: Diversity, Flexibility and Leverage
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Transcript of Institutional Products: Diversity, Flexibility and Leverage
Institutional Products:Diversity, Flexibility and Leverage
Vic GalloSenior Vice President
Group Pension Institutional Business
Institutional Products: Spread-Based Business▲ Raise funds at AA rates, reinvest at
A/BBB rates ▲ Different from debt
– 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 BusinessRegulatory
Capital
BONDS / SECURITIES A 30% 0.3%BBB 48% 1.0%BB 6% 3.4%B 2% 7.4%
COMM'L MORTGAGES 12% 1.0%EQUITIES 2% 30.0%
SAMPLE ASSET ALLOCATION
Required Capital:Assets 1.64%
Asset Liability Management Risk 0.50%Total 2.14%
Times 300% 6.43%AFIT Return on Equity Target: 12.0%
Required Profit (Net of Expenses) 0.74%
Products and Customers
▲ Guaranteed Investment Contracts (GICs) – Defined contribution pension plans– Guarantees plan participants’ principal plus interest– Distributed directly to fund managers by JNL staff
▲ Funding Agreements– 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)▲ Medium-Term Notes (MTNs)
– 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
TRUSTEE
INVESTORS
NOTE ISSUERJNL Funding, LLC
orJNL Global Funding
JacksonNational Life
Principal/Interest
on Notes
IssuanceProceeds
Notes
IssuanceProceeds
Funding Agreement
FundingAgreement
Principal/Interest
on Funding Agmt.
MTN Program Structure
Source: JNL research as collected from Bloomberg and industry publicationsUnlikely that private, unlisted issues are fully reflected.
Period Total 2002 2001 2000 1999 1998
AIG/SunAmerica 25,404 5,533 7,337 4,766 5,038 2,730
John Hancock 10,767 1,487 3,170 2,464 2,141 1,505
Monumental Life 7,788 1,987 2,928 1,668 1,205
Jackson National 6,443 1,313 2,165 1,956 1,009
Principal 5,563 1,574 1,634 1,372 983
Allstate 5,416 1,679 2,035 1,125 577
Pacific Life 5,032 949 1,112 893 975 1,103
Nationwide 4,007 875 1,470 1,066 596
Travelers 3,720 916 1,529 220 755 300
Massachusetts Mutual 2,572 615 1,216 441 300
Allmerica 1,913 119 1,164 548 82
Protective (Premiere) 1,568 464 618 486
Sun Life 1,398 398 435 565
New York Life 1,396 556 840
Metropolitan Life 500 500
Combined Life 82 82
Total 83,569 18,965 27,653 17,652 13,661 5,638
GIC Backed MTN Issuance Through June 2002
50's 60's 70's 80's 90's 2000 2001 2002
US Pension Plans
US Short Term Funds
Non-US Institutions
All Institutions
Market
IPG: Immediate Participation
Guarantee
Guaranteed Investment Contract
Funding Agreement
European MTN
Global MTN
Registered MTN Public Securities
Buyers
Evolution of Product Distribution
$0
$10
$20
$30
$40
$50
$60
$70
1995 1996 1997 1998 1999 2000 2001 2Q02
Sales ($ billions)
0%
10%
20%
30%
40%
50%
60%
70%
80%
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100%
Market Share
General Acct Sales GIC Share
Funding Agmt Share MTN Share
Source: LIMRA/SVIA
Industry General Account Institutional Sales
Institutional Products Business Growth
* Net Premiums, excluding renewals of maturing contracts
1,2492,178
3,683 3,579 3,3202,858 2960
2,972 4,399 4324
593
884
1,079
966
837 805
100
1,019
215
1697
476
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1995 1996 1997 1998 1999 2000 2001 Jun'02
1893
300
1,957
103
412
344475
100
10851177 1158
189107
1,009
1,690
106
450
236
364
138
1210
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1995 1996 1997 1998 1999 2000 2001 Jun'02
Funding Agreements EMTN GICs GMTN
In-Force Sales*
Industry General Account Institutional Sales, YTD June 2002
Source: LIMRA
Company GICMTN / Fund. Agreement Total GIC
MTN / Fund. Agreement Total
AEGON 564$ 4,167$ 4,731$ 6 1 1 Travelers 528$ 3,068$ 3,596$ 7 2 2 New York Life 573$ 1,810$ 2,382$ 4 4 3 ING 372$ 1,978$ 2,350$ 9 3 4 Principal Financial 709$ 1,565$ 2,274$ 2 7 5 John Hancock 567$ 1,587$ 2,154$ 5 6 6 GE Financial 719$ 1,220$ 1,939$ 1 10 7 MetLife 684$ 1,169$ 1,854$ 3 11 8
Jackson National 107$ 1,613$ 1,720$ 15 5 9Allstate 39$ 1,554$ 1,592$ 17 8 10 Pacific Life 244$ 1,262$ 1,506$ 10 9 11 MassMutual 125$ 765$ 890$ 13 12 12 Hartford Life 218$ 551$ 769$ 11 13 13 Prudential of America 472$ 25$ 497$ 8 17 14 AIG Life (U.S.) -$ 485$ 485$ 20 14 15
RankingsSales
Strategic Fit of Institutional Business▲ Diversify mix of business ▲ Adds flexibility in adjusting general account
– 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– Asset generation – Good ratings– Expense control – Risk management
Risk Management▲ Assets
– Portfolio similar to rest of general account• Less tolerance for call and prepayment risk
– Asset class/issuer limits– Interest rate risk limits– Liquidity minimums
▲ Liabilities – Consistent pricing using models recognizing options
▲ Asset/Liability Mismatch– Measure weekly, more frequently if large transaction
▲ Liquidity Monitoring – Monthly stress testing of available liquidity vs. potential
cash needs
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0
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Jan-00 Jul-00 Jan-01 Jul-01 Jan-02
Target Mismatch Actual Mismatch Policy Max Policy Min
Interest Rate Risk Management:Asset minus Liability Duration
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02
$Mill
ions
Exc
ess
Ass
ets
30 Day Horizon 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.
JNL Internal Liquidity Model: Institutional Portfolio Excess Liquid Assets*
Institutional Products: Comparison to Individual Spread Business
Characteristic
Fixed Annuities
Institutional Products
Source of Funds Retail Institutional Investors
Contract Size Small (usually <$1mm) Large ($3 to $500mm)
Distribution Independent Agents Broker/Dealers Bank Reps
JNL staff Brokers Investment Banks
Crediting Rates Generally, JNL can reset annually
Fixed for contract life.
Optionality Many with BV surrender Generally none. Some with MV surrender.
Liquidity Sticky, especially during surrender charge period
Large sizes and some MV options imply higher need to control risk
Definition of Liability Cash Flows
Surrender assumptions needed in varying rate environments
Very well defined
Pricing Environment Subject to behavior of competitors
Largely defined by financial markets
▲ Interest rate risk– Tighter matching needed, given lack of ability to reset
crediting rates▲ Spread risk
– Liability spread known at time of pricing given lack of options
– Expense risk is relatively low ▲ Liquidity risk
– Larger sizes implies need to more carefully monitor ▲ Credit risk
– Same as individual business
Institutional Products: Comparison to Individual Spread Business
Institutional Products: Summary
▲ Provides diversification value to JNL▲ Allows opportunistic deployment of
capital when Return On Equity is attractive
▲ Not for everyone…need certain core competencies– JNL well-suited for this business