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Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business.

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Presentation on theme: "Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business."— Presentation transcript:

1 Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

2 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

3 Economics of Spread Business Regulatory Capital BONDS / SECURITIES A30%0.3% BBB48%1.0% BB6%3.4% B2%7.4% COMM'L MORTGAGES 12%1.0% EQUITIES 2%30.0% SAMPLE ASSET ALLOCATION Required Capital: Assets1.64% Asset Liability Management Risk0.50% Total2.14% Times 300% 6.43% AFIT Return on Equity Target:12.0% Required Profit (Net of Expenses)0.74%

4 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

5 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

6 TRUSTEE INVESTORS NOTE ISSUER JNL Funding, LLC or JNL Global Funding Jackson National Life Principal/Interest on Notes Issuance Proceeds Notes Issuance Proceeds Funding Agreement Funding Agreement Principal/Interest on Funding Agmt. MTN Program Structure

7 Source: JNL research as collected from Bloomberg and industry publications Unlikely that private, unlisted issues are fully reflected Sun Life 1, New York Life 1, Metropolitan Life 500 Combined Life 82 Total 83,569 18,965 27,653 17,652 13,661 5,638 GIC Backed MTN Issuance Through June 2002

8 50's60's70's80's90's 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

9 $0 $10 $20 $30 $40 $50 $60 $ Q02 Sales ($ billions) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market Share General Acct SalesGIC Share Funding Agmt ShareMTN Share Source: LIMRA/SVIA Industry General Account Institutional Sales

10 Institutional Products Business Growth * Net Premiums, excluding renewals of maturing contracts 1,249 2,178 3,683 3,579 3,320 2, ,972 4, , , $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12, Jun' , ,009 1, $0 $500 $1,000 $1,500 $2,000 $2,500 $3, Jun'02 Funding AgreementsEMTNGICsGMTN In-ForceSales*

11 Industry General Account Institutional Sales, YTD June 2002 Source: LIMRA

12 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

13 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

14 Jan-00Jul-00Jan-01Jul-01Jan-02 Target MismatchActual MismatchPolicy MaxPolicy Min Interest Rate Risk Management: Asset minus Liability Duration

15 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Dec-00Mar-01Jun-01Sep-01Dec-01Mar-02Jun-02 $Millions Excess Assets 30 Day Horizon1 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*

16 Institutional Products: Comparison to Individual Spread Business

17 ▲ 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

18 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

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