institutional products: diversity, flexibility and leverage vic gallo senior vice president group...

19
Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

Upload: emil-lane

Post on 16-Dec-2015

218 views

Category:

Documents


0 download

TRANSCRIPT

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

Institutional Products:Diversity, Flexibility and Leverage

Vic GalloSenior Vice President

Group Pension Institutional Business

Page 2: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior 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

Page 3: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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%

Page 4: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 5: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 6: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 7: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 8: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 9: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

$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%

90%

100%

Market Share

General Acct Sales GIC Share

Funding Agmt Share MTN Share

Source: LIMRA/SVIA

Industry General Account Institutional Sales

Page 10: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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*

Page 11: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 12: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 13: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 14: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

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

Page 15: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

$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*

Page 16: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

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

Page 17: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business

▲ 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

Page 18: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional 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

Page 19: Institutional Products: Diversity, Flexibility and Leverage Vic Gallo Senior Vice President Group Pension Institutional Business