1 / 27

Asset Liability Management: Identifying and Managing Risk

Asset Liability Management: Identifying and Managing Risk. Chad Myers Vice President Asset Liability Management. Overview. Risk management philosophy affects nearly everything JNL does Product development Product pricing Investment strategy and implementation Hedging activities

elkan
Télécharger la présentation

Asset Liability Management: Identifying and Managing Risk

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Asset Liability Management: Identifying and Managing Risk Chad Myers Vice PresidentAsset Liability Management

  2. Overview • Risk management philosophy affects nearly everything JNL does • Product development • Product pricing • Investment strategy and implementation • Hedging activities • Emphasis on identifying risks and understanding them • JNL doesn’t take risks it can’t properly evaluate • Assumption of risk requires appropriate compensation • Deterministic vs. stochastic approach

  3. Approaches to Risk Management • Pricing • Structure • Reinsurance • Diversification • Hedging

  4. Fixed Annuities • JNL’s single largest product line • Third largest fixed annuity block in the U.S. • Spread-based • Contractual minimum interest rate is generally 3% • 92% of JNL’s book can be reset annually

  5. 8.0% 7.5% 7.0% 6.5% (%percent) 6.0% 5.5% 5.0% 4.5% 4.0% 05/04/00 06/04/00 07/04/00 08/04/00 09/04/00 10/04/00 11/04/00 12/04/00 01/04/01 02/04/01 03/04/01 04/04/01 05/04/01 06/04/01 07/04/01 08/04/01 09/04/01 10/04/01 11/04/01 12/04/01 01/04/02 02/04/02 03/04/02 04/04/02 05/04/02 06/04/02 JNL Max Plan Rate vs. Market Rates 8.0% 7.5% 7.0% 6.5% (%percent) 6.0% 5.5% 5.0% 4.5% 4.0% Highest Competitor 9 Yr Treasury Max New Money Competitor Average

  6. Fixed Annuity Interest Spread (Net Spread %) (Net Credited Rate %) 8.0% 8.0% 7.0% 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% Nov- Nov- Nov- Nov- Nov- Nov- May- May- May- May- May- May- May- Sep- Sep- Sep- Sep- Sep- Sep- Jul-97 Jul-99 Jul-96 Jul-98 Jul-00 Jul-01 Jan-96 Jan-97 Jan-01 Mar-97 Jan-98 Jan-99 Jan-00 Mar-01 Jan-02 Mar-02 Mar-96 Mar-98 Mar-99 Mar-00 Normalized Net Investment Spread Normalized Credited Rate

  7. Variable Annuities • Growing portion of JNL’s retail liabilities • Unit-linked deferred annuity contract • Performance in the underlying funds is passed onto the client • Asset based fees used to cover benefits /expenses • JNL has moved to an unbundled platform

  8. VA Guaranteed Benefits • JNL has chosen not to be a leader on guaranteed benefits • Aggressive benefits not adequately priced in market • Aggressive benefit built on unproven assumptions • GMDB • Main exposure is to 5% annual accumulation • Perspective II offers return of premium • Other options offered with appropriate charges • Not reinsured due to manageable mortality-based risk • GMIB • Only offered on unbundled basis • Must be elected at extra charge • Requires annuitization after 10 years • Benefit capped at 200% of premium • Reinsured due to uncertainty of utilization

  9. Perspective II Optional Benefits Elected: Year-to-Date September 2002 Benefit InitialPremium Percentage No optional benefits elected 71,338,166 13% 5% Compounded Death Benefit 107,163,001 19% Maximum Anniversary Death Benefit 59,720,935 11% Combination Death Benefit 90,830,651 16% Earnings Max 30,246,358 5% GMIB 145,244,111 26% 2% Premium Credit 23,902,163 4% 3% Premium Credit 12,957,713 2% 4% Premium Credit 238,462,750 42% 20% Free Partial 26,691,070 5% 5 Year Withdrawal Charge 31,458,968 6% Year-to-Date Issues September 2002 562,564,441 100%

  10. Equity Index Annuities • Hybrid of variable annuity / fixed annuity • Greater of: • 90% of the premium accumulated at 3% or… • Percentage of the gain in the S&P 500 • Simple design, easy to hedge • Options bought to cover the equity portion • Fixed income invested to provide minimum guarantee • Spread-based

  11. Life Insurance • Not primary focus over last several years • Maintain $5 billion in life insurance liabilities • Term and Interest Sensitive Life • Mortality on term locked in at time of sale due to 90% quota share arrangement • Interest Sensitive Life pricing has spread and mortality gains to cover benefits and expenses

  12. Statutory Reserves – Major Product Categories Category 12/31/96 6/30/02 Amount % Amount % Annuities with Book Value Surrender $15,844 64.0% $13,830 33.0% Annuities with MVA 1,863 7.5% 4,949 11.8% Equity-Linked Index Annuities 34 0.1% 2,466 5.9% Other 733 3.0% 1,327 3.2% Total General Account Annuities $18,474 74.6% $22,572 53.9% Life Insurance 4,494 18.1% 5,053 12.0% Institutional Products 1,464 5.9% 9,786 23.4% Total General Account $24,432 98.6% $37,411 89.3% Separate Account (VA) 345 1.4% 4,463 10.7% Total Reserves $24,777 100.0% $41,874 100.0% Data is consolidated to include Jackson National of New York.

  13. JNL Risk Profile • Three main product types • Fixed annuities / Institutional (spread-based) • Variable annuities (fee-based) • Life insurance (hybrid of spread and mortality)

  14. JNL Spread Business Basics • JNL issues contracts with initial crediting rates subject to reset • Policies are subject to surrender charges • Long-term rate guarantees are further subject to market value adjustments • Assets are invested in a diversified pool of mostly fixed income assets to earn a spread

  15. Risk Inherent in Spread Lending Businesses • Interest rate risk • Spread risk • Credit risk • Liquidity risk

  16. Interest Rate Risk • Rate movements cause changes in the value of assets and liabilities • Where sensitivities are materially different, rate changes will cause economic gains or losses • Significant rate increases - book value surrenders • Significant rate drops - minimum rate guarantees

  17. JNL Approach to Interest Rate Risk • General risk mitigation • Option adjusted pricing • Surrender charges • Product diversification • Increasing rates • Swaption program • Market value adjustments • Decreasing rates • Product specific investment guidelines • Annual resets on fixed annuities

  18. Spread Risk • Profitability depends on • Ability to achieve pricing spreads • Spreads can be affected by • Reinvestment risk • Embedded options in assets/liabilities • Equity return assumptions • Investment lag • Lost coupon income • Expense variances

  19. JNL Approach to Spread Risk • Focus on annual reset products for fixed annuities • Match assets and liabilities • Low exposure to equity/property • Risk adjusted return assumptions • Strong expense discipline

  20. Credit Risk • At its core the spread-based business relies on a credit arbitrage • Issue contracts based on high credit rating • Invest in lower-rated credits to earn a spread above issuance cost • Hold adequate capital to allow for risk • The main question is how much risk to take? • Higher-risk assets provide higher spreads, but increase capital needs and credit risk • Lower-risk assets have lower capital needs and credit risk but provide lower spreads

  21. JNL Approach to Credit Risk • Balance trade-off between risk and yield • Capitalize the company to a level appropriate for the level of risk • Evaluate all investments net of expected long-term default cost • Rigorous credit evaluation process • Well-diversified portfolio • JNL establishes policy, PPMA implements

  22. Liquidity Risk • Liabilities provide for varying degrees of liquidity • Medium-term notes, Single Premium Immediate Annuities – no liquidity • Fixed annuities offer liquidity with varying surrender penalties • Retail policies tend to be “sticky” • Due to surrender charges and inertia • Institutional holders exercise options very efficiently • Asset liquidity must reflect potential liability demands

  23. 2.5x $20,000 2.3x $18,000 2.0x $16,000 1.8x $14,000 1.5x $12,000 Excess Liquidity ($millions) Coverage Ratio Multiple 1.3x $10,000 1.0x $8,000 0.8x $6,000 0.5x $4,000 0.3x $2,000 0.0x $0 Jul-99 Jul-00 Jul-01 Oct-98 Jan-99 Feb-99 Mar-99 Jun-99 Oct-99 Jan-00 Feb-00 Mar-00 Jun-00 Oct-00 Jan-01 Feb-01 Mar-01 Jun-01 Oct-01 Jan-02 Feb-02 Mar-02 Jun-02 Nov-98 Dec-98 Sep-99 Nov-99 Dec-99 Sep-00 Nov-00 Dec-00 Sep-01 Nov-01 Dec-01 Apr-99 Apr-00 Apr-01 Apr-02 May-99 Aug-99 May-00 Aug-00 May-01 Aug-01 May-02 Excess liquidity-30 day horizon JNL Approach to Liquidity Risk JNL Liquidity Analysis * Excess liquidity-1 year horizon Coverage ratio-30 day horizon Coverage ratio-1 year horizon * Ratio of Available Assets to Potential Obligations

  24. Variable Annuities • Fee-based business • Main drivers of profitability are determined at pricing • Earnings variability driven by: • Equity returns • Guaranteed benefits • Expenses

  25. Life Insurance • Spread and mortality based business • Spread component similar to fixed annuities • Mortality component managed through reinsurance • Lock in mortality assumptions at policy issue

  26. Where Does JNL Stand? Hedge Analysis 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Pop Pop Pop Level Pop Up Pop Up Pop Up Pop Up Pop Up Pop Up Pop Up Down Down Down 1% 2% 3% 4% 5% 6% 7% 3% 2% 1% Rate Scenario Unhedged Hedged

More Related