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Institutional Products: Diversity, Flexibility and Leverage

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

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Institutional Products: Diversity, Flexibility and Leverage

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  1. Institutional Products:Diversity, Flexibility and Leverage Vic Gallo Senior Vice PresidentGroup 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. Regulatory SAMPLE ASSET ALLOCATION 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% Economics of Spread Business Required Capital: Assets 1.64% Asset Liability Management Risk 0.50% Total 2.14% 6.43% Times 300% 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. MTN Program Structure Principal/Interest on Notes Principal/Interest on Funding Agmt. • TRUSTEE Funding Agreement Funding Agreement NOTE ISSUER JNL Funding, LLC or JNL Global Funding Notes Jackson National Life INVESTORS Issuance Proceeds Issuance Proceeds

  7. 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 GIC Backed MTN Issuance Through June 2002 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 Source: JNL research as collected from Bloomberg and industry publications Unlikely that private, unlisted issues are fully reflected.

  8. Evolution of Product Distribution Market Registered MTN Public Securities Buyers Global MTN 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

  9. 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 2000 2001 2Q02 General Acct Sales GIC Share Funding Agmt Share MTN Share Source: LIMRA/SVIA

  10. Institutional Products Business Growth In-Force Sales* $3,000 $12,000 $2,500 $10,000 450 364 1697 475 476 344 $2,000 $8,000 805 837 138 966 1,009 $1,500 $6,000 1,079 236 412 4324 4,399 2,972 1210 1,957 884 $1,000 1,019 $4,000 1893 1,690 593 1177 1158 1085 $500 $2,000 3,683 106 3,579 215 3,320 2960 2,858 103 2,178 100 1,249 300 189 100 107 $0 $0 1995 1996 1997 1998 1999 2000 2001 Jun'02 1995 1996 1997 1998 1999 2000 2001 Jun'02 Funding Agreements EMTN GICs GMTN * Net Premiums, excluding renewals of maturing contracts

  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. 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 Jul-00 Jan-01 Jul-01 Jan-02 -0.2 -0.3 -0.4 Target Mismatch Actual Mismatch Policy Max Policy Min

  15. JNL Internal Liquidity Model: Institutional Portfolio Excess Liquid Assets* $6,000 $5,000 $4,000 $Millions Excess Assets $3,000 $2,000 $1,000 $0 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 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.

  16. Institutional Products: Comparison to Individual Spread Business

  17. Institutional Products: Comparison to Individual Spread 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

  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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