Financial Overview Andy Hopping Executive Vice President, Chief Financial Officer and Treasurer.
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Transcript of Financial Overview Andy Hopping Executive Vice President, Chief Financial Officer and Treasurer.
Financial Overview
Andy HoppingExecutive Vice President,
Chief Financial Officer and Treasurer
Key Advantages▲ Low cost
– Flat organization structure– Fast decision making– Highly disciplined culture
▲ Excellent distribution– ~41,000 independent deal direct representatives– 6th largest (based on revenue) independent broker-dealer (National Planning
Holdings Inc.)– Leading participant in the bank channel (Institutional Marketing Group)
▲ High customer value reputation– Low costs benefit everyone– Customers and representatives know we provide long-term value
▲ Full product line– Products that sell well in any economic climate– Strong position in our chosen product lines– Platform built for sustainable growth
▲ Life sales support a more scalable platform– Allows infrastructure cost to be spread over a larger base of policies
JNL: the low-cost provider with full product line and distribution excellence
Total GAAP assets have shown strong and steady growth
* Excludes FAS-115, FAS-133, reverse repurchase obligations, and securities lending deposits.
$31,974$34,262
$35,999
$42,116$45,163
$28,778
$38,367
$5,126
$5,586
$370
$1,952
$4,522
$4,756
$1,122
$20,000
$30,000
$40,000
$50,000
1996 1997 1998 1999 2000 2001 H1, 2002
($ m
illio
ns)
General Account * Separate Account
$49,919
$47,242
$43,953
$40,521
$36,214
$33,096
$29,148
Total Generally Accepted Accounting Principles Assets
$430 $442
$266 $238
$414
14.8%
13.2%
7.6%6.7%
7.6%7.1% 7.2%
5.0%
16.3%
4.1%
$0
$500
$1,000
$1,500
$2,000
1998 1999 2000 2001 TTM H1, 2002
( in
$ m
illio
ns)
0%
5%
10%
15%
20%
JNL aftertax operating income* Net Operating ROAE - Actual
Industry aftertax operating ROAC**
Notes:(a) Total capital is at book value and excludes unrealized gains or losses in equity. In addition, JNL excludes FAS-133.* Excludes net realized g/(l) and associated DAC amortization, minority interest g/(l), and change in accounting principle. ** Industry source: SNL Financial.
GAAP Aftertax Operating Earnings and Return on Average Capital (a)
JNL’s return on capital exceeds the industry average by 1.7%
Profit Signatures of Achieved Profit, Statutory and GAAP Bases
Profit Signature of a Fixed Annuity Policy
1 2 3 4 5 6 7 8 9 10
Years
Pro
fits
AP SAP GAAP
Under GAAP, expenses related to sale of product are amortizedin proportion to profits over life of product
$0
GAAP Profits - Hypothetical $1,000 Fixed Annuity Policy
Profit emerges smoothly under the GAAP basis
1 2 3 4 5 6 7 8 9 10
Investment income 74.6$ 77.7$ 79.3$ 80.3$ 79.8$ 76.8$ 65.9$ 54.4$ 48.0$ 43.6$
Interest credited (59.3) (60.4) (61.0) (61.1) (60.1) (57.3) (48.7) (40.2) (35.6) (32.4)
Spread income 15.3 17.4 18.4 19.2 19.7 19.5 17.2 14.2 12.5 11.3
Surrender charge income 1.2 1.0 1.3 1.1 1.3 0.9 - - - -
Commissions (60.0) (0.0) (0.0) (0.1) (0.2) (0.3) (0.2) (0.2) (0.2) (0.2)
General expenses (16.3) (1.7) (1.6) (1.6) (1.5) (1.4) (1.2) (1.0) (0.8) (0.8)
DAC 66.9 (5.7) (6.2) (6.5) (6.8) (6.5) (5.0) (4.0) (3.4) (3.1)
Pretax income 7.1 11.1 11.7 12.1 12.4 12.1 10.8 9.1 8.0 7.2
Income tax (2.5) (3.9) (4.1) (4.2) (4.3) (4.2) (3.8) (3.2) (2.8) (2.5)
Net income 4.6$ 7.2$ 7.6$ 7.9$ 8.1$ 7.9$ 7.0$ 5.9$ 5.2$ 4.7$
EOY equity 69.5$ 73.1$ 76.3$ 78.9$ 79.3$ 77.8$ 67.1$ 56.6$ 49.6$ 43.4$
Return on EOY equity 6.6% 10.1% 10.0% 10.0% 10.2% 10.1% 10.4% 10.4% 10.5% 10.8%
Return on EOY invested assets 0.45% 0.69% 0.71% 0.73% 0.77% 0.79% 0.88% 0.87% 0.85% 0.84%
Year
* Over the life of the policy
Statutory1 2 3 4 5 6 7 8 9 10
Premium income 1,000.0$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Investment income 74.6 77.7 79.3 80.3 79.8 76.8 65.9 54.4 48.0 43.6
Policyholder benefits & reserves (996.2) (68.6) (70.1) (70.8) (70.2) (67.4) (58.2) (40.3) (35.7) (32.5)
Commissions (60.0) (0.0) (0.0) (0.1) (0.2) (0.3) (0.2) (0.2) (0.2) (0.2)
General expenses (16.3) (1.7) (1.6) (1.6) (1.5) (1.4) (1.2) (1.0) (0.8) (0.8)
Pretax income 2.1 7.5 7.5 7.8 7.9 7.6 6.3 12.9 11.3 10.2
Income tax (4.7) (2.2) (2.2) (2.3) (2.3) (2.3) (1.8) (4.1) (3.6) (3.1)
Change in required surplus (62.4) (1.6) (0.9) (0.3) 2.0 3.9 13.2 7.4 4.4 3.8
Distributable income (64.9)$ 3.6$ 4.4$ 5.2$ 7.6$ 9.3$ 17.6$ 16.3$ 12.2$ 10.8$
Internal rate of return* 11.0%
Achieved Profits1 2 3 4 5 6 7 8 9 10
NPV of stat. distributable income 18.6$
Aftertax value of inforce 83.6 86.2 88.2 89.7 88.8 86.2 75.0 64.3 57.0
Times the discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Aftertax new business profits 18.6$ 6.3$ 6.5$ 6.6$ 6.7$ 6.7$ 6.5$ 5.6$ 4.8$ 4.3$
Year
Year
SAP and AP Profits - Hypothetical $1,000 Fixed Annuity Policy
Distributable income is negative in year one under statutory accounting
Achieved Profits Assumptions▲ Investment spread on new business
– 140 grading to 175 bps▲ Long-term market returns
– 8% gross of M&E fees▲ Mortality and lapses
– Consistent with current pricing and current experience
▲ Expenses – Representative of long-term unit costs
▲ Discount rate and expense inflation– Tied to US Treasury rate with equity premium
Achieved profits assumptions are generally consistent with GAAP assumptions
Spread income recognition varies by asset class and accounting methodology
Emergence of Spread Income
▲ Spread income represents:– Investment income earned on
policyholder deposits– Minus interest credited to
policyholder accounts
▲ Spread income relates primarily to:– Fixed annuity policies– Stable value business
Fixed Annuity Interest Spread Analysis
0
50
100
150
200
250
Jan-
99
Mar
-99
May
-99
Jul-9
9
Sep
-99
Nov
-99
Jan-
00
Mar
-00
May
-00
Jul-0
0
Sep
-00
Nov
-00
Jan-
01
Mar
-01
May
-01
Jul-0
1
Sep
-01
Nov
-01
Jan-
02
Mar
-02
May
-02
(Basis Points)
Target Spread KPI Spread (Prospective)
’01-’02 spread depressed by corporate bond defaults and performance of LP private equity portfolio
$3.7 $3.1
$18.6
$31.2 $30.6
$0
$5
$10
$15
$20
$25
$30
$35
1998 1999 2000 2001 H1, 2002
($ millions)
Foregone non-accrual income
Foregone Pretax Investment Income from Non-Accrual Investments
’01-’02 spread earnings depressed by corporate bond defaults
Fee Income
▲ Calculated based on:– Daily closing market value of the separate
accounts▲ GAAP/STAT:
– Recognizes fee income in period it is assessed
▲ AP:– Profits include present value of all future
fees
Fee income: mortality and expense charges plus our share of asset management fees
Fee Income
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-
99
Apr-9
9
Jul-9
9
Oct-99
Jan-
00
Apr-0
0
Jul-0
0
Oct-00
Jan-
01
Apr-0
1
Jul-0
1
Oct-01
Jan-
02
Apr-0
2
S&P month-end value
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Asset management fees Variable annuity fees S&P 500 month-end value
Fee income correlates with S&P 500 performance
* GAAP gains/(losses) include sales of fixed maturities, sales of equity securities, sales of other invested assets and impairment losses.
GAAP Pretax Realized Gains/(Losses), Net of Minority Interest, Before DAC Amortization*
$70
($71)
($568)
($235)
$44
($600)
($400)
($200)
$0
$200
1998 1999 2000 2001 H1, 2002
Net realized gains/(losses)
’01-’02 results broadly in line with U.S. peers
GAAP Treatment of Investment Writedowns▲ Written down to market or net realizable
value when impairment is “other than temporary”
▲ Recorded as net realized loss, with associated tax and DAC benefit
▲ Deferred tax benefit recognized when writedown occurs
No hard and fast rules on what constitutes “other than temporary” impairment
SAP Treatment ofInvestment Writedowns▲ Writedowns generally follow GAAP unless
rated NAIC 6 ▲ Credit related losses flow through net
income with surplus adjusted by change in AVR
▲ No tax benefit until investment sold▲ Interest related: charged to IMR and
amortized to net income over remaining life of bond
Statutory rules require NAIC 6 to be carried at current Securities Valuation Office published market prices
AP Treatment of Investment Writedowns▲ Current year realized gains/losses added to
prior 4 years gains/losses, and 1/5 brought through as current year operating profit
▲ Variance from actual current year treated as adjustment in deriving total long-term profits
▲ Represents estimate of long-term rate of capital return under U.K. GAAP
Approximate method but transparent to investors
Tax Treatment of Investment Writedowns▲ No statutory tax benefit until
investment sold▲ Losses can be utilized only to extent of
gains, subject to: – 3-year carryback– 5-year carryforward
Income taxes drive much of the economics in managing investment gains/losses
GAAP
▲JNL periodically evaluates expected long-term cost of GMDB benefit under various market and mortality scenarios
▲JNL sets aside the portion of long-term cost accumulated from policy inception to valuation date (funded from VA fees)
▲Paid claims charged against this reserve
▲Continued declines in equity markets this year will result in higher provisions for GMDB reserves
Statutory
Statutory reserves assume:
▲ No lapses
▲ Very conservative mortality table (from 50% to 70% higher than standard)
▲ A further ~11% drop in the market (net of M&E)
▲ While ignoring future fee income
Guaranteed Minimum Death Benefit (GMDB) Reserves
GAAP literature for GMDB is still being developed
GMDB Costs
▲ Year-to-date 6/30/02 death benefit cash spend– $10.3 million
▲ Statutory reserve: ~$270m at 6/30/02 (more than 13 times the 2002 run rate) – After-tax capital impact: ~$176 million
▲ Bulk of JNL’s inforce variable annuity product has a 5% roll-up, meaning beneficiary receives greater of– Current market value– Or net premium accumulated at 5% annually
Actual GMDB costs are significantly less than statutory reserves would imply
Deferred Acquisition Costs Overview▲ Certain costs of acquiring new business are capitalized
as deferred acquisition costs– Commissions and certain costs associated with
policy issue – Which vary with and are primarily related to the
production of new business▲ Deferred costs recorded as an asset and amortized
ratably over life of policy – In proportion to gross profits – To reflect a steady margin on the business
▲ DAC applies to all retail product lines ▲ Very few acquisition costs related to stable value business
Deferred Acquisition Costs are amortized into GAAP earnings over life of policy
Deferred Acquisition Costs Amortization
▲ AP results are not impacted by amortization of intangibles – Because acquisition costs are fully expensed
when calculating the present value of new business
▲ For U.S. GAAP, amortization is increasing compared to our original assumptions– Due to drop in Variable Annuity fee income
stream
Separate account balances have decreased along with equity markets
G&A Average G&A/Year ending Expense * Assets ** Avg. Assets1997 $165.1 $27,086 61 bps1998 $162.0 $28,890 56 bps1999 $191.5 $30,970 62 bps2000 $203.5 $32,529 63 bps2001*** $215.8 $33,500 64 bps2002 (HY annualized) $218.2 $34,800 63 bps
Top 25 individual annuity peer competitors 98 bps
* G&A expense excludes the stable value business and, in 2001, $7.8m marketing reorganization expense.** Average assets excludes stable value and reverse repo liabilities.*** The peer composite has not been adjusted to eliminate industry stable value assets and expenses, which would raise the peer expense level.
Statutory General Expense Trend Analysis
JNL has maintained its expense discipline over the past five yearsdespite growing complexity in products and the marketplace
Pro Forma
June 30,1998 1999 2000 2001 2002
NAIC Risk-Based Capital Ratio 268% 245% 231% 341% 364%
Capital Ratio (a) 8.7% 9.1% 8.5% 7.7% 7.5%
Capital, Surplus and AVR ($millions) $2,519 $2,733 $2,662 $2,651 $2,292
Notes:(a) (Capital and Surplus, AVR) / (General Account Reserve Liabilities).2001 data represents consolidated JNL and JNLNY, 2000 and prior are JNL only.June 30, 2002 reflects $500m Q3 capital infusion.
Capital Analysis
Capital ratios impacted by high fixed annuity sales, investment writedowns and Statutory GMDB reserves
Asset Growth and Capital Flows
$19,100$21,600
$29,148
$33,096
$40,521
$43,953
$36,214
$16,700
$26,000
$13,600
$47,242
$20$39
$59$78
$53
$113
$169
$226
$282
$238
$0
$10,000
$20,000
$30,000
$40,000
$50,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
(Total Assets in $ billions)
$0
$100
$200
$300
$400
$500
(Cumulative net capital flow in $ millions)
Total Assets Cumulative net capital flow
From end of 1991 to end of 2001 JNL returned net capital to the U.K. while nearly quadrupling assets