Insurance operations
United States
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| CER | RER | ||||
|---|---|---|---|---|---|
| United States | Half year 2008 £m |
Half year 2007 £m |
Change % |
Half year 2007 £m |
Change % |
| * Based on longer-term investment returns excludes broker dealer, fund management and Curian. | |||||
| APE sales | 356 | 351 | 1 | 352 | 1 |
| NBP | 137 | 144 | (5) | 144 | (5) |
| NBP margin (% APE) | 38% | 41% | 41% | ||
| NBP margin (% PVNBP) | 3.9% | 4.1% | 4.1% | ||
| Total EEV basis operating profit* | 354 | 344 | 3 | 344 | 3 |
| Total IFRS operating profit* | 232 | 218 | 6 | 218 | 6 |
Introduction
The United States is the largest retirement savings market in the world and continues to grow rapidly. At the end of 2007, total retirement assets in the US exceeded US$17.6 trillion, up from US$16.5 trillion at the end of 2006 (Source: Investment Company Institute). As 78 million baby boomers (Source: US Census Bureau) move into retirement, these assets will shift from asset accumulation to income distribution. Currently, US$1.6 trillion of assets are generating retirement income. This amount is estimated to grow to US$7.3 trillion by 2017 (Source: Financial Research Corporation).
Despite these favourable demographics, US life insurers face challenges from both within and outside the industry. The industry remains highly fragmented, with the top 15 annuity companies sharing only 74 per cent of the total market share in 2007 (Source: LIMRA). Competition is intensifying through aggressive price competition, especially in the variable annuity market.
The S&P index decreased 13 per cent during the first six months of 2008 and 15 per cent from June 2007 (total for 2007: increase of 3.5 per cent). During the same periods, the US equity markets also experienced significant volatility.
Financial performance
Jackson National Life Insurance Company (Jackson) delivered APE sales of £356 million in the first half of 2008, representing a one per cent increase from the same period in 2007 and the highest level of total sales in Jackson's history. APE retail sales in the first half of 2008 were £274 million, down four per cent over the same period in 2007 and represent the second highest level of sales during the first half in the company's history. This decline was primarily driven by lower variable annuity sales. On a PVNBP basis, new business sales were £3.5 billion.
These achievements demonstrate the diversification of Jackson's product portfolio and the resilience of Jackson's business model despite volatile equity markets and a deteriorating macroeconomic environment experienced in the first six months of 2008.
Variable annuity APE sales of £180 million in the first half of 2008 were 20 per cent down on the same period in 2007. The significant volatility in US equity markets during the second half of 2007 continued into 2008 and price competition in the variable annuity market has remained intense. Jackson remains disciplined on the pricing of variable annuities. In the first quarter of 2008 Jackson ranked fourth in variable annuity net flows and had the lowest outflows as a percentage of variable annuity inflows in the industry.
US APE sales £m
US new business profits £m
In the first half of 2008, Jackson maintained its track record for product innovation by enhancing its variable annuity offering, with the addition of two new guaranteed minimum withdrawal benefits (GMWBs) and two new portfolio investment options. Jackson also introduced new fixed annuity products designed specifically for the bank channel and a new fixed index annuity that offers a selection of two market indices and two contract lengths.
Jackson seeks to employ capital profitably in the retirement space. The internal rate of return on new business was 18 per cent in the first half of 2008, in line with the same period last year.
Fixed annuity APE sales of £63 million were 121 per cent up on the same period of 2007 reflecting a higher customer propensity towards fixed-rate products in a period of declining equity markets. Jackson ranked ninth in the traditional deferred fixed annuity market in the first quarter of 2008 with a market share of 3.1 per cent, up from the tenth position at the end of December 2007.
Fixed index annuity sales continue to be affected by difficult market conditions. Jackson's APE sales of £20 million in the first half of 2008 were nine per cent down on the same period of 2007. Jackson ranked tenth in the fixed index annuity market in the first quarter of 2008 with a market share of 3.4 per cent.
Institutional APE sales of £83 million in the first half of 2008 were up 26 per cent on the same period of 2007. Jackson continues to participate in this market on an opportunistic basis when margins are attractive.
EEV basis new business profits of £137 million were five per cent below the prior year, reflecting a shift in the mix of business toward fixed annuities as well as increased sales of institutional business with shorter durations. Specifically, new business profits of variable annuities decreased by 15 per cent, from £103 million at 30 June 2007 to £88 million at 30 June 2008 as a result of lower sales, while new business profits of fixed annuities increased nearly four times from £4 million to £15 million.
Total EEV basis operating profit for the long-term business in the first half of 2008 was £354 million compared to £344 million in the prior year at CER. In-force EEV profits of £217 million were nine per cent above prior year profit of £200 million at CER. Experience variances were £33 million lower than the corresponding period in 2007 mainly due to lower spread income. Operating assumption changes were £44 million, including a credit of £29 million for changes to mortality assumptions, a credit of £27 million relating to a change of projected product fees for variable annuity business and a net charge of £12 million for other items.
US EEV basis operating profit £m
IFRS operating profit for the long-term business was £232 million, up six per cent on the prior year of £218 million at CER, primarily reflecting higher fee income from the variable annuity business and favourable hedging results from the impact of market movements during the period. The decision to acquire additional hedging protection in the derivative markets in 2007 at favourable prices demonstrated its value in the IFRS operating profit in the context of falling equity markets experienced in the first half of 2008.
Jackson's IFRS operating profit continues to diversify across the various lines of business. Specifically, operating profit from the variable annuity and other fee-based business increased from 32 per cent at 30 June 2007 to 42 per cent at 30 June 2008, while profit from the spread-based business fell from 44 per cent to 43 per cent for the first half of 2008.
Jackson's overall credit exposure is well within Group risk parameters and Jackson continues to manage it proactively.
Total credit losses impacting Jackson's IFRS income statement were £108 million (2007: £19 million). This includes £103 million of writedowns on securities. Within the £103 million is £82 million of losses from Jackson's residential mortgage-backed securities (RMBS) book. Impairments are determined by first undertaking detailed cash flow projections to identify those securities where an economic loss of principal is anticipated – in this case £38 million of losses. However, the accounting loss also includes a deduction of £43 million to reflect reduced market value. Out of the total charge of £108 million in the income statement, £23 million is booked as the RMR default charge to the operating result, to reflect the longer-term expectation for impairment, with the excess shown in short-term fluctuations in investment returns.
For securities classified as available-for-sale under IAS 39, at 30 June 2008 there was an increase in the net unrealised loss position to £(813) million from £(136) million at 31 December 2007. This increase reflects declines in the market value of residential mortgage-backed securities and broader distressed pricing due to illiquidity in the market as well as increasing credit spreads.
Jackson remains confident of the quality of its overall portfolio of £18 billion of debt securities. Some 82 per cent of its gross unrealised loss is on investment grade securities. Of the £270 million of gross unrealised losses on securities with a fair value of less than 80 per cent of book value, only £31 million is on securities rated as non-investment grade. In addition, there have been no credit defaults in the investment portfolio and downgrades were minimal. Jackson maintains its ability and intent to hold its debt securities for the longer term.
