Insurance ALM case study

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Use of structured products in wealth management
April 2008 Tomas Hochmeister
EQUITY DERIVATIVES HOUSE OF THE YEAR
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Agenda

• Why Structured Products?
• Innovation dedicated to investor needs
• Alternative to Equity Investments
• Alternative to Global Asset Allocation Investment
• Widen your horizons Core Satellite
• Niche Investments
• Alpha Generator

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Why Structured Products ?

• Structured Products have witnessed a huge
  increase in the past few years.
• Investors have exhibited enhanced appetite for
  these investment solutions because of a variety
  of reasons
• Enhancement of risk/return profile
• Capital Protection has proved to be a very
  attractive feature
• Possibility to benefit from innovative payoffs
• Opportunity to be linked to multiple asset
  classes
• Benefit from the performance of traditional and
  non-traditional asset classes
• No currency risk ( CZK Quanto)
• Insurance linked guarantees have also seen a huge
  demand

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Structured Products a fast growing activity

• A business led by the European market
• The most innovative

Structured products Retail market volume 2004/2006
52
EUR Billion
39
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Source Structured retail products
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Structured Products created for a range of
clients
Conservative Profile
Medium Profile
Dynamic Profile

• Investment with total safety
• Pattern recognition for Target Clients
• Lifestyle Simple and Safe
• Risk Tolerance Low
• Current Portfolio Bond Oriented and Less
  Diversified
• Typical Age group 50
• Behavior Traits Highly concerned about risks

• Investment with the optimal balance
• Pattern recognition for Target Clients
• Lifestyle Balanced
• Risk Tolerance Medium and Normal
• Current Portfolio Equities Bonds (or deposits)
• Typical Age group 25 - 60
• Behavior Traits Willing to go the extra mile
  with added risk appetite

• Investment with a maximum leverage
• Pattern recognition for Target Clients
• Lifestyle Adventurous
• Risk Tolerance Extremely High
• Current Portfolio Equity Options Bias
• Typical Age group 25-60
• Behavior Traits Enjoy taking risks for the
  additional upside potential

100 Capital Guarantee
Partial Capital Guarantee
No Capital Guarantee
Best Size ? Fits all Solution
Solution for Gambling can be fun
Play Safe Solution
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Encouragement for Innovation Case Study on
Principal Protected Notes

• From the distributor standpoint
• A true and concrete tool to fight against the
  behavioural bias of small investors

"Odd Lot Theory" Illustration
CAC 40
Net inflows in equity funds in France
Source Bloomberg
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Enhancement of risk/return profileCase Study on
Principal Protected Notes

• From the investor standpoint
• Value added as compared to balanced funds
• Improvement of the efficient frontier

B
A
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Agenda

• Why Structured Products?
• Innovation dedicated to investor needs
• Alternative to Equity Investments
• Alternative to Global Asset Allocation Investment
• Widen your horizons Core Satellite
• Niche Investments
• Alpha Generator

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When did it begin? Much earlier than what you
guessed
One of the first derivatives in history
If any one owe a debt for a loan, and a storm
prostrates the grain, , . in that year he
needs not give his creditor any grain, .. pays
no rent for this year
Hammurabi Code 1800 B.C. Hammurabi was the 6th
king of Babylonia. He unified his kingdom
creating a unique religion, language and law The
Hammurabi Code
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Case study Market context at the end of the 90s

• 1998 LTCM Emerging markets crisis
• Equity Market volatility is higher and higher
• Risk aversion is high, interest rates are low or
  not high enough to match liabilities requirements
• Investors can hardly afford a principal
  protection and an exposure on the increase
• Client needs Principal protected investments
  linked to Equities but not relying on bullish
  markets to generate performance
• ?Answer Creation of "promises" products /
  Mountain range

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1998 the Everest Concept

• Payoff at maturity
• 200 100 of the performance of the worst
  performing stock positive or negative
• If after 10 years, the worst performing stock of
  the portfolio displays a flat performance, the
  investors principal is doubled
• Equivalent to an annual return of 7.18
• As of October 1, 1998 10-Y swap rate was at 5.00

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Innovation in SP answered a Client need
What was possible at this stage Bet on the
increase or the decrease of equity markets
What became achievable with this new range of
Structured Products Bet on the non decrease of
equity markets with principal protection
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Agenda

• Why Structured Products?
• Innovation dedicated to investor needs
• Alternative to Equity Investments
• Alternative to Global Asset Allocation Investment
• Widen your horizons Core Satellite
• Niche Investments
• Alpha Generator

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An alternative to equity investments

• Structured products enable to manage what
• asset managers dream of achieving
• 1. To get the BEST ENTRY point
• Example Strike min mechanism
• 2. and the BEST EXIT point
• Example Launch of emerald concept on 2002, first
  structured product to offer a lock in mechanism
  and a high level of participation rate

• Call on Max Emerald innovation at a glance
• A 6-Year Fund
• Linked to a basket of 12 international stocks
• 100 capital guarantee
• The maximum performance of the basket
• Every 6 months, the value of the basket is
  observed. At maturity, the redemption value of
  the product is based on the best valuation of the
  basket reached on any of the 12 observation dates
• Secure the gain
• At each observation date, the price of the best
  performing stock since inception is locked-in,
  its performance is secured until maturity

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Agenda

• Why Structured Products?
• Innovation dedicated to investor needs
• Alternative to Equity Investments
• Alternative to Global Asset Allocation Investment
• Widen your horizons Core Satellite
• Niche Investments
• Alpha Generator

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Getting the BEST PERFORMING ALLOCATION

• Efficient Allocator
• 3 underlying profiles,
• At maturity investor is exposed to the best
  performing profile, and the principal is
  protected
• Payoff
• 100 of Initial Principal 100 of the BEST
  PROFILEs Performance
• The performance is calculated as the average of
  the performances recorded every six-months since
  inception, negative performances being deemed nil

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Agenda

• Why Structured Products?
• Innovation dedicated to investor needs
• Alternative to Equity Investments
• Alternative to Global Asset Allocation Investment
• Widen your horizons Core Satellite
• Niche Investments
• Alpha Generator

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The Asset Management Industry is changing rapidly

• The asset management sphere has evolved towards a
  core satellite structure with a strong growth of
  the ETF and Hedge Fund industries

Global Mutual Fund Industry 10,000 bn
30 annualized growth since 2000
20 annualized growth since 2000
Hedge Fund Industry 1,800 bn
ETF Industry 500 bn
Source SG Marketing
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Underlyings Demand for Alternative Innovative
Indexation

• ETFs and Structured Products indexation still
  focus on mainstream indices
• Traditional indices have well-known limitations
• No niche markets in terms of regions
• No niche sectors

Source SG Marketing
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Exotic Equity betas new types of underlying for
SP

• Demand for alternative way to generate
  performance
• Play global long term growth themes which are not
  represented in main stream indices
• Example SGI Thematic indices SG in
  collaboration with Dow Jones Indexes and asset
  management specialists such as SAM Group
  (Sustainable Asset Management) has created the
  following indices

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Core ß-research indices overview
Source SG Marketing
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SGI Global Environment

• What is the environment sector?
• Investing in environment means investing in
  companies involved in clean water, alternative
  energy and waste management. Energy and clean
  water savings through recycling as well as the
  production of heat and power in incinerators
  provide attractive approaches to mitigate energy
  and water challenges. Vice versa, rising energy
  prices and water scarcity will drive demand for
  recycled material and thus provide further
  impetus to the development of this sector.
• Index Description
• SGI Global Environment aims to reflect the
  environmental sector. The global index comprises
  30 stocks of companies which have their biggest
  share of revenues in either or several of the
  following investment clusters clean water,
  alternative energy and waste management.
• Index components are selected and weighted
  according to their free float market
  capitalisation and market liquidity.

SGI Global Environment
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Satellite generating a

• a-research range designed to outperform a
  reference index
• Systematic or discretionary strategies (hedge
  fund like) that aim at creating an alpha over a
  specified benchmark index
• Indexation to funds of hedge funds

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Satellite Access to the universe of funds of
hedge funds

• Total Return Strategies
• Alternative investments have traditionally been
  the province of professional investors
• This asset class has enjoyed exceptionally strong
  returns since 1990 with remarkable consistency
  Indexation to funds of hedge funds
• Lower market directionality of this asset class,
  plus its capacity to capture diverse trends
  across all asset classes, and to benefit from
  arbitrage opportunities

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Conclusion

• Equity linked Structured Products are not trendy
  investments but long lasting financial tools
• Their ability to provide added value encourages
  new developments innovation
• Their flexibility allows to address almost all
  client needs

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And what is Adequity?

• First structured products brand fully dedicated
  to European wealth managers since 2001
• Offering a complete range of investment solutions
  and related services dedicated to wealth managers
• Every month, at least one product launch
  embedding the latest techniques of structured
  management
• Benefits from the renowned expertise of GEDS in
  terms of market opportunities and investment
  solutions

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• Thank you for your attention!

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Important Information

• The contents of this document are given for
  purely indicative purposes and have no
  contractual value. Prior to any investment in
  the product, you should make your own appraisal
  of the risks from a legal, tax and accounting
  perspective, without relying exclusively on the
  information with which you were provided, by
  consulting, if you deem it necessary, your own
  advisors in these matters or any other
  professional advisors. Subject to compliance with
  legal and regulatory requirements, Société
  Générale may not be held responsible for the
  financial or other consequences that may arise
  from the investment in this product.
• This product may be subject to restrictions with
  regard to certain persons or in certain countries
  under national regulations applicable to said
  persons or in said countries. It is your
  responsibility to ensure that you are authorised
  to invest in this product. This document does not
  constitute an offer for sale of securities in the
  United States. The securities can be neither
  offered nor transferred in the United States of
  America without being registered or being
  exempted from registration under the US
  Securities Act 1933, as amended.
• The documents relating to this product will
  provide for methods of adjustment or substitution
  in order to take into account the consequences on
  this product of extraordinary events which may
  affect one or several of the underlying
  instruments on which it is based or, as the case
  may be, the early termination of this product.
• Moreover the investor should be aware that the
  capital protection feature requires for the
  Issuer, the Guarantor and/or their affiliates, to
  enter into hedging transactions which have a cost
  and which may affect the market price, liquidity
  or value of the Notes, especially when comparing
  them to the market price, liquidity and value of
  the underlyings of the Note. The Issuer and the
  Guarantor assume no responsibility whatsoever for
  such consequences and their impact on the
  investment
• WHEN SIMULATED PERFORMANCE OR PAST PERFORMANCE
  ARE DISPLAYED, THE FIGURES RELATING THERETO REFER
  TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR
  OF FUTURE RESULTS. When future performance is
  displayed, the figures relating to future
  performance are a forecast which is not a
  reliable indicator of future results.
  Furthermore, where past performance or simulated
  past performance rely on figures denominated in a
  currency other than that of your country of
  residence, the return may increase or decrease as
  a result of currency fluctuations. Finally, when
  simulated performance or performance (whether
  past or future) are displayed, the potential
  return may also be reduced by the effect of
  commissions, fees or other charges.
• For the products benefiting from a guarantee of
  Société Générale or of any other entity of
  Société Générale group (hereinafter referred to
  as the Guarantor), the due and punctual payment
  by the principal debtor of the obligation of any
  sums due in respect of these products is
  guaranteed by the Guarantor according to the
  terms set forth in the deed of guarantee. In this
  case, the investor bears in the end a credit risk
  on the Guarantor.
• The attention of investors is drawn to the fact
  that, by the maturity date, the price of certain
  products can be subject to volatility due to the
  evolution of market parameters and more precisely
  the price of the underlying and the interest
  rates. For certain products, except when Société
  Générale undertakes to assure a secondary market,
  there is no liquid market on which these products
  can be easily traded, and this may have a
  material adverse effect on the price at which
  these products might be sold.
• The information presented in this document is
  based on market data at a given moment and may
  change from time to time. Back testing permits
  the calculation of returns that the product would
  have had if it had been launched in the past,
  presented according to the maturity date. It
  allows an understanding of how the product would
  have performed at different market stages over
  previous years.
• This document is confidential and may not be
  communicated to a third party (with the exception
  of your external advisors on the condition that
  they themselves respect the confidentiality)
  without prior written consent from Société
  Générale.
• The accuracy, completeness or relevance of the
  information provided is not guaranteed although
  it has been drawn from sources believed to be
  reliable.