Broker Seminar March 2018 Agenda The Structured Investment Journey - PowerPoint PPT Presentation

Broker Seminar March 2018

Agenda • The Structured Investment Journey The SRP Market from 2014 to 2017 • Comparing Ireland and the rest of Europe • • Its not all about Capital Protection How accepting some Capital at Risk allows for creativity in Managing • Risk and Generating Returns • Things to watch out for Some new product innovations/features are good and some are less so • • Our Current Range of Structured Investments Reminder of the Key Features of our 3 Core Structured Investments • • Other Upcoming Broker Training & Education • Closing Summary, Questions & Answers

Structured Investment Journey Ireland & Europe since 2015

The Structured Investment Journey • Facts & Figures (2015 to 2017) • Ireland v Rest of Europe • Product Trends

Facts & Figures – The Irish SRP Market • The Irish Structured Investment market averaged €1.1bn and achieved sales of over €1bn every year in the 15 years from 2000 to 2014 • The market shrank from 2015 when Bank Assurers began to focus on a “funds only” investment solutions and platforms Structured Investment sales in Ireland 2015 2016 2017 921,000,000 719,000,000 522,000,000 • The breakdown of the Irish market is more interesting

Breakdown of the Irish SRP Market 2015 Sales Share 2016 Sales Share 2017 Sales Share Capital at 180,000,000 19.54% 304,000,000 42.28% 277,000,000 53.07% Risk Partial 479,000,000 52.01% 359,000,000 49.93% 219,000,000 41.95% Capital Protection 100% 262,000,000 28.45% 54,000,000 7.51% 26,000,000 4.09% Capital Protection > 100% 0 0% 2,000,000 0.28% 0 0% Capital Protection Total 921,000,000 719,000,0000 522,000,000

Breakdown of the European SRP Market 2015 Sales Share 2016 Sales Share 2017 Sales Share Capital at 49,560,000,000 52.20% 50,247,000,000 52.35% 48,990,000,000 68.17% Risk Partial Capital 19,639,000,000 20.69% 11,501,000,000 11.98% 7,822,000,000 10.88% Protection 100% Capital 20,709,000,000 21.81% 26,156,000,000 27.25% 10,725,000,000 14.92% Protection > 100% 5,027,000,000 5.30% 8,072,000,000 8.41% 4,328,000,000 6.02% Capital Protection Total 94,935,000,000 95,976,000,000 71,865,000,000

Compare Irish & European SRP Market 2015 2016 2017 Ireland Europe Ireland Europe Ireland Europe Capital at 19.54% 52.20% 42.28% 52.35% 53.07% 68.17% Risk Partial 52.01% 20.69% 49.93% 11.98% 41.95% 10.88% Capital Protection 100% 28.45% 21.81% 7.51% 27.25% 4.98% 14.92% Capital Protection > 100% 0% 5.30% 0.28% 8.41% 0% 6.02% Capital Protection

Irish v European SRP Market Trends 2015 2016 2017 3 Year Change Ireland Europe Ireland Europe Ireland Europe Ireland Europe Capital at 19.54% 52.20% 42.28% 52.35% 53.07% 68.17% +53.89% -1.15% Risk Partial 52.01% 20.69% 49.93% 11.98% 41.95% 10.88% -54.28% -60.17% Capital Protection 100% 28.45% 21.81% 7.51% 27.25% 4.98% 14.92% -90.08% -48.21% Capital Protection > 100% 0% 5.30% 0.28% 8.41% 0% 6.02% -100% -13.90% Capital Protection

Not all about Capital Protection Capital at Risk = Creativity & Innovation

Its not all about Capital Protection • The relationship between Risk & Return • How Structured Investments work? Capital Protected Bonds • Capital at Risk Bonds • • Introducing Capital at Risk Accepting some Capital at Risk allows for creativity in • Managing Risk and/or • Generating Returns • • Our Current Range of Structured Investments include 2 of the most common Capital at Risk structures Auto Callable – Kick Out Bonds for Capital Growth • Reverse Convertible – Fixed Return Bonds for Income •

Relationship between Risk & Return

How Structured Investments work? • Firstly, Capital Protected Bonds Formerly Tracker Bonds • Now mostly listed Notes/Certificates • • All Capital Protected Bonds have 3 parts: 1. Capital Protection Part: the amount set aside to pay for the Capital Protected Level 2. Investment Upside Part: the amount spent on to generate returns 3. Upfront Fees: amount payable to Broker & Manufacturer

Example 90% Capital Protected cont. • Example 5 Year Capital Protected Bond: 1. 90% Capital Protection: 86.2% set aside initially will be worth 90% at maturity 2. Investment Upside Part: 9% of the total spend 3. Upfront Fees: 4.8% of the total spend • Investment Part: What can 9% buy? A EuroStoxx 50 call option premium is around 18% = 50% Participation • A Basket of Low Vol Absolute Return Funds/Bond Funds call option • premium is around 4.5% = 200% Participation Our Solactive European Equity Index call option premium is 6% = • 150% Participation Note: All figures are for illustrative purposes only

How Structured Investments work? • Capital Protected Bonds • Capital at Risk Bonds 1. More than Full Capital at Risk 2. Full Capital at Risk with No Protection 3. Full Capital at Risk with Soft Capital Protection 4. Full Capital at Risk with Conditional Capital Protection 5. Other Derivatives

Introducing Capital at Risk • Accepting some Capital at Risk allows for creativity in Managing risk and/or Generating returns • • Managing Risk Soft Capital Protection • Downside Barrier (above = good, below = potential for loss) • • Generating Returns Fixed/Guaranteed Returns • Returns from Rising, Flat or Falling Markets • Higher Product Performance than Market Performance • New Asset Classes/Regions/Sectors/Futures/Options etc. • • Our Current Range of Structured Investments include 2 of the most common Capital at Risk structures Auto Callable – Kick Out Bonds for Capital Growth • Reverse Convertible – Fixed Return Bonds for Income •

Capital at Risk – for Fixed Return/Income Typical Fixed Return/Income Bond Bond Parts Broker Solutions and The Issuing Bank Investors Down and In Knock Benefit Above Barrier Benefit Below Barrier In Put Option Reason for Trade Annual Coupon Using Long Positions/Dividends in Equity Indices Example 3.833% Corresponding Derivative (23% over 6 years) (Hedge DIKIP) Cap the Return Fee Upfront Fees Execution Fee Total 100% 100%

Capital at Risk – for Capital Growth Typical Kick Out/Auto Call Bond Bond Parts Broker Solutions and The Issuing Bank Investors Down and In Knock Benefit Above Barrier Benefit Below Barrier In Put Option Reason for Trade Kick Out/Auto Call Using Long Positions/Dividends in Underlying Equities Example 5% every 6 months Other Derivatives to Hedge if greater than 90% exposure to DIKIP & Auto Call Cap the Return Fee Upfront Fees Execution Fee Total 100% 100%

Things to watch for Not all innovations and features are positive

Things to watch out for…. • Modern Structured Investments facilitate great innovation and creativity opportunities but beware: The majority of additional features are added to make the product look better rather than actually improve it Most “rinky dinks” make the product cheaper rather than better Rule of Thumb: the simpler the product payoff, the more likely it is that it will work

Things to watch out for: Examples Usually Positive Product Features Usually Negative Product Features Adding returns to 100% of initial Adding returns to 90% of initial Averaging: For no more than 12 Averaging: For more than 12 months, months and monthly quarterly/6 monthly/annually etc. European Capital at Risk Barriers: American Capital at Risk Barriers: observed at maturity only observed continuously Constant Kick Out Barriers Step Down Kick Out Barriers Synthetic Indices with positive & Synthetic Indices with negative negative features illustrated/marketed features not clearly disclosed or with equal prominence without Warning Boxes in relation to negatives Being clear that Underlying Suggesting that Underlying Investments with low risk/volatility are Investments with low risk/volatility can likely to give low investment returns provide high returns or market returns

Example 1 Returns added to 100% or 90% • 5 Year, 90% Capital Protected Bond Option 1: 200% Participation added to 90% Capital Protected Level • Option 2: 150% Participation added to 100% of Initial Investment • Performance of Underlying Option 1 Product Return Option 2 Product Return -15% -10% -10% -10% -10% -10% -5% -10% -5% 0% -10% 0% +5% 0% 7.5% +10% 10% 15% +15% 20% 22.5% +20% 30% 30% +25% 40% 37.5%

Example 1 Returns added to 100% or 90% • Why add returns to 90% of initial investment amount rather than 100% of initial investment amount Results in Higher Participation: Marketing of product is easier but does • the client benefit? You have a strong view that the Underlying Investment is going to • produce high returns (the Higher Participation will accelerate returns) • Sample Pricing Dynamics for Product launched in February Product with Absolute Return Underlying with returns added to 90% • Capital Protected Level gave 225% Participation and 5% Upfront Fees Product with same Absolute Return Underlying with returns added to • 100% of Initial Investment gave 100% Participation and 2% Upfront Fees