Francois Montenay : « Variable Annuities, a new generation of life insurance»

Francois Montenay, National Sales Manager - France - at Axa Global Distributors , answers our questions about variable annuities contracts in order to better explain their operating model [1]

It must be said that these financial products, mostly used as additional income sources and with complex mechanisms for the uninitiated, are now booming in France in a context of uncertainties over pension compensation...

What is this product? Can you explain the mechanism?

Today, The product range branded Secure Advantage ® consists of two products: a guaranteed income product called «Secure Advantage® Revenus Garantis», and a capital guaranteed product called « Secure Advantage® Capital Garanti »

The product Secure Advantage® Revenus Garantis is designed for individual life insurance denominated in units of account that includes a lifetime guarantee to benefit from additional income sources, called "revenus garantis".

This product enables to receive a lifetime guaranteed income. The amount may increase if financial markets perform well but can never decrease even in case of poor performances of financial markets [2].

The product operates as follows:

First, there is an accumulation phase for a minimum of two years, during which the calculation basis of the guaranteed income can increase every year. At the anniversary date of the contract, the calculation basis becomes the maximum of three amounts: the previous year calculation basis, increased premiums with a 2% rate per annum and the value of savings in the account.

Then there is a distribution phase during which the amount of guaranteed income is taken from savings account and transferred to the client until the savings come to nil. Starting from there, AXA Life Europe continues to pay the guaranteed income but as an annuity until the death of the insured. The guaranteed income is equal to a percentage of the income base. This percentage depends on the age at which the insured begins the distribution phase: 4% from 60 to 64 years and 4.5% for 65 years and older.

This solution guarantees a additional lifetime income even when your capital comes to nil.

This product provides no guarantee on the capital invested. Moreover, any redemption exceeding the amount of guaranteed income will lead to a decrease of the amount of guaranteed incomes in the future, in proportion of the excess.

The product Secure Advantage® Capital Garanti is designed for life insurance with a guarantee denominated in units of account.

This product enables to can take advantage of market growth with the guarantee to recoup, after a waiting period of 10 years, the capital invested regardless of market performances.

Every anniversary date, we look at the savings value of the customer contract. If the value is higher than the one of previous year , it is secured with a ratchet mechanism. If the value decreased (in case of bear market, for example), the ratchet mechanism is not activated and the guaranteed capital remains equal to the one achieved during the previous year.

Any redemption leads to reduction, in proportion, of the guaranteed amount

Since when is this type of product sold?

We must first remember that the U.S. subsidiary of AXA is behind the creation of such guarantees in 1996 and has since become a major player in this segment. In France, this range has been launched by AXA France for internal networks in 2007 (Capital Resources) and 2008 (Accumulator).

The range of products offered under the brand Secure Advantage ® is marketed in France since September 2009 by AXA Life Europe Limited via banks or wealth management advisors with which ALE has entered into partnerships

What are the advantages and disadvantages of these products?

Most experts believe that the arrival on the French market for these products denominated in units of account which include specific safeguards is a true innovation that represents "the new generation of life insurance. " Products with guarantee of income are particularly suited to the current period which saw the arrival at the age of retirement of baby boomers, so with real financing needs of additional resources for retirement and also for dependence. The only question of these experts is how fast this innovation will spread into the market..

If we get into the details of the products range Secure Advantage®, I would highlight the following advantages:

About Secure Advantage® Revenus Garantis :

 Opportunity to benefit from market performance while being guaranteed a minimum additional income for life
 Opportunity to secure the growth achieved every year in the financial markets
 Tax advantages of a life insurance contract
 Availability of capital (no warranty on it)
 Guarantee of additional resources even when capital is depleted
 Access to leading companies in asset management to help the client to yield profits of his investments

About Secure Advantage® Capital Garanti :

 Opportunity to benefit from market performance while having the guarantee to recoup at least the initial capital invested (after a waiting period of 10 years)
 Opportunity to secure the growth achieved every year in the financial markets
 Tax advantages of a life insurance contract
 Access to leading companies in asset management to help the client to yield profits of his investments

Disadvantages?

As we have seen, these two products meet real needs for guarantees from customers. They therefore do not have disadvantages in the absolute from the moment this solution is suggested in a context matching the need and risk profile of the customer. Two points, however, raise some reservations: First, the fact that the product is relatively new in France. Keep in mind that this product has been sold for a long time in other developed countries (U.S. and Japan in the lead), where the need of additional income for retirement have emerged more quickly than in France. The second reluctance is related to guarantee fees. Customers are accustomed to paying insurance premiums to protect their real estate assets, their cars, but not for their financial assets. But the idea is gaining ground.

How big is this market abroad and in France?

In the U.S. it is a huge market. Sales of products denominated in units of account with guarantees, account according to different years for 150 to 180 billion dollars per annum. In Japan it is between 25 and 35 billion € per annum. It is obviously difficult to make reliable projections, but we believe these products should be 5 to 10% of new business in the medium term. Consultants such as Oliver Wyman or Watson Wyatt believe that the French market in 2020 will worth between 95 and EUR 200 billion (Source: company homepages - October 2010). However, we expect a strong growth for these products : more and more financial advisors and brokers seem to be aware of the benefits they can offer to their customers in preparation for their retirement.

Can you give us the typical profile of the subscriber?

These products are aimed primarily at people who have issues of replacement rates at retirement and who fear the negative impact of falling markets on their savings. These customers are typically in the range "well-to-do"to "wealthy" of the market and are preparing to retire or just take it. AXA Life Europe Limited offers guarantees for the various phases of their retirement.

How does the guarantee mechanism operates ? What is the cost for the subscriber?

Guarantee fees are paid for benefit of the protection mechanisms of the contract, like insurance premiums paid for coverage. They are calculated on the basis of the guaranteed income base and are valued at 1.40% per annum for Secure Advantage® Revenus Garantis and 1.90% per annum for Secure Advantage® Capital Garanti.

How AXA hedges its risk?

 The individual life insurance contracts with guarantees denominated in units of account are products with very long maturity (20, 30, 40, 50 and sometimes 60 years). How does AXA manage to hedge the portfolio and with what instruments, knowing that there is little or no market for these maturities, whether it is bond or equity?
 On the other hand, how companies like AXA manage to hedge actuarial risks, including mortality, longevity and redemption associated with some GMxb products ? Are there any tools like it could exist for the financial risks?

AXA uses a sophisticated hedging program, which relies on the experience we have of marketing these products worldwide, particularly in the USA over the last 15 years. We managed to go through safely two world recessions and risk management tools we use have always enable us to meet our commitments to our customers.

To hedge the financial risks we use financial instruments such as index futures or options. We compute our positions on financial markets on a daily basis.

As for the hedging of actuarial risks: It is part of AXA’s business to take, in its balance sheet, longevity, redemption and mortality risks and transform or transfer them via reinsurance or financial markets. Today we do not use financial markets to hedge these risks.

We demonstrated the viability of these products through our presence in this market, which is a strong heritage and gives us real credibility.

AXA Group is also one of the largest insurers and most established in the life insurance market and savings in general. Thus it benefits from years of experience working to develop its proprietary analysis tools that enable it to sustainably manage the risk in a responsible way to benefit of both customers and shareholders.

What are your competitors in France on such products?

Currently, very few companies offer these types of products on the French market: two others offer a product with guaranteed additional incomes and no one else offers similar products with guaranteed capital. We take the presence of several players in this market as a positive, as it strengthen the credibility of such offers. As we have mentionned, the AXA Group is the creator of these guarantees and has a very strong global position in these products resulting in very different sales and marketing experience. We are confident that, with the quality of our offer, the help we provide financial advisors with, and the reputation of the AXA brand in France, we will always be extremely well positionned to compete without losing confidence of our customers.