Axa Equitable Life Insurance Company has begun offering US investors a new market stabiliser option within its Incentive Life Optimizer variable universal life (VUL) insurance product.
This equity index-linked investment option offers two features traditionally found within a retail structured note, namely an upside performance cap and a fixed downside buffer against losses.
"We believe we are the only ones with this cap and downside buffer," said Dave Kahal, the newly-knighted president of the National Division of Axa Advisors, the company's retail sales organisation which includes about 6,000 financial advisers. Before assuming his new role on 1 April, Kahal served as the firm's senior vice president and national sales manager for life insurance. Kahal was closely involved in the development of this new option.
Although other insurance companies offer VUL investment subaccounts options whose performance is linked to an underlying index, Axa Equitable appears to be a pioneer in offering a performance cap and downside protection aimed at allowing investors to participate in the growth of the equity market while protecting assets from a market decline or substantial volatility.
Moreover, plans are already on the drawing board for Axa Equitable to, later this year, offer similar structured note-like caps and buffers on other proprietary investment products.
The concept was born out of consumer demand, Kahal said. Having seen their investments suffer seriously over the past couple of years, investors recognised the need to rebuild their nest eggs with equity investments but were not prepared to face another significant market decline, he noted. Advisers told Axa officials that their clients wanted some protection certainty.
The market stabiliser option tracks the S&P500 Price Return index; essentially the S&P500 index excluding dividends. Each month, the Axa rate committee will establish a new return cap on the subaccount, which will have 12-month lockup segments after which time investors can transfer all or some assets into or out of this investment option.
The cap cannot fall below 6%, has no upper limit and will initially be set at 15%. Kahal said Axa has committed to keeping that 15% cap level for at least the next six months, although it will vary with market conditions after that. He also noted that caps will fluctuate with equity volatility and changes in interest rates.
The initial downside buffer is 25%, although by prospectus rules Axa can increase (but not decrease) that buffer in the future. The buffer will cover up to the initial 25% decline in the performance of the underlying index during a single 12-month period. However, if the investor chooses to roll assets over into a new 12-month segment, the buffer will start anew in covering downdrafts up to 25%. Axa will use a point-to-point review at the end of the segment to determine the overall performance change.
According to Kahal, on average the market stabiliser option will cost 0.40% more than the average cost of the other subaccount investment options available within the Axa Equitable VUL. All-in expenses, which include mortality and expense costs of 0.80% but not the cost of insurance, will be 2.25%. "We think it's a cost-effective way to bring downside protection to the market and allow investors to dip a toe back into equities," he said.
The market stabiliser option is not yet available to residents of New York or Montana.