Axa Spain partnered with Societe Generale corporate & investment bank (CIB) in Q1 2016 to launch Axa Best Selection, a new financial product inspired by the tax reforms introduced by the Spanish government in June 2014 under the Personal Income Tax framework, which establishes that any returns generated by long-term individual savings insurance products (seguro individual de ahorro a largo plazo - SIALP, and cuenta Individual de ahorro a largo plazo - CIALP), would be exempt from taxation.

Following the launch of the fourth tranche of the Axa Best Selection (April 2017) which closed its subscription period at the end of April, SRP spoke to Thierry Vaudelin, director of cross asset solutions sales- Iberia at SG CIB, and Francisco Javier Parra, director, individual savings and financial services, at Axa Spain, about the opportunities in this segment, how to differentiate the offering and the challenges ahead to bring the new product type to the mainstream.

This product is an addition to Spain's structured products market and has also brought to the market new features around insurance-linked products including the ability to guarantee up to 85% of the capital contributions, according to Parra.

"The tax reforms opened up new opportunities for insurance firms as for the first time we can offer soft-protected products as opposed to 100% fully protected structures," says Parra. "With the introduction of the new rules we saw an opportunity to differentiate our offering in the market and we began looking for a product that would allow us to match the 85% capital protection with the fiscal/tax advantage."

Axa has spoken since then with a number of product manufacturers but Societe Generale offered the most comprehensive set up, according to Parra. "This is a proposition based on the issuance of multiple structured notes within an open ended/continuous structure," says Parra. "The resulting product ended up filling all the requirements and allows investor to benefit from the capital protection, a potential of high returns and the tax benefits associated to it."

Because the product is based on periodic premium payments SG CIB issues structured notes periodically with the same characteristics (three times per year) so each premium payment is invested in a different tranche but with the same conditions and a shorter term, according to Vaudelin.

"Over the five-year term we issue 15 structured notes, and this is a differentiating factor because SG backs the conditions of those notes and this provides piece of mind to the end investor," says Vaudelin.

The product has been structured in a way that provides soft-protection (85%) and exposure to a basket of funds selected by Axa including AB American Growth Portfolio, Axa WF Framlington Europe, Axa Rosenberg Pacific ExJapan Small Caps, Axa WF Framlington Europe Small Cap, Axa WF Framlington Euro Real Estate Securities and Axa IM FIIS Europe Short Duration High Yield. The 85% capital protection applies to the contributions made into the product and the guarantee is provided by looking at the monthly performance of the underlying basket: investors get a participation of 76% in positive monthly returns instead of 100%.

The underlying strategy is not a basket of funds per se but a bespoke index with a systematic risk control mechanism developed by SG and calculated by S&P Opco, (a subsidiary of S&P Dow Jones Indices), says Vaudelin.

According to Parra, from a market perspective, the product enabled Axa to position its offering in a completely different way as other providers in the Spanish market that are focused on the traditional fund wrapper and the full capital protection.

"The problem with traditional capital protected funds is that there is not much room to generate yield," says Parra. "We were looking for a product that would involve limited risk taking and a higher potential return."

So far the product has outperformed most of the traditional capital protected products we have seen out there, says Parra, adding that as Axa started to promote its fourth campaign around this product it noticed that "having a track record helps at the point of sale as you don't talk theoretically but you can show how the product has performed".

According to Parra, the new product type fills a gap in the market not only because the underlying strategy is offered within a life insurance wrapper but also because it's aimed at clients that are seeking potential higher returns on their investments and are willing to take some risk.

"We have another version of this product for clients that want to invest more than €5,000 without the tax exemption and we also offer other structured notes with full capital protection for the more conservative clients," says Parra. "However, because of the tax exemption and the potential yield Plan Ahorro 5 offers this range is getting significant traction among clients that are happy to give up some of the protection in exchange of a potential 10% annualised return which is a pretty appealing yield for a retail investor."

The product is performing well and this will help to establish it in the market as an alternative to the more mainstream structured products such as funds, according to Parra. "From an Axa perspective it also complements our existing offering and enables us to provide answers to different clients' needs and risk profiles," says Parra.

According to Vaudelin, a number of Spanish providers have approached SG CIB and enquired about this product, and the French bank believes there is still room to increase its market share.

"For us, this represents an opportunity to leverage our equity derivatives DNA and capitalise on our structuring and engineering capabilities," says Vaudelin. "We think this segment will also provide new opportunities to expand the underlying choice as we have shown by bringing a risk controlled index to the market. The market has evolved and the aim now is to provide meaningful solutions as opposed to push fancy products."

According to Parra, the uptake of the product remains low as "the product is somehow going against what is been offered in the market".

"[However,] as we know investors vote with their feet," says Parra. "If the product performs and delivers according to investors' expectations we think it will take off. Having a one-year track record is already helping us with our own commercial network and to promote it among clients."

Parra also expects the partnership with SG to bear fruit in the short term and that other manufacturers will increase their footprint in this segment. "We are very pleased with the partnership with SG and we hope to continue working with them to increase the offering in this segment in due course," says Parra. "SG is at the forefront in this space and it is only a question of time before other issuers move to capitalise in this space."

Axa has marketed over 20 structured insurance products in Spain of which six are still live products.

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