1. AXA Presents… AXA’s Two-Product Approach IUL Hedging Mechanics The Discount Rate Trap
Christian Kaplan, CFA
VP, Specialty Markets & EPG Life Sales
For Financial Professional Use Only- Not for distribution to the public

2. AXA’s Two-Product Approach
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3. Product Paradigm BL Protect (Single & Surv.) + IL Legacy III
Two Key Components for Success, across Product Spectrum:
Optimize Cost Structures for Targeted Product Solutions
Death Benefit Focus/DB IRR – Levelized Costs
BL Protect (Single & Surv.) + IL Legacy III
Accumulation Focus/CV IRR – Low Early, Higher Late Stage Costs
BL Grow (Single & Surv.) + IL Optimizer III
Reduce Overall Chassis Costs
Comes with benefit of reduced reliance on illustrated rates
Comes at expense of reduced illustrated rates
Net overall effect = Narrower range of return outcomes = increased probability of success!
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4. Why a 2-Product Strategy?
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5. Why a 2-Product Strategy?
For Financial Professional Use Only- Not for distribution to the public

6. Why a 2-Product Strategy?
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7. Why a 2-Product Strategy?
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8. Why a 2-Product Strategy?
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9. Why a 2-Product Strategy?
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10. AXA Equitable/ MONY America Product Portfolio
COI Curve Differentials
AXA Equitable/ MONY America Product Portfolio
Raw COI Curves
AXA Equitable/ MONY America Product Portfolio
Raw COI Curves
For Financial Professional Use Only- Not for distribution to the public

11. Product Paradigm Conclusions
Two product strategy allows:
Improved performance of each individual product for their respective purpose
BL Protect & Legacy II & III for level-funded lifetime premium solves
Focus: IRR on DB
Result: Lower reliance on future returns to perform via levelized lower charges
BL Grow & Optimizer II & III for max-funded short(er)-pay scenarios
Focus: IRR on CV
Result: Lower reliance on future returns to perform via lower charges early on
NOTE: For best results, using Option B to A switch where optimal
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12. IUL Hedging Mechanics
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13. IUL Hedging Mechanics – Part 1
Net Premium
5.26% Yield on GP assumed here
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14. IUL Hedging Mechanics – Part 3
Buy 1yr ATM European Call Option
Sell 1yr OTM European Call Option
Net Cost = Discount Rate/Options Budget (e.g. 5%)
Exposure to Index = Total Notional Value of all segments for all inforce policies every month
Result:
Max Carrier Gain = Cap – Options Cost
Max Carrier Loss = Options Cost
Carrier takes aggregate counterparty risk but no equity return risk!

15. Yield Cost vs. Cap & Floor
1/15/1998
1yr ATM European Call Option Cost (as % of notional) = 10.85%
1yr 12% OTM European Call Option Cost = 5.14%
Net Carrier Cost to Hedge 12% Cap Bull Call Spread = ( )= 5.71%
1/17/2006
1yr ATM European Call Option Cost (as % of notional) = 6.94%
1yr 12% OTM European Call Option Cost = 1.63%
Net Carrier Cost to Hedge 12% Cap Bull Call Spread = ( )= 5.3%
1/15/2013
1yr ATM European Call Option Cost (as % of notional) = 5.79%
1yr 12% OTM European Call Option Cost = 1.37%
Net Carrier Cost to Hedge 12% Cap Bull Call Spread = ( )= 4.41%
Carrier Buys = Cost
Carrier Sells = Income
For Financial Professional Use Only/ Not for distribution to the public

16. Yield Cost vs. Cap & Floor
70% of the options cost variability could be explained by movements in the 10yr TSY
My Conclusion: IUL performance is more closely correlated to FI than Equity Returns
Source: St. Louis FED’s FRED DB - TSY data
AXA Hedging Team - historical hedging cost data

17. Yield Cost Differentials
Nov 2008
Periods of Hedging Cost Spread Compression = Low RFR + Low VOL
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18. IUL Hedging Summary Hedging Costs in IULs
Predominantly Driven by Interest Rate Levels
Through Long-Term options prices via RFR
Mostly from options budget discount rate from carrier (I-Rate Sensitive)
Implied Volatility, although important in options pricing, plays much smaller role in mid-to-long term cap setting for IUL carriers
Return Commitment in IUL not borne by carrier
Counterparty risk exists, but no return risk on payout
Carrier trades assumed GP Yield/Discount Rate for net zero cost
‘Bird in the hand vs. two in the bush’ for consumer
For Financial Professional Use Only/ Not for distribution to the public

19. The Discount Rate Trap (and how AXA helps you avoid it)
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20. Question…
Do you believe, that certain insurance carriers have a competitive advantage long-term, in achieving above-average rates of return on policyholder’s investable assets?
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21. IUL Hedging Mechanics – Part 2
Average Yield on GP across Top 50 = % (5yr avg)
Average Yield on GP across Top 20 = % (5yr avg)
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22. Crediting Rate/Discount Rate Differentials
If all companies achieve roughly the same return on invested assets, how can fixed crediting rates, or IUL cap rates differ so markedly?
In my opinion, factors can be:
Increased reliance on expected future investment returns using historical data (carrier and/or client)
Product Cost Structure Optimization (PL, Exp. Chrgs, COI discounts, bonuses)
Taking more investment risk via derivative instruments, captive reinsurance, etc.
Differing Accounting/Actuarial Standards depending on HoldCo Domicile
Use of different Required Rates of Return on Product Suite (Carrier RoC)
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23. The Efficient Frontier
Carriers can invest almost exclusively here
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24. Using the EF for LI Products
Investment Risk Borne By Policyholder
Investment Risk Borne By Carrier & Policyholder
Investment Risk Borne By Carrier
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25. Outcome is not Singular
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26. Outcome is not Singular
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27. Outcome is not Singular
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28. Outcome is not Singular
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29. A Thought Experiment
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30. Beware of the Discount Rate Trap
Simple Life Insurance Product Calculator to show the impact of discount rates versus chassis costs
Modeled after BL Protect COI Curve and Premium Load Structure
Results using sample male aged 30, Standard NT:
Current BLP COI 2% Crediting Rate – MPC to A100 = $8,054
1.75x BLP COI 4% Crediting Rate – MPC to A100 = $8,027
1.5x BLP COI 4% Crediting Rate – MPC to A100 = $7,198
With 10-yr 2.4%, which would you rather rely on as a policyholder?
Costs are Sticky
Discount Rates are not
For Financial Professional Use Only/ Not for distribution to the public

31. VP, Specialty Markets & EPG Life Sales
Thank You!
Christian Kaplan, CFA
VP, Specialty Markets & EPG Life Sales
(212)
Life insurance products are issued by AXA Equitable Life Insurance Company or MONY Life Insurance Company of America and are co distributed by AXA Network, LLC and AXA Distributors, LLC. Variable Life products are co- distributed by AXA Advisors, LLC and AXA distributors, LLC.
Please be advised that this presentation is not intended as legal or tax advice. Accordingly, any tax information provided in this article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transactions) or matters) addressed, and clients should seek advice based on their particular circumstances from an independent tax advisor. Neither AXA Equitable and its affiliates do not provide legal or tax advice.
For Financial Professional Use Only- Not for distribution to the public