The International Investment Bond by AIG Life International is a new offshore investment bond.  This article, part of a series of monthly LifeBase product analyses, takes a detailed look at the Bond to see how it compares in its peer group.

Company

AIG Life International (“ALI”) is one of the younger offshore life companies in the Isle of Man, established in 2002.  Formerly named American Security International until a change of name in 2007, ALI sits offshore alongside a sister company AIG Life (Ireland) established in Dublin.

Having transacted large volumes of specialist single premium business in recent years (over £1 billion of new business in 2006), ALI is now moving into the mainstream, and the International Investment Bond (IIB), launched in February 2008, is the first part of this new market strategy.  The Bond is aimed both at UK and international markets, with AIG having significant sales presence both in and out of the UK.

In the Isle of Man, ALI has 50 staff.  Worldwide, however, AIG has a few more – some 106,000 more at the last count!  AIG is the 6^th largest public company – and the largest insurance company - in the world.  As much as it pains me to say it, they also sponsor the best football club in the world.

Funds

The IIB is, as its name suggests, an investment bond, which is to say that it wraps a defined range of funds .  In ALI’s case, the range of funds is one of the widest in its sector, with in excess of 200 funds.  The investment proposition is accentuated by the fact that fund switching is free, at least in relation to the first 20 switches in any year.  (For the over-active investor, subsequent switches incur a £20 charge.)

The IIB links to over 50 fund management groups, which makes it one of the most diverse of its type, including:

The initial fund range for the IIB has been constructed by ALI following an overlay of quantitative and qualitative research methods.  It should be noted that the funds are direct external links, rather than mirror funds.  Consequently ALI charges are deducted by cancellation of units, rather than via the unit price.

Features

The IIB is a comprehensive product with a choice of no less than four charging structures, which is an unusually large number of options for an investment bond. 

The Bond is available also in a choice of life assurance (whole of life) structure or capital redemption (99-year) form, with no price differential between the two forms.  For the life assurance version, the death benefit is 101% of surrender value (or 100.1% if all lives assured were aged 80+ at inception). 

The minimum premium for the IIB is £25,000, or €37,500/$37,500 for international business. 

Charges

As noted above, the IIB comes in four charging structures, one front-end loaded, three back-end loaded.  For the three back-end loaded designs, annual withdrawals of up to 10% pa (non-cumulative) can be made in any year.

The full product charges and design are summarised in Table 1 below.

TABLE 1	Option A – “Penalty-Free”	Option B – “Establishment”	Option C – “Total Allocation”	Option D – “Enhanced Allocation”
Investible Percentage Convert x 1.5 for €/$ amounts	99%	100%	100%	£25-49k: 101.0% £50-99k 101.5% £100k+: 102.0%
Initial Charge % of premium	7%	-	-	-
Establishment Charge (% of fund value or premium if higher)	-	1.5% pa x 5 years = 7.5%	-	1.7% pa x 5 years = 8.5%
Administration Charge (% of fund value or premium if higher)	0.35% pa	0.45% pa	1.20% pa	0.55% pa
Surrender Penalties (% of fund value or premium if higher)	-	7.5% reducing over 5 years	8% reducing over 8 years	10% reducing over 5 years
External Fund Charges	Heavily discounted (mostly eliminated/nil) initial charges on external funds. Standard annual management charges apply on external funds.
Dealing Charge	20 free deals pa, £20 thereafter
Loyalty Bonus	0.25% pa bonus units if premium > £250,000

 

Our analysis (Chart 1) suggests that the difference in projected values is relatively small, across the four structures.  Through some actuarial back-solving program, they all have remarkably consistent reductions in yield of 2.8-2.9% pa over 10 years (which is based on an average external fund charge of 1.5% pa).  The choice of which charging option is therefore substantially a marketing decision, as opposed to a financial decision (at least when looked at over a 10-year term) - though Option C will prove the most expensive of the four in the longer term.

CHART 1: PROJECTED SURRENDER VALUES, OPTIONS A-D, £50,000 PREMIUM (source: LifeBase)

To see how the IIB compares against other products in its sector, Table 2 shows projected policy values on the standard FSA projection basis.  The companies and products selected for this comparison are aimed more at international markets than the UK market.  (LifeBase users can of course see the full picture.)  The comparison shows ALI’s new Bond to be very competitive, and therefore well-positioned.

TABLE 2 – COMPETITOR COMPARISON PROJECTIONS, £50,000 PREMIUM

source: LifeBase