At $2.3 billion, total net sales of segregated funds were down by more than half in 2010 compared to $4.8 billion in 2009, according to industry data collected by Investor Economics. This sharp decline is due massive redemptions experienced by some players in the market. In some cases, these redemptions required substantial top-up payments to meet the capital guarantees of certain funds sold at the height of the tech bubble a decade ago.
Iassen Tonkovski, associate consultant with Investor Economics, explains that gross sales were actually up by 9% in 2010 over 2009, but maturing segregated fund policies resulted in a high level of redemptions. “These are policies that were sold 10 years ago prior to the introduction of the capital requirements and prior to the tech bubble at that time,” he says. “These are policies that came into maturity in 2010 and you see a lot of redemptions…Indeed, redemptions were up 48% from 2009.”
In the accompanying table from Investor Economics (see page 8) on segregated fund net flows (includes sales and redemptions), there is a particularly notable change in the top 10 list of seg fund sellers. In 2009, Manulife Financial held the number one position with $1.78 billion in net sales, whereas in 2010 it had dropped to fourth position with $289 million in net sales. Meanwhile, Industrial Alliance shot up to first position with $927 million in net sales from fourth position in 2009 with $476 million in net sales.
Mr. Tonkovski adds that the level of redemptions contributed to the downward movement of some insurers in terms of their net sales ranking in 2010.
This was certainly the case for Manulife Financial. Michael Ondercin, the insurer’s assistant vice president of guaranteed investment products, says that gross segregated fund sales for 2010 were about $2.5 billion, but redemptions were close to $2.2 billion.
“Most of the market, not just Manulife, had a lot of maturity guaranteed products that were sold back in 1999 and 2000,” he explains, adding that much of this block came into their 10-year maturity guarantee in 2010. “Once the maturity guarantee top up hit, advisors used it as an opportunity to either transition to different products, go to mutual funds or even look at other segregated fund products.”
2010 was the big year for redemptions for the industry, he adds because many products sold back in 2000 had reset features which locked in the 100% maturity guarantees at the top of that market. “Some (investors) had automatic resets to their guarantees or their advisor would do a manual reset which extended the guarantee out 10 years but locked in the current market value,” he recalled.
Transamerica Life Canada was also hard hit by redemptions with negative net sales of $650 million. Top ups paid amounted to one billion, Geraldo Ferreira, vice president, investment product development and management, told The Insurance and Investment Journal (see article, page 11.
Despite the high level of redemptions in 2010, Mr. Ondercin of Manulife points out that the segregated fund industry has been doing well compared to other investment sectors such as mutual funds. “We’ve done a pretty good job in Canada of having positive net sales almost every year for the last seven or eight years.” Meanwhile, he adds that the mutual fund industry has seen much more fluctuation with some great years and then bad years with “tremendous” net negative redemptions.
Mr. Ondercin adds that when a client exits a seg fund contract, the money does not always leave the company. “We’ve seen some transition into our mutual fund dealership Manulife Securities. Last year, there were even some clients who didn’t want to participate in the markets at all and went into our GIC products.” And, in other cases, the money is taken out to be used for other purposes, such as buying a certain asset or to fund a child’s education, he added.
As for 2011, Mr. Ondercin expects an improvement in Manulife’s net sales. The low net sales in 2010 were “driven by older products that hit these maturity guarantees. The good news going forward is because most of our sales are in income guaranteed products or products with much longer maturity guarantees, that we’re not likely to see a 2010 again.”
Also, he added that in 2011, some contracts will be maturing, but the amount of top ups will be significantly lower than it was in 2010. This is because by 2001, the stock markets had declined from their peak in 2000.
The level of top ups paid out on maturing policies depends on the type of fund in which they were invested, Mr. Ondercin adds. “Some of the funds would have rebounded almost all the way back. Other equity funds may not have, especially the US equities wouldn’t have come all the way back.”
Manulife declined to disclose how much was paid out in top ups during 2010. But Mr. Ondercin says he does not consider top ups to be losses for the company. “We are required to set aside a certain amount of reserves and capital for this over time. We do collect fees to account for this…I wouldn’t classify them as losses. They were top ups that the clients’ fees were paying for.” He adds that Manulife had been anticipating these redemptions and built up its reserves in consequence.
Jim Virtue, president and CEO of PPI Solutions Inc., a national managing general agency (MGA) says that like the market in general, his company saw both a high level of seg fund sales and redemptions in 2010. In particular, it had a substantial maturing block of seg funds with Transamerica.
“I would say the ones that were particularly subject to redemption were the ones that 10 years ago were invested in the technology funds,” he added. In some cases the top ups were greater than 50% of the value of the fund, he added.
Commends the industry
Mr. Virtue says he commends the insurance industry on how it handled itself in 2010. “I think the industry as a whole, and Transamerica specifically, should be very proud…notwithstanding the chaos in the market, the industry made good on all of those guarantees. I think this is something that the industry should be shouting from the rooftops. Those guarantees have value. We just proved that.”
He added that previously, critics of segregated funds have often questioned the usefulness of the guarantees and the fees that investors paid for them. The argument was that these guarantees were never called on because the stock market goes up given enough time. Now this view has been proven incorrect. “Here there was a case where we sold products that have guarantees. The guarantees were called upon and in every case all of those clients received the full amounts of their guarantees. I think it is a tremendous success story for the industry and it proves to a lot of the doubters the value of segregated funds and the value of that guarantee,” states Mr. Virtue.
He believes that redemptions should fall back to normal levels in 2011. “My view would be that most of that bubble from 10 years ago is now behind us and we’re into a more normal phase again.”
Does he expect another year like this in 2018 when seg funds purchased before the 2008 market crash reach maturity? It depends on the market at the time, he says. “I think the situation that happened with Transamerica – they were invested in the NASDAQ index – I think that was quite an unusual circumstance.”
Before the crash of 2008, he adds, many companies did still have 10-year 100% guarantees. “What you’ve seen is the companies have generally moved away from that now. I believe that no one now has a 100% guarantee over 10 years. Some have moved to 100% guarantees over 15 years.”