The departure of a number of insurers from the guaranteed withdrawal benefit (GWB) market and an ongoing high level of redemptions converged to hammer net sales in the segregated fund market in 2012.
nomics shows that industry net sales were down 42.5% in 2012 compared to a year earlier. “That difference is largely due to a lack of GWB sales and ongoing pressure from redemptions from existing products,” explains Karol Kalejta, senior analyst with Investor Economics.
Gross sales of segregated funds stood at $11.7 billion in 2012, which is a drop of 4.6% compared to the previous year.
Meanwhile, total segregated fund assets were up in 2012, hitting $91.6 billion, which is growth of 6.1% over 2011. The majority of this growth – an estimated 4.7% – is due to market effect, Mr. Kalejta says. “The assets are up over the 90 billion dollar mark, which is probably the highest it’s ever been, so even though you have a decrease in sales you have increasing assets…the markets have been strong.”
At $10.3 billion, total segregated fund redemptions were 2.1% higher than the year before.
This high level of redemption activity can be accounted for by the fact that products sold 10 or 15 years ago are rolling into their maturity period now, Mr. Kalejta explains.
In terms of individual company rankings, one of the most notable changes saw Empire Life shoot up from 18th place in 2011 in net sales to second place in 2012. The reason behind this leap is that Empire Life held back on announcing changes to its GWB product until the end of the year.
“As the year progressed, you saw companies pull out of the GWB space. It started with Transamerica, then Standard Life. It was kind of like a domino effect. One by one, all of them were taking their product out (or modifying them) and Empire Life was one of those companies that stayed with the product for the longest time…”
From discussions he had with people from Empire Life, Mr. Kalejta says he understood that the company took longer to modify its product because it still had room on its balance sheet to take on some extra risk.
“With that, they gained some market share and I am sure they gained some new clients as well. So I think it was their strategy to stay in the game, get their name out there and pick up some of those sales...and that’s really what’s reflected in them coming up in that ranking.”
In January, Empire Life introduced Class Plus 2, a new version of its GWB with some modifications, for example, a 4% lifetime withdrawal amount at age 65 instead of 5%, which was available in its earlier GWB product Class Plus.
Standard Life tops the list
Topping the net sales list is Standard Life, up from fourth place in 2011. Interestingly, this company suspended its GWB product in April 2012. Despite this move, Standard Life’s seg fund line is still bringing in strong sales, specifically the 100/100 guarantee option, says Mr. Kalejta.
Few players still offer a 100/100 guarantee, so this is another example of an insurance company attracting sales because it is willing to take on more risk and provide an extra level of insurance, he comments. Mr. Kalejta thinks that stronger equity markets should lead to improved segregated fund sales. “I think once the markets come back and once people start coming back to equity funds, then segregated funds will have a better value proposition for individuals who aren’t only looking for guaranteed income.”
Segregated fund features such as capital protection and estate benefits will again be strong selling points, particularly for clients who are ready to take on more risk to try to get a better return, but who are still feeling cautious enough that they are not ready for mutual funds, Mr. Kalejta says.
The future of GWBs is “a much bigger question mark for the industry,” he adds. Only a handful of players are still offering these products but there is still a strong need for guaranteed income products. Potentially, payout annuities will have a bigger role to play in meeting this need, he says.
“A lot of companies are thinking about guaranteed income…the important thing for segregated funds is what shape will the guaranteed income take? Will it be again based on a segregated fund chassis like the GWB was, or will it be something else?
Mr. Kalejta pointed to a new Sun Life product SunFlex Retirement Income launched at the end of 2012 that is based on a payout annuity chassis.
“2012 was a year of retrenchment…especially for the GWB product. It’s going to be interesting to see where 2013 leads us.”