“It was batten down all the hatches… we were planning for it for a few years knowing that it was going to be a big year simply from a volume perspective. We had a significant number of contracts that were all coming to an end, that were maturing in the first half of 2010.”
Now it is with both a sense of relief and pride that he says the company is looking to the future. “I think everyone in the company is actually very proud how well everything was…handled and, more importantly, that we met every single guarantee.”
The block of contracts that matured last year were GROWSafe contracts sold in the late 1990’s which had resets that took place at the high point of the market prior to the tech bubble bursting. The bulk of these contracts did not have an automatic renewal feature. “They all came to an end so when these contracts were coming up for maturity in 2010, clients had to take the money.”
The majority of the contract holders were older clients, so Mr. Ferreira believes that most of them took the money to their banks and invested in GICs. He estimates about one-third of the redeemed funds were reinvested in Transamerica products, some in new seg fund contracts and some in annuities.
Many of these matured contracts paid the policyholders top ups, which is the extra money over the market value paid to meet the capital guarantee obligations of the funds.
The funds requiring top ups did not have a chance to fully recover to the peak reached in 2000. Mr. Ferreira notes that two major market downturns – after the tech crash and the 2008 financial crisis – almost bracketed the period that these funds were maturing. With the exception of Canada’s stock market, global stock markets have yet to fully recover from these two declines, he says. One of Transamerica’s funds, the US 21st Century Fund was invested in the NASDAQ, an index which saw a decline of more than 70% from its 2000 peak. Transamerica closed this particular fund in 2003 and merged its assets with other index funds into a new fund called the
Global Growth Fund.
Showed their value
Mr. Ferreira says the fact that Transamerica met all its obligations to policyholders was a service to the industry in that it showed the value of seg funds. “These segregated funds delivered what they were supposed to, which was to protect and preserve their capital. We paid all our top ups on every single contract…I think that speaks to the strength of Transamerica, but also to the benefit that segregated funds offer over mutual funds. They really can preserve capital, especially when markets are volatile.”
And, for anyone that doubted Transamerica, Mr. Ferriera is pleased the company succeeded to fulfill its obligations. “For those that were naysayers, we proved them wrong. We did deliver.”
He noted that policyholders were certainly happy about receiving the top ups. “We were getting thank you letters.”
Despite its experience of 2010, Mr. Ferreira says the company’s commitment to the segregated fund market has not wavered. During the period that the company was mobilizing for the redemptions of 2010, it was also preparing for its future in the segregated fund market by launching its Transamerica GIF contract in 2009 and its Five for Life guaranteed withdrawal benefit in 2008.
“We’re very pleased with the structure of our new contracts and the profitability of those contracts. I think we’re better positioned today than we were three years ago or two years ago.”
He notes that while some of its competitors have been scaling back on their investment offerings, Transamerica plans to distinguish itself in the market through its range of investment choices. Its Transamerica GIF product offers 50 investment funds to choose from and 15 of these are 100% equity funds.
In 2010, Transamerica had gross sales of $342 million, but posted negative net sales of $650 due to redemptions. In 2011 the insurer is aiming to grow its sales and market share in the seg fund business. It plans to achieve this by improving its product offering. “We are making plans to further enhance our contracts and our investment offerings because we do want to be a leader in this business.”
Asked about the impact of the new capital requirements on the seg fund market (see page 3), Mr. Ferreira said the market has already seen companies adjusting to these rules, i.e., by extending maturity guarantees from ten to 15 years or longer and stopping deposits into older, feature rich contracts. He expects to see a continuing “pullback on features or a commoditization of features,” as a result of the new rules and also because of the pressures added by the sustained low interest rate environment and market volatility.
In particular, he believes there is going to be less distinction between the various insurance companies on the types of guarantees that they’ll offer. “They’ll probably still offer the 100% death benefit guarantee, but I think maturity guarantees now are going to be 75%, which is the minimum you need to guarantee to be a segregated fund and some companies are restricting their investment offerings, not offering equity funds, etc.”
Because there will be greater similarity among insurance companies with respect to contractual guarantees and features, Mr. Ferreira believes insurers will seek to distinguish their seg fund products through their investment offerings.