AXA closes segregated fund line due to economic turmoil

By Alain Thériault | May 26 2011 07:13PM

AXA Assurances closed its 12 accumulife option segregated funds to all new clients on Sept. 30, and will no longer accept new deposits after Dec. 31. Fundamental uncertainty in the sector has pushed the insurer to leave the market less than one year after entering it.

AXA is closing 12 funds it launched in June 2008 due to the current market instability, fuelled by unprecedented volatility. The current economic context and financial markets unfavourable for development of a new investment product line have prompted the company to reorient its activities around those that have ensured remarkable growth since 2006, namely individual and group insurance, AXA announced in a letter sent to its advisors on Sept. 30.

AXA had launched its fund line with fanfare in 2008. This was its first foray into funds in Canada since it founded its insurance life subsidiary more than two decades earlier. At the time, the company was confident that AXA could prosper in this market. The insurer was banking on its global expertise in the variable annuity sector. Then the recession struck.

Today, AXA can no longer afford to invest millions of dollars each year to develop a line of business in a sector "that is being totally restructured and that is currently experiencing major fundamental actuarial problems," says Robert Landry, Executive Vice President, life insurance and financial services at AXA.

The fact that so many insurers are modifying their segregated fund products, he continues, proves that this sector is experiencing serious problems. The guaranteed minimum withdrawal benefit (GMWB) product is at the heart of these problems, because it makes promises that actuaries cannot fulfill," Mr. Landry adds.

This type of product requires insurers to keep a margin of error over the long term, Mr. Landry explains. If it promises the client a lifetime annuity of 5%, the insurer will generate a profit margin if it achieves a 7% return, for example. Given the unprecedented volatility, maintaining a 7% return over the long term is not guaranteed. Insurers that were not already covered for this risk, which include most players, are coming into the game a little late, he says. Volatility has made the cost of risk hedging strategies prohibitive. The counterparties willing to accept the risk are also on a shakier footing because of the crisis.

"This means insurers must roll back the guarantees they offered their clients, modify them, increase the fees or withdraw them altogether. The competition is in a cutting frenzy. In the segregated funds sector, everything is moving, even the foundations. We’ve just jumped in. The timing isn’t great," he says drily. 

"People that think that Canada is immune to the financial crisis are dreaming. We are seeing the delayed consequences of the crisis, and it’s far from over. We’re in the thick of it," Mr. Landry continues.

What’s more, AXA does not have viable assets in its funds. "We had $7 million in sales, which is not a failure in itself, because we had just started. But to be profitable in the business sector, you have to sell in the hundreds of millions, maybe even a billion," Mr. Landry explains.

AXA did not sell as much funds as it hoped because of the stampede to GMWB funds. AXA wanted to launch its own guaranteed lifetime withdrawal benefit fund to make up for the loss in the popularity of traditional segregated funds. Mr. Landry continues.

"As we do not want to offer the GLWB in the current environment, and our basic funds did not sell sufficiently to let us reach sufficient critical mass in a reasonable time, our two reasons for being in the sector aren’t there anymore. Conditions are unfavourable for a new player in this sector. So we thought it more reasonable to bow out," he says.

A comeback?

Mr. Landry is not ruling out an eventual return to segregated funds. He says that AXA is not accepting more clients, but will continue to honour contracts in force and is keeping the customer service team. Clients can continue to make transfers between funds, he adds.

For now, the only savings products left at AXA are the universal life investment options. What would AXA’s return to investment products look like? The insurer is still interested in the retiree and pre-retiree markets, but is seeing how the market will restructure itself before any comeback. "We are not sure if we’ll launch the same line again by buying one, or if we should start from scratch. For now we are concentrating on individual and group life insurance, sectors where we have the highest growth to date in 2009 in Canada, according to LIMRA figures."

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