Guaranteed withdrawal benefits boost seg fund sales

By Ian Bolduc | September 12 2009 06:22PM

Industry sales statistics show that guaranteed withdrawal benefit products are continuing to boost segregated fund sales. Paradoxically, perhaps, some insurers are in the process of re-evaluating these guarantees, which some consider risky following the stock market decline.

Net seg fund sales reached $2.5 billion dollars for the first half of 2009. "It's a very positive story," says Iassen Tonkovski, Senior Analyst at Investor Economics, a research firm specializing in the Canadian retail financial services industry.

However, he notes that the seg funds sales momentum has slowed down somewhat. The net sales recorded during the first six months of 2009 are not as high as those enjoyed by the industry during the same period in 2008, when they reached nearly $2.9 billion. That's a drop of 11.7%.

On the other hand, the drop in net seg fund sales is still not as severe as that experienced in the mutual fund business. Net mutual fund sales between January and June 2009 were $3.85 billion, while they had reached $12.77 billion during the same period in 2008. This amounts to a reduction of 70%.

Iassen Tonkovski explains that guaranteed minimum withdrawal benefits (GMWB) and guaranteed lifetime withdrawal benefit (GLWB) products are boosting seg fund sales, as was the case in 2008. These products offer the annuitant a guaranteed income for several years, or for life, and respond to consumers' serious concerns about running out of money during their retirement.

"Guaranteed withdrawal benefit products continue to rally sales," says Mr. Tonkovski. He adds that these products have become essential to insurers' lineup, especially as baby boomers continue to age and begin to retire.

He also believes that companies that do not offer GMWB or GLWB products stand to lose market share in the seg fund industry.

Great-West Life is one of the biggest insurers and one that still does not offer a guaranteed minimum withdrawal option on its contracts. While the company used to have the highest assets under management in the seg fund industry, Great-West has now fallen to second place, overtaken by Manulife Financial.

However, Great-West says it is watching this market to determine if it might be a good time to enter. In last year's annual report, Great-West Lifeco said that it will "monitor developments in this area and will consider introducing lifetime income guarantee products in 2009."

RBC Insurance is another company that has stated it is considering launching this kind of product sometime towards the end of 2009 or at the beginning of 2010.

Although the two insurers have not announced launch dates, Mr. Tonkovski notes that in the past some insurers have introduced their guaranteed withdrawal benefit products in October or November, shortly before the beginning of RRSP season. "It's likely that we will see a new player by that time. It's only a few weeks away, but we'll see," he says.

For several months, insurers have been reducing the guarantees offered in their seg fund contracts. According to Mr. Tonkovski, stock market volatility is the primary reason for these changes.

Desjardins Financial Security (DFS) recently announced the temporary suspension of the GMWB option offered under its Helios product. Desjardins says it wants to overhaul the product and reduce its risk exposure. In the first six months of 2009, the insurer's seg fund sales skyrocketed, mostly thanks to Helios. According to Investor Economics, the peak was between January and June of this year when net sales increased by 815%. Even though the GMWB option is currently unavailable, "DFS has a very competitive offering on the GLWB front within their Helios product. It's still receiving a significant share of the sales," says Mr. Tonkovski.

"It is likely that more changes will come through," he adds. "They may not be as significant as the measure taken by DFS, but we could see some changes that will reduce some of the risk exposure for the insurers.We've seen sponsors like Sun Life Financial, Empire Life, and Manulife that all made changes to their contracts," he says.

Mr. Tonkovski adds that despite market conditions, he believes Canadian insurers' reserves remain strong.

The assets under management in the segregated fund industry increased by 11.9% in the first half of 2009, reaching $70.8 billion by the end of June. "Two-thirds of this increase is due to the very positive market performance and the last third is due to positive net sales," explains Mr. Tonkovski.

According to his analysis, mutual funds have also seen an increase in assets under management during the first half of the year, albeit less than that enjoyed by seg funds. Mutual fund assets grew by 7.9% to $547.1 during the first six months of the year.

The rankings show that Manulife is now the seg fund market leader. With 28.8% of the market as of June 30, 2009, Manulife is at the top, pushing Great-West Life down to second place with 27%. Great-West is also the insurer that has lost the most ground since June 2008, giving up 1.8%, while Manulife has gained 1.3%.

Although Sun Life remains in third position, it grew the most between June 2008 and June 2009, increasing its market share from 12.9% to 14.4%.

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