Market recovery boosts segregated fund sales

By Alain Thériault | May 12 2011 02:46PM

After unprecedented growth in 2009, sales of term deposits and traditional payout annuities have begun to wane while investors, encouraged by signs of a market upswing, have flocked into segregated funds and guaranteed withdrawal benefit products since the start of the year.

Growth in sales of fixed annuities continued to slow in Q2 2010, indicates the latest LIMRA survey on insurers' annuities and segregated funds.

The industry uses the term "fixed annuity" for term deposits and payout annuities (life or fixed duration annuities). Investors' zeal for these products, pegged to interest rates, is ebbing in favour of products linked to stock markets. As interest rates hit historical lows, investors are hungry for higher returns.

Sales of fixed annuities in Canada plunged by 27% in Q2 2010 compared with the same quarter in 2009. During this period, segregated funds gained 8%. For the first half of the year, annuity sales slumped by 19% compared with the same period in 2009. By comparison, segregated fund sales advanced by 20%.

At the end of Q2 2010, total assets under management in individual annuities reached $110.7 billion in Canada. This figure includes term deposits, payout annuities and segregated funds.

New sales turned around completely. LIMRA reports that sales of fixed annuities grew by 127% between the second quarters of 2008 and 2009. Segregated fund sales slipped by 20% in the same period. Between the first six months of 2008 and 2009, sales of fixed annuities soared by 108%, while segregated funds fell 18%.

At Standard Life Canada, like at many other insurers, 2009 was a stellar year for fixed annuities. New life annuity premiums rose 9% in the first half of 2009 compared with the same period last year, and term deposits soared by 300%, confirms Michel Fortin, Vice President of marketing and sales development, individual networks.

The tide has turned, Mr. Fortin says. He told The Insurance and Investment Journal that segregated fund sales boomed, at 107% in the first six months of 2010, versus the same quarter in 2009.

The insurer saw sales of its own brand of mutual funds skyrocket by 60% during the comparison period. At the same time, term deposit sales dropped 49% between the first six months of 2009 and 2010, while annuity sales remained stable.

Mr. Fortin describes 2010 as being the opposite of 2009. Investors had sought shelter in fixed income products after having lost huge sums of money in 2008, he points out. "People want returns and are now coming back to variable products, which performed well in 2009," he says.

For a smoother ride, he recommends that investors stick to their financial plan at all times, with their advisor's help. "The TSX gained 21% in the first half of 2009 compared with the same period the previous year. In the second six months of 2009, it advanced 15% and only 3% in the first quarter of 2010. It's a wave effect," he says.

Standard Life has seen its clients return cautiously to financial markets. "They are not ready to plunge back into equity. In 2009, 23% of their assets managed with us were in equity. This proportion remained steady in 2010. In contrast, the cash parked in the money market shrunk from 20% to 8% during this period. The money was transferred to fund portfolios. Advisors are behind this: good advisors that did their job well," Mr. Fortin explains.

Sally Bryck, author of the LIMRA report entitled Canadian Individual Annuity Sales, Second Quarter 2010, notes that investors have returned to the market prudently and moderately. They decided en masse to opt for segregated funds. Above all, people are seeking products with guaranteed income, Ms. Bryck says.

Segregated fund sales climbed 31% in the first quarter of 2010 compared with the same quarter in 2009. The increase, however, was only 8% in Q2 2010 compared with the same period in 2009.

Another wave effect? Ms. Bryck points out that the RRSP period bolstered seg fund sales in the first quarter. The need to contribute before the deadline to take advantage of the tax deductions typically boosts sales during this quarter, she says.

"It's also the same in Q4: December 31 drives sales because of the conversion of the accumulated registered plans into income registered plans. Quite strong results can be expected at this time," she adds.

At Manulife Financial, Michael Ondercin, Assistant Vice President, segregated funds, confirms that the insurer's products have followed the trend LIMRA described. Sales of guaranteed interest products are down, which strongly influences fixed income results.

Term deposits stoked sales of fixed annuities in 2009, and are also leading the slowdown, Mr. Ondercin adds. "2009 was a tremendous year for GICs, but that growth was unsustainable," he points out.

Marie-Élaine Gaudreault, Director of product development and training for individual insurance and annuities, at Industrial Alliance, calls 2009 "an exceptional year." Following a stock crisis, many investors tend to seek refuge in fixed annuities, she says. When the picture improves, people want to return to the stock market. "We saw growth of 98% in cumulative segregated fund sales on June 30 compared with the same period last year," she says.

Yet the insurer's clients are not snubbing guaranteed fixed income products. For example, at Industrial Alliance, sales of fixed annuities increased 7% in the first half of 2010 compared with the same period the previous year. "We think that the advent of guaranteed withdrawal benefit (GWB) products boosted annuity sales," Mr. Fortin continues.

At Manulife, Mr. Ondercin predicts that clients will still need less risky products even though the growth of fixed annuities has slowed. "Fixed annuity sales are down from 2009 but not from a 2008 point of view," he points out.

He noticed that investors returning to the markets tend to choose balanced investments or fixed income solutions. "More and more baby boomers are getting closer to retirement and our clients are looking for a way to help sustain their retirement income and increase their chances of not running out of money," he says.

Desjardins Financial Security (DFS) noticed that its clients are returning to variable return investment products. The company reported solid results in investment products. The performance of the insurance subsidiary of the Desjardins Group has been unaffected by the closure of its guaranteed minimum withdrawal benefit Helios.

DFS was simply caught up in the segregated fund wave, and there is more to its product line than Helios funds, Richard Fortier, CEO, told The Insurance and Investment Journal. Not only does it offer other group savings and individual products, but DFS also relies on group and individual insurance to offset underperformance.

"In addition, unlike some insurers, DFS entered the GMWB product game fairly late when the markets were already very low. Because of this, we did not lose as much money as some of our competitors. Second, we hedge the risk of some of our investment products, which staved off the adverse effects on financial statements. So, if the market moved and we lost money, we had instruments that let us recover some. We have a hedging program that lets us absorb 90% of the fluctuations of financial markets," he says.

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