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Segregated fund sales in freefall

By Mathew Kokas | November 20 2001 07:24PM

Insurers are witnessing a virtual exodus from segregated funds. Because the stock markets have eroded billions of assets under management, and new regulations have caused prices for 100% guarantees to soar, investors have been scared off.

So far this year, segregated fund sales have plunged 65%!

The situation is so bad that many insurers are reporting negative net sales, meaning that new premiums make up less than the amounts people have pulled out of their accounts.

An example of the extent of market uncertainty and year-over-year change is that some insurers who led in sales last year do not even qualify for the top 20 this year.

Third quarter sales 2001 (the three months ending September 30) are down an astonishing 75%* from 2000 (see tables).

Assets under management were hit so hard that even with the hundreds of millions in new premiums, total assets (3Q year-to-date) are down 13.5% compared to last year’s mark. Mutual fund results tell a similar story. The industry’s average assets under management are down 10.9%.

Insurers are primarily attributing the disastrous seg fund sales to the steep downturn in the market performance, but also say that increasing management fees due to stricter risk-to-reserve regulations is taking its toll.

(To be able to honour their funds’ guarantees in the event of a prolonged market downturn, the Office of the Superintendent of Financial Institutions (OSFI) introduced regulations about a year ago forcing seg fund insurers to meet new capital requirements. Since then, several insurers have reacted by increasing management expense ratios (MERs). Still others have pulled out of the seg fund market altogether.)

Markets hit assets

Great-West Life performed well winning pole position in both net sales and assets under management. But although it ranked first in terms of net sales, its assets under management still shrunk – from $9,666 million in 2000 to $9,221 million in 2001. “The real impact is the market,” said Rick Rausch, Vice-President Individual Retirement Services for Great-West and London Life.

Canada Life, which saw a reduction of 23% in assets under management, cited several factors to account for the decline in seg fund sales, with the current economic downturn topping the list. “It’s really hard to isolate one factor. Markets didn’t perform well, plus the impact of terrorist attacks,” said Kathy Halvorson, Manager, Individual Investment Marketing at Canada Life.

Transamerica Canada suffered a more serious setback. Its assets under management dropped by 40.9%, from $5,247 million last year to $3,100 million this year.

In addition, “There was a 25% drop in our sales from last year,” said Lauren Bradley, Vice-President Marketing Investment Products. Ms. Bradley ascribes the decline of Transamerica sales squarely on its portfolio managers’ style. “Our portfolio is growth oriented. In this down cycle, growth managed funds were most affected.”

Marc Johnston, Investment Fund Consultant at Industrial Alliance, and Serge Pépin, Director of Research and Analysis of Returns at Maritime Life also attribute their decreases in assets under management to the drop in the stock markets.

Maritime and Industrial Alliance saw their assets under management reduced by 17.4% and 7% respectively.
It was only Empire Financial that sticks out the crown as it made a dramatic leap by increasing its assets under management by 20.6%!

Rules hit sales

The bull markets of the last 90s attracted unprecedented investment in mutual and segregated funds. “There were so many jumping on the bandwagon,” said Mr. Rausch. Now that the markets are down, however, “there is a certain segment of investors that will not return. …But the primary reason [for the drop in seg fund sales] is there have been a great deal of design changes and price increases as a result of the new capital requirements.”

The markets should not take so much of the blame for poor sales, agrees Dan Richards, Principal at Strategic Imperative! (formerly known as Marketing Solutions), a marketing analysis firm. Mr. Richards explains that there are a number of other reasons, which when combined, explain the pitiable sale of segs.

First, the popularity of segs really gained steam when they could offer 100% guarantees and resets at an affordable price. With the new capital regulations, prices have increased to the point where these features have lost their lustre.

“If segregated funds still had those features, we’d be seeing record sales today,” he asserts. “This is a perfect market for seg funds! In this kind of market, 100% guarantees would be a very strong selling point.”

Second, firms belonging to the Investment Dealers Association (IDA) are responsible for a significant proportion of seg fund sales. But this distribution channel now has alternative like-products. “This could account for up to four billion dollars in the last 12 months,” continues Mr. Richards.

And finally, life insurance producers are increasingly licensed to sell mutual funds. Producers used segregated funds to compete with mutual funds. Now, says Mr. Richards, “any serious financial planner, which most producers are becoming, has a license to sell mutual funds to offer a broader range of options. Before it was almost as if segregated funds had their own sales force. This is no longer the case.”

“There will always be a market for segregated funds because of benefits of estate planning and protection from creditors,” he says, “but they may never be as popular as they were between 1997 and 1999.”

Mutual funds: a different story

The fall was more cushioned for mutual funds. These funds averted the worst case scenario because of investors’ tendency to take refuge in money market funds.

The latest reports from the Investment Funds Institute of Canada (IFIC) stated that net sales of mutual funds, excluding money market funds and reinvested distributions, were down nearly 50% for the first three quarters of 2001 compared with the same period in 2000.

For all funds combined, there was actually a 9% increase in sales. The reason: money market funds have largely bolstered sales of mutual funds this year. IFIC figures show money market fund sales skyrocketed by a stellar 2400%!

Some insurers have observed the same phenomenon for segregated funds. “For the past year, people have changed their investment choices. They are placing most of their assets in the money market because they are on standby. They are parking their money,” observed Alain Brunet, Senior Vice-President, Marketing, Standard Life at a segregated fund conference on October 10.

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