Segregated funds is a dynamic and changing market in which the largest insurers still hold the lion’s share of assets, but other players are racking up higher net sales and expanding their market share.
Data compiled by industry research fi rm, Investor Economics, shows that for the fi rst nine months of the year “the big three insurers” Manulife Investments, Great-West Life (GWL) and Sun Life held the top three spots and 68.8 per cent of industry assets (see tables below)
Meanwhile, these companies ranked fourth, fi fth and tenth respectively in terms of net sales. Manulife’s net sales were $164 million for the period, GWL $154 and Sun Life just $16 million.
The top three players with respect to net sales were Industrial Alliance ($554 million), Standard Life ($298 million) and Desjardins Financial Security ($285 million).
Why the lower net sales ranking for the big three?
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Gross sales figures
Karol Kalejta, an analyst with Investor Economics points to the gross sales fi gures to explain the current sales trends.
“If you look at the gross sales or the premiums – the new money coming in – it is still the big three insurers with Industrial Alliance that are the top ranked in driving a very big proportion of the sales.”
Great-West and Manulife are ranked number one and two with $2.8 billion and $1.9 billion in gross sales respectively. Industrial Alliance is in third position with $1.2 billion and Sun Life takes fourth position with $790 million in sales.
A higher level of redemptions account for the lower net sales posted by the big three companies, explains Mr. Kalejta.
Redemptions triggered
Why these high redemptions? The insurers who have been in the market longer now have maturing product portfolios with many policies hitting their 10-year maturity, explains Goshka Folda, senior managing director of Investor Economics. “We think it is natural that some of the larger companies that have been around for a longer time…would experience redemptions to a greater extent. These companies were the original purveyors and the key sellers of segregated funds, whereas some companies with younger books of business simply don’t face this kind of fact of life.”
She added, however, that redeemed funds are not necessarily leaving the companies. Often investors will move their money out of seg funds and into another investment or income oriented product.
“There is defi nitely a lot of new product development and a lot of companies making a concerted effort to ensure that (holders of) those maturing policies have an array of options to choose from on their shelves…”
Overall gross sales for the seg fund market were down a little more than half a billion in 2011 as of September 2011 compared with the same period last year. While she considers seg fund sales have done quite well overall, Ms. Folda adds that the sales decline could be explained by investors turning their attention to mutual funds, which experienced very strong sales during the 2011 RRSP season due to improved market returns seen in 2009 and 2010. Fixed income funds were also hugely popular with Canadians.
Ms. Folda adds that the current market volatility may now favour segregated funds due to their risk management features.
In the mid to long-term, segregated funds also have a very positive outlook, she adds. “Products like guaranteed withdrawal benefi ts (GWB) policies that have an income feature attached to them clearly are products that are going to benefi t because of the aging of the population.”
Catching up
Ms. Folda believes that the segregated fund market is innovative and active with newer players focused on building their market share. “Clearly this is a market that has grown faster than a lot of other investment and insurance markets and has attracted a lot of attention. A number of companies have defi ned it as an area of focus and have launched a great number of products.” She says it is not surprising to see newer players with their host of new products garnering very good sales.
In terms of success with product innovation, Mr. Kalejta pointed to Industrial Alliance which – similar to Manulife and Sun Life before it – realigned their products to offer three very distinct series for specifi c goals that segregated fund clients might have.
Standard Life which introduced a guaranteed withdrawal benefi t option in 2011 and made other changes to its lineup also attracted stronger sales. “The pick up in sales (Standard Life) has seen lately is very much due to the fact they’ve rejigged their product lineup,” comments Mr. Kalejta.
Ms. Folda says the newer players in the seg fund market are also benefi tting from growing relationships with various independent distributors, including national accounts and managing general agencies.
“I think you’re seeing some of the results of the stronger relationships that are now in place.”
The market share gains being made by some of the newer players could be compared to the development of the mutual fund market where at fi rst Investors Group dominated and then the little players eventually grew their market share. “There is a game of catch up being played and right now we see this (segregated funds) as a very dynamic market place.”
Diversification
Another factor that is likely impacting the new sales of some of the larger players in this market is their desire to diversify their business across product lines. The seg fund market has seen this particularly with GWB products.
“I think that any prudent business manager would strive toward diversifi cation of their revenue stream and their risk. So I think I get also the sense of a general desire to have a more diversifi ed pattern of incoming money into a greater variety of products,” explains Ms. Folda.
An example, is Manulife’s introduction of PensionBuilder, which is somewhere between the payout annuity and the GMWB, she adds. “So the shelf is growing and diversifi cation is growing.”
Challenges for insurers
Pressures such as capital requirements and the beginning of the International Financial Reporting Standards regime are creating balance sheet management challenges for insurers, which will infl uence the design of the GWB products, she adds.
“It is a very strong product but the insurers will have to manage the features of that product against the additional costs of making and maintaining that product…I think we are going to see the typical tug of war between the marketers, the advisors and the actuaries, but I think that everyone recognizes that this is an important product and will continue to be.”
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