Canadian insurers are in a financial and strategic position to make acquisitions around the globe, but it may take some time before any blockbuster deals materialize.

“They’re all in the deal flow,” says Tom MacKinnon, financial services equity analyst for ScotiaMcLeod Inc. in Toronto.

But some are in the flow more than others. Toronto-based Manulife Financial Corp., Toronto-based Sun Life Financial Inc. and Winnipeg-based Great-West Lifeco Inc. top MacKinnon’s list. They have both the financial wherewithal, he says, and the interest in making more acquisitions.

Dave Harrison, dividend portfolio manager with Vancouver-based Phillips Hager & North Investment Management Ltd. agrees. Canadian insurance companies are being tapped by bankers and consultants who are shopping around distressed asset managers and insurance companies. And the insurers are in a position to take advantage of the opportunities.

But, Harrison notes, there are challenges in this environment. Canada’s insurers don’t want to buy assets that the markets might perceive to be risky. To boot, the shifting sands of global banking and regulatory policy are making developing long-term strategic plans tenuous.

Sun Life has been the subject of the most public speculation since it unloaded its 37% stake in CI Financial Income Fund to Bank of Nova Scotia early in October, bringing in $2.3 billion in cash. In a conference call with analysts, Sun Life executives made it clear that the insurer plans to spend the capital somewhere. The executives just weren’t clear on where and when.

Several Canadian sell-side analysts, including MacKinnon, have pointed out in research notes to investors that the target of Sun Life’s new-found capital could be Lincoln Nation Corp., a Philadelphia-based life and health insurer. Less than a week before the sale of the CI holding, Sun Life hired several key executives from Lincoln, including former CEO Jon Boscia. These hires would give Sun Life deeper knowledge, not only of Lincoln but of the entire U.S. life insurance business.

Sun Life’s U.S. life insurance business is not big enough to achieve the benefits of volume, so another book of business and more distribution points would help.

Principal Financial Group, based in Des Moines, Iowa, is also a potential target.

“They’re good franchises,” says MacKinnon. “But they have distressed valuations and balance sheets. And they might have itchy boards, if you will.”

Other analysts have noted that Connecticut-based Hartford Financial Services Group Inc. is a possible target, as is New York-based American Insurance Group Inc.’ s U.S. life and annuities business.

AIG is proving to be a tough nut to crack, however. Executives there are guarding its most prized possessions: its U.S. life and wealth-management businesses and its Asian units.

They may be among the few units to survive when AIG surfaces from its bailout in a few years. The obvious tension is that the company is motivated to pay off the $85 billion in credit financing it has received from the U.S. Federal Reserve Board, as that debt grows at a rate of 11.25%.

AIG’s Asian business is a massive prize. It earned more than US$6.2 billion in 2007, according to an RBC Capital Markets Inc. report, and AIG’s non-domestic life and annuities business is thought to be worth about US$35 billion. Moreover, AIG has a lot of flexibility. It has assets of more than US$1 trillion — including its reinsurance, general insurance and aircraft leasing business.

Of the Canadian insurers, Manulife is the behemoth; it is now the largest North American insurance company, as ranked by market capitalization, with the muscle to pry parts of AIG loose from the parent.

From a strategic perspective, Manulife is potentially less interested than its competitors in acquiring U.S. life and annuities businesses, because it already has significant business in the U.S. Several analysts note in recent reports that Manulife may prefer 401(k) — retirement portfolio —businesses or asset-management companies, which are more immediately profitable.

But the demographics in some regions of Asia are ripe for growth. So, key AIG assets — including those in India, Japan and South Korea — are a possibility. At Manulife’s Investor Day at the end of September, the insurer estimated its established Asian business may grow by 30% a year in the medium term.

Industrial Alliance Insurance and Financial Services Inc. is in a different strategic position than the Big Three insurers because it doesn’t already have a significant U.S. business. Making a good acquisition there is possible, notes PH&N’s Harrison, but the Quebec City-based IA doesn’t have the inside knowledge of that market that, ideally, it would need to make a deal that would make strategic sense — and at the right price.

@page_break@Byren Innes, vice president with Toronto-based consultant Newlink Group Inc., says that IA, Montreal-based Desjardins Financial Security and Quebec City-based La Capitale have wanted to step into English-speaking Canada for some time, so AIG Life Insurance Co. of Canada, the Canadian unit of AIG, might be the right fit for one of them. It’s officially for sale, as AIG Canada’s CEO, Peter McCarthy, announced to shareholders and policyholders at the beginning of October that the parent company was unloading non-core assets.

For large Canadian insurers such as Manulife and Sun Life or medium-sized players such as Empire Life of Canada, which is owned by E-L Financial Corp. of Kingston, Ont., the AIG Canada deal makes less sense, Innes notes. These insurers already do business with most of the key advisors in English Canada, so acquiring AIG Canada would gives them no new distribution.

“But if you’re a little guy wanting to expand into a new region,” says Innes, “this might fit.”

And what of Winnipeg-based Great-West Lifeco? It has the financial might and interest, although, notes MacKinnon: “It might be a little bit consumed with integrating Putnam Investments, as it stands now.”

Great-West Lifeco bought the U.S. mutual fund giant more than 18 months ago. The insurer’s results for the second quarter ended June 30 show that it’s still struggling for the profitability that it had forecast to analysts earlier in the year. In essence, according to Harrison, Great-West Lifeco’s deal for Putnam, which had been performing poorly, partly illustrates why bigger deals will be hard to come by.

Canadian insurers themselves are suffering from some of the same symptoms as the distressed sellers are experiencing, Harrison says. Stock prices are down and the insurers don’t want to spend capital in ways that the market may perceive as being risky.

“They’re gun-shy,” he says. “So, they [won’t] risk anything by making a risky acquisition, because it’s the kind of environment that penalizes any form of risk.”

In the end, financial services companies need capital markets to participate in deals in the form of debt or liquid shares, and no company manager wants to appear to the markets to be taking risks.

“People have this notion that [the Canadian banks and insurers] will swoop down today and buy cheap assets for giveaway prices,” he says. “You know, it could happen. But, typically, everybody freezes — and they have motivation to freeze.”

Case in point: by the middle of October, all of the potential targets noted by Canadian sell-side analysts — Hartford, Lincoln, Principal — had seen their share prices plunge after Fitch Ratings Ltd. said all U.S. life insurers face a “significant” risk of downgrades because of investment losses.

That said, says Harrison, Canada’s banks and insurers have proven that they have a global competitive advantage. They are well positioned and, while they could make smaller tuck-in acquisitions within the next three months, it will be some time before major strategic moves are made. The crisis needs to pass first.

“From 2010 to 2012, it will be chockablock with M&A activity — and the Canadian insurers will be involved,” says Harrison, although he hastens to add that the landscape can change quickly and he’s been humbled before.

Finally, he notes, regulators around the globe are making ad hoc decisions that make it difficult for executives in any financial services company to move with confidence. “The world’s turning upside down,” he says, “and it’s hard for managers to react.

MacKinnon agrees: time could be on the insurers’ side. IE