It has been a watershed year for the Big Four Canadian life insurers.
Manulife Financial Corp., Sun Life Financial Inc., Great-West Life Assurance Co. and Industrial Alliance Insurance and Financial Services Inc. each posted strong third-quarter results this past month. Fund managers and equity analysts alike are favouring them as a group over the Canadian banks — both for the short term and the long term.
In fact, John Reucassel, insurance companies analyst for BMO Nesbitt Burns Inc. in Toronto, calls the life insurers “arks of stability.” In the midst of the turmoil in both equity and credit markets, he adds, the life insurers’ results indicate they have the strongest balance sheets in the global financial services industry.
Nor is the Canadian insurers’ good outlook just about short-term price performance. The combined story about Manulife, Sun Life (both based in Toronto), Winnipeg-based Great-West and Lévis, Que.-based Industrial Alliance is every bit as much about strong geographical diversification and product and distribution mix as the banks’ story is about poor credit fundamentals and the threat of an economic recession in the U.S.
“Most people expect that the life insurers’ growth rates, because they’re more diversified geographically, will be higher than the banks’ growth rates,” says Fred Pynn, chief investment officer with Bissett Investment Management Ltd. in Calgary, a unit of Franklin Templeton Investments Corp.
Moreover, from a return on investment perspective, while the insurers are underperforming the banks in regard to dividend yield by an average of 200 basis points, Pynn says, over the next three to five years, that’s likely to change.
The insurers as a group boast strong Canadian distribution, but they are also finding that the smaller “tuck under” and blockbuster acquisitions that they’ve made in both wealth management and insurance over the past three years are coming along well and will play a part in their future, adds Pynn.
Manulife, which Desjardins Securities Inc. insurance companies analyst Michael Goldberg in Toronto describes as a behemoth “with its tentacles all over the place,” recently bought distributor Berkshire-TWC Financial Group Inc. of Burlington, Ont., after acquiring Boston-based John Hancock Financial Services Inc. in 2006. Manulife stands apart: in life insurance assets alone, it is among the top two in North America, alongside New-York based American International Group Inc. , and Manulife is one of the top five globally.
“[Manulife] has been good at distribution,” says Goldberg. “In Asia, it has direct distribution. But in developed markets such as Canada, it has really focused on wholesale distribution and has done really well that way.”
Although Sun Life and Great-West are both substantially smaller, they also distinguish themselves from their global competition through diversification. The difference among the insurers geographically is whether you believe in Europe or Asia as growth markets, says Pynn — and you could argue either way.
Goldberg agrees. He points to Great-West, which, through its acquisition of Canada Life in 2003, picked up a good share of the life insurance market in both Britain and continental Europe and strong trust businesses in Ireland and Germany. “It has discovered that the embryonic business that Canada Life had built there really is quite a gem,” he says. “Great-West is devoting a lot of energy to [that part of the business.]”
Analysts roundly agree that Asia and Europe both represent long-term emerging markets with strong growth potential. But that’s not to underestimate the importance of the U.S. market, which contributes more than 40% on average to the insurers’ collective earnings, according to Nesbitt’s Reucassel, although the weakness in the U.S. dollar is dragging that back.
Great-West’s U.S. health and life insurance sales continue to put it among the top players in that country, and its recent acquisition of Boston-based Putnam Investments Trust, the struggling U.S. mutual fund manufacturer, puts Great-West firmly in the wealth-management business.
In some ways, that mirrors Sun Life’s approach to wealth management in the U.S. It owns Massa-chusetts Financial Services,which, following the market-timing scandal, had struggled. It’s now a strong unit of Sun Life, which also gathers fee-based income from its more than 33% equity ownership of Canadian fund manufacturer and distributor CI Financial Income Fund.
“Sun Life bought MFS some time ago, and it wasn’t nearly the commitment Putnam is for Great-West,” says Pynn. Sun Life realized a lot of value from MFS by turning its fortunes around. There’s some question whether Great-West can realize the same value from Putnam, he adds: “[Great-West] has a great track record in making acquisitions work, but this is new because the previous acquisitions were all lifecos.”
@page_break@Desjardins’ Goldberg says a key to making the Putnam acquisition work is to get some strong performance. “That could stem the tide of redemptions that Putnam has experienced,” he says. “In the meantime, it can make sure expenses are well aligned with revenue. It will take time to get all this in place.”
Industrial Alliance is the odd-insurer out. It owns no distribution outside North America, and although it has considered making a move in the U.S., it has yet to stray from Canada. “If it’s something it is trying to do, it’s at an early stage of development,” Goldberg says.
What IA loses in breadth of strategy, analysts agree, it gains in focus on Canada. Not only has IA executed well with niche distributors domestically, such as Quebec-based Investia Financial Services Inc. and Markham, Ont.-based FundEx Investments Inc. , IA is going after more as the latest entrant to the so-called “variable annuities” market.
Consumers in North America and in every other aging boomer market are interested in this product, which packages a future income guarantee together with equity growth from segregated funds. “IA will be coming out with a [guaranteed minimum withdrawal benefit],” says Goldberg. “That’s a good area of growth for Canada.”
Sun Life and Manulife have already released their GMWB products in Canada, and both are expected to retain their advantage as early entrants. While Great-West offers a variable annuity in the hugely competitive U.S. market, it has only hinted at developing a competing product in Canada. “The implication is that it can come up with something less complicated [and expensive for consumers],” Goldberg adds, “but it hasn’t gone further than that.”
While insurers are generally more conservative in their investment approach than banks, there are still some short-term concerns. The insurers have little to no direct exposure to asset-backed commercial paper, collateralized debt obligations or what Nesbitt’s Reucassel calls “the next potential crisis”: U.S. monoline insurers. (See page 26.)
Monoline insurers such as MBIA Inc. and Ambac Financial Group Inc., both of New York, provide insurance wrappers on debt below AAA quality to various third parties. That debt, of course, used to be limited to municipal bonds; but, over the years, the monoline insurers have strayed into distressed housing debt and CDOs, says Reucassel: “The Canadian insurers do have exposure to the U.S. monoline, but we believe this level of exposure is small and very manageable.”
On the positive side, Canadian insurers tend to have provided stronger investment performance than their U.S. counterparts. That’s due in part to good strategy and in part to a difference between U.S. and Canadian accounting rules. In the U.S., insurers report operating profit before investment gains. This discourages investment in variable assets such as equities and real estate. “If they want to increase their returns, they’ll invest in high-risk debt,” Goldberg says. “Canadian insurers don’t have to do that.” IE
The new “arks of stability”
- By: Gavin Adamson
- December 5, 2007 December 5, 2007
- 09:43