Low interest rates and volatile stock markets in North America have pushed Canadian insurers to expand their ventures in emerging markets. The results will pay off in the long run, analysts say, as the appetite for savings and investment products in various Asian markets grows.
Among Canada’s largest insurers, Manulife Financial Corp. and Sun Life Financial Inc. (both based in Toronto) have been the most active in the emerging-market regions.
“These companies are facing tremendous pressure to grow investments domestically. Investing in emerging markets provides another growth outlet, which is critical at this point,” says Craig Fehr, a senior equities analyst specializing in Canadian large-cap firms with St. Louis-based Edward D. Jones & Co. LP.
According to statistics collected by Zurich-based Swiss Re Ltd., a global reinsurance company, insurance premiums have grown by 11% per year on average for the past decade in emerging markets such as Asia and Latin America. Insurance premiums in more developed economies, such as North America, have only grown 1.3% on average over the same period.
A report released in early January by Oldwick, N.J.-based A.M. Best Co. features statistics from the Insurance Regulatory and Development Authority based in Andhra Pradesh, India, indicating that total premiums in India increased by 11.3% to US$75.5 billion for the year ended March 31, 2011.
In emerging markets, clients tend to have less sophisticated insurance and savings needs. By supplying emerging markets with more term and investment products that are less capital-intensive than the whole life insurance and guaranteed income products that are popular in North America, says Fehr, insurers can offset some of their capital risk: “The plain-vanilla products these companies offer in emerging markets have less uncertainty associated with them and, therefore, reduce insurers’ capital risk.”
In Southeast Asia, which includes countries such as Hong Kong and Japan, demand for savings products has increased during the past few years.
The growing middle class in this region has recognized that government pension plans will be insufficient to meet their retirement needs, says Candy Yuen, chief distribution and marketing officer for Sun Life’s Asian operations in Hong Kong: “Most clients are realizing that their government pensions will not be enough. And, as a result, we have seen the demand for savings and endowment products increase.”
Sun Life also has seen increased client appetite for critical illness products in the region. Clients are starting to buy into policies as early as their late 30s and early 40s, says Yuen: “In Southeast Asia, people are starting to see the impact of having a high-cholesterol diet on their health, and clients have been facing heart disease as early as their 40s.”
It’s for this reason, Jakarta-based Manulife Indonesia, a division of Manulife Asia, launched Pro Health, an all-encompassing health product that provides medical coverage for all illnesses, including critical illnesses, up to age 99.
Explosive revenue growth is likely to come from markets in countries such as India and the Philippines, which remain relatively untapped — even by local players, says Tom MacKinnon, insurance analyst with Toronto-based BMO Capital Markets Corp.: “There’s a lot of promise for large returns since a large portion of the population is underinsured.”
Of the two companies, Manulife is better positioned in Asian markets, and has been profitable in all of its established ventures, says MacKinnon: “[Manulife is] in the black in all of the countries [it has] expanded to.”
Manulife conducts the majority of its operations through its Asian division and various local partnerships. And Manulife Asia is in the process of launching operations in Cambodia. The Canadian parent firm earns about 25% of its revenue from its Asian operations alone.
Meanwhile, emerging markets make up less than 5% of the top line for Sun Life. The firm mainly conducts its business through three wholly owned subsidiaries — Sun Life Hong Kong Ltd., Sun Life of Canada Philippines Inc. and PT Sun Life Indonesia. These subsidiaries distribute the bulk of their insurance and savings products through locally owned captive sales forces. The bulk of the Canadian parent firm’s emerging-market revenue comes from the Philippines, where it has been operating since 1895.
Yuen expects rapid growth will come from the recent expansion in India. In 2011, Sun Life opened 90 new branches through Birla Sun Life, a joint venture with Mumbai-based Aditya Birla Management Corp. Private Ltd. Sun Life has a 26% stake in its partner’s life insurance business and a 50% stake in the wealth-management operations.
Government regulation will continue to challenge growth in these markets, adds Fehr: “As emerging markets become more developed, governments are likely to put more controls around how products are being sold.”
Revenue growth for insurers operating in foreign markets is typically constrained by the amount of ownership they are allowed to acquire in a local partner. For example, foreign insurers in India are required to work in conjunction with local partners and can own up to a 26% stake in the venture. Foreign insurers in Hong Kong are able to open wholly owned subsidiaries.
In the past year, low interest rates on long-term bonds have punished both Manulife and Sun Life; insurers invest the bulk of their reserves in such bonds.
Adding to the pressure has been the implementation of international financial reporting standards, which have forced insurers to record more capital on their books than necessary to meet their long-term financial obligations. IE