Canada’s life insurers are focused increasingly on beefing up their wealth-management businesses. They are enticed by the profitability of this side of the financial services sector and are eager to capture a piece of the pie as a huge intergenerational wealth transfer begins.
A research paper released in late February by BMO Capital Markets Corp. highlights the aggressive growth of the wealth-management units of the large Canadian life insurance companies (a.k.a. lifecos) in recent years. When compared with the wealth-management operations of the big banks, the paper notes, the lifecos’ wealth operations are now larger than those of the banks, in terms of assets under management (AUM), are significantly more global and account for a much higher proportion of profit, at roughly 35%-50%, compared with approximately 15% for the banks.
“The growth of [the lifecos’] wealth-management businesses has been faster than the banks over the past five years,” says Tom MacKinnon, managing director of equity research with BMO Capital Markets and author of the paper. “The breadth and depth of their wealth-management operations are more so than the banks.”
Although most lifecos have long been active in the wealth-management space, through such offerings as segregated funds, annuities and pensions, they have ramped up their efforts in this field considerably in the past few years. Specifically, many lifecos have expanded their rosters of mutual funds and retirement- income products, which has helped boost AUM substantially.
Toronto-based Manulife Financial Corp., for example, saw its fourth consecutive year of record net sales in mutual funds in 2013, driving its AUM to $27.6 billion as of Dec. 31, 2013, up by 33% from a year earlier. That increase reflects a deliberate effort by the company to expand and promote its mutual fund offerings, according to Paul Lorentz, executive vice president and general manager, retail markets, with Manulife.
Next: Leveraging talent
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Leveraging talent
“About three to five years ago, we created a strategy to start packaging out capabilities and leverage the talent we already have in the retail market,” Lorentz says. “Those products and the investment philosophy and our approach, which is long-term in nature, seem to be resonating well with consumers as well as advisors.”
Similarly, Kingston, Ont.-based Empire Life Insurance Co.‘s mutual fund subsidiary, Empire Life Investments Inc., has grown significantly since its launch in 2011.
“Our growth is improving each and every month in that space,” says Drew Wallace, executive vice president, retail, with Empire Life Insurance. “We are seeing very, very significant traction now.”
The increased push into wealth management is a natural progression for lifecos, given the asset-management capabilities that they already have in place, says Neil Parkinson, partner, audit, and national insurance sector leader with KPMG LLP in Toronto.
“[Lifecos] already manage very substantial investments to support their insurance business and also the pension, group and individual savings businesses they’ve built in the past,” Parkinson says. “It’s an area of strength they can exploit, and try to build out more market opportunities and more economies of scale.”
Parkinson suspects that the lifecos have been motivated to begin accelerating their foray into wealth management, given the opportunity to capture market share as the demographic landscape shifts and wealth begins to change hands.
“There are more people retiring, with more money,” Parkinson says. “And, with people transferring wealth to the next generation, some of those legacy relationships are changing. It’s become a more competitive environment for everyone.”
Wealth-management products are also appealing to lifecos to offer from a financial perspective, because these products bring in a predictable stream of revenue and come with substantially lower capital requirements compared with insurance products. That latter feature is particularly attractive, considering the increase in capital requirements for long-term guaranteed insurance products.
“The fee revenue from asset management doesn’t require as much supporting capital as a protection product does,” Parkinson says. “So, [wealth-management products] can be attractive for insurers that want to improve capital leverage and achieve a better return on the capital required to run a business.”
Thanks to the lifecos existing clients in the insurance space, the firms don’t have to look very far to find prospective wealth-management clients, says Parkinson: “[Lifecos] have a big base of people whom they do business with now that they can try to cross-sell to – people who have bought protection products from [lifecos] in the past. They can try to leverage those relationships.”
Distribution
Similarly, the lifecos already have solid distribution platforms in place, including relationships with independent financial advisors across the country.
“[We’re] engaging with those advisors,” Wallace says, “who are dually licensed and have used us for years in segregated funds, to bring them up to speed now on what we’re doing on the mutual fund side.”
As part of the lifeco’s expansion efforts in the wealth-management space, Wallace adds, they also will be looking to expand these networks to include advisors with whom they haven’t yet worked on the insurance side.
The expansion of the lifecos’ wealth-management businesses shows no signs of slowing down, with certain competitive advantages bolstering their position relative to other players in the financial services sector. For example, lifecos have the advantage of being able to offer a broader suite of products than other investment firms, including segregated funds and other products with guarantees.
Lifecos, unlike most of their competitors, are also able to provide employee savings and retirement products and services, thanks to pensions and other group offerings. And this market is poised to get a further significant boost with the impending introduction of pooled registered pension plans.
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