TORONTO-BASED MANULIFE FINANCIAL CORP.‘s acquisition of Standard Life PLC‘s Canadian operations takes a strong competitor out of the Canadian insurance industry while further bulking up the country’s largest life insurer – a prospect that could make it more challenging for smaller insurers to compete.
“It’s a major deal, there’s no question,” says John Hamilton, president and CEO of Kitchener, Ont.-based Financial Horizons Inc. “It definitely strengthens Manulife’s position in the marketplace.”
The $4-billion acquisition, which was announced on Sept. 3 and is subject to regulatory and shareholder approval, would beef up Manulife’s group benefits, group pensions and individual investment businesses substantially. Although the transaction presents limited growth on the life insurance side – Standard Life ceased sales of individual insurance policies at the beginning of 2012 – the wealth-management implications, Hamilton says, are significant.
“Manulife has always been strong on the life [insurance] side,” Hamilton says. “This is going to catapult Manulife into the major position on the group pension side and on the seg fund side.”
Although the transaction is generally considered to be positive for Manulife, there is concern within the insurance industry about the prospect of more consolidation. That’s because less competition generally means fewer product options, says Jim Ruta, founder and CEO of the Expert Institute in Toronto and a regular video columnist for Investment Executive, and that is a negative for insurance advisors and policyholders.
“I’m concerned about the concentration of market power in one company,” Ruta says. “Are the insurance companies going to become like the banks, where we have Schedule 1 banks – the major ones – and then nobody else?”
Standard Life is just the latest in a slew of Canadian life insurance companies that Manulife has acquired in the past 15 years, among them Maritime Life Assurance Co., Zurich Life Insurance Co. of Canada and Commercial Union Life Assurance Co. of Canada.
Although scale provides cost savings and other advantages in the insurance business, Ruta adds, there are challenges associated with consolidating so many companies. For example, Manulife faces the tough task of keeping track of all of the policyholders and advisors affiliated with the companies it has absorbed and ensuring that they continue to receive a high level of service.
“How will [Manulife] make sure that it provides service to clients?” Ruta says. “I worry about policyholders. I also worry about agents, who now have one less market to place their insurance with.”
As Manulife’s competitors strive to keep up with the company’s aggressive growth, Ruta speculates that other major Canadian insurers could be motivated to explore their own acquisition prospects, prompting further industry consolidation.
That strategy is likely to be daunting for smaller industry players, says Richard Nield, portfolio manager in Austin, Tex., with Toronto-based Invesco Canada Ltd. As the big insurers get bigger, he says, it tends to become more difficult for smaller companies to compete – unless they manage to carve out a niche in the industry.
“Scale matters in insurance,” Nield says. “There’s clearly some synergies to be had.”
However, Nield doesn’t expect to see any other major insurance industry acquisitions in the near future. With global regulators having substantially increased the capital requirements for long-term insurance products – and with continued uncertainty about what the final capital requirements will look like – many companies, Nield says, are reluctant to pursue acquisitions that would significantly increase the volume of their insurance business.
“The regulators have been keeping a closer eye on banks,” Nield says, “but they’re also looking at insurance companies and trying to determine whether they’re too big to fail, and whether they have adequate capital buffers. Because of that, there hasn’t been a lot of [mergers and acquisition] going on in the insurance space.”
Wealth management, on the other hand, has strong appeal for insurance companies, as that line of business provides an attractive stream of fee-based revenue without the onerous capital requirements associated with insurance products. This probably was the primary appeal of the Standard Life deal for Manulife.
The prospect of less volatile earnings is particularly attractive to Manulife, given the turmoil that it experienced during the global financial crisis of 2008-09. That market downturn left Manulife facing substantial losses related to its variable annuities and guaranteed minimum withdrawal benefit products. Since then, Manulife has been focused on dialing back its risk exposure and improving the state of its balance sheet.
© 2014 Investment Executive. All rights reserved.