Integration challenges and growth for biggest insurers

By La rédaction | June 19 2005 03:11PM

Two thousand and four was a year of integration challenges for life insurers as the various players digested their recent acquisitions. But the improved returns of financial markets and the popularity of segregated funds, combined with a healthy insurance market, often led to strong growth and profits for the largest players. 2005 promises a stable but slowing trend.

To see how the industry leaders are faring, The Insurance Journal examined the 2004 annual reports and first quarter financial results for 2005. Below are some of the highlights:

Manulife’s profits surge in first quarter

Manulife Financial’s 2004 return on common shareholders’ equity (ROE) reached 13.7% in 2004 compared to 17.7% in 2003. It lagged the 2003 (ROE) improvement of 17.7% over 2002 returns, reflecting the larger capital base resulting from Manulife’s acquisition of John Hancock Financial Services in the United States. Still, a first-quarter 2005 profit surge of 88% over the same period last year was also largely due to that very same deal.

Total premium and deposits reached $49.9 billion in 2004 compared to $31 billion in 2003 – growth of 61% mainly due to the Maritime Life acquisition.

Net income rose to $801 million from $425 million for the same period a year earlier, and the company raised its quarterly dividend four cents per share to thirty cents per share.

This is a year-to-year net income increase of 66% between 2003 and 2004. The John Hancock business was again responsible for a substantial portion of the earnings both this quarter and the last.

The insurer also saw growth in Japan, where it received a $20 million tax benefit. Another contributor to profits was John Hancock’s Canadian subsidiary Maritime Life.

Profit was limited by a $40 million after-tax accrual charge to cover exposure to Portus Alternative Asset Management, a collapsed hedge fund the insurer’s financial advisers had recommended to clients.

Portus is under investigation by the Securities Exchange Commission (SEC), and Manulife has offered clients the return of 100% of any principal they had invested in the fund. Weak U.S. markets and a strong Canadian dollar have also hindered investment returns for the insurer.

President and CEO Dominic D’Alessandro says the John Hancock acquisition will be largely completed by year-end. By that time any further acquisition-related issues should be cleared.

Great-West posts more than 20% return

Great-West Life showed a return on common shareholders’ equity, including restructuring costs, of 20.5% for the twelve months ended December 31, 2004, compared with 20.4% for the same period in 2003.

For 2004 total premium and deposits totalled $34.1 billion, compared to $28.2 billion in 2003, for 21% growth.

Net income attributable to common shareholders’ equity, excluding restructuring charges related to the acquisition of Canada Life, was $1.630 billion for the twelve months ended December 31, 2004, compared to $1.215 billion reported a year ago, an increase of 34%.

Furthermore, in 2004 the company’s book value rose 9%, to almost $4 billion, as its premiums and deposits rose a whopping 47% to $23.7 billion.

The company, which operates in Canada, the United States and Europe, had total premiums and deposits of $14.5 billion. In Canada alone, for the twelve months ended December 31, 2004, the insurer saw an increase of $4.5 billion over 2003. Fee income for the period rose by $153 million.

Great-West also had a decent start to 2005, but lost a bit of steam compared to last year’s momentum. First quarter net income attributable to shareholders’ equity rose 10% to $423 million, while assets under administration rose by $2.1 billion or 1% to $167 billion.

Premium and deposit income, on the other hand, fell 5% to $9.2 billion. Segregated fund group product sales, among others, fell 53% to $1.2 billion.

Sun Life’s international operations growing

Sun Life Financial’s management is confident, with international operations growing steadily and Canadian business still going strong. It is facing continuing issues resulting from its purchase of U.S. mutual fund company Massachusetts Financial Services and an investigation by the SEC, but markets in India and China are developing at pace, and the company is well placed to profit from the trend.

CEO Donald Stewart was quoted in a press release of last May saying: “The business we’re in is a vital one with great prospects…with the opening of India and China, the life insurance industry now has access to huge markets.” Sun Life is diversified both geographically and along product lines, counting among its subsidiaries mutual fund companies McLean Budden and MFS Investment Management, as well as various partnerships in Asia.

Reflecting this diversification, in 2004 Sun Life earned 51% of its revenue from the U.S. (including its MFS subsidiary), 40% from Canada, 6% from the UK and 3% from Asia.

In 2004, Sun Life posted a 12.0% return on shareholders’ equity, compared to 10.6% in 2003. Shareholders’ net operating income reached $1.740 billion last year, compared to $1.520 billion in 2003 for growth of 14.5%.

To the contrary, total premiums, market-based deposits and fund sales were down 12.0% in 2004 from 2003, with $63.090 billion compared to $71.683 billion a year earlier.

First quarter 2005, nevertheless, is looking rosier with total premiums, market-based deposits and other sales up 19% over the first quarter of 2004. For their part, CI mutual funds sold through the Clarica sales force were up 38% over the first quarter of last year.

Earnings per share rose 9% over the equivalent period and ROE rose 0.6% to 12.6%. The company’s aim is to raise ROE at a rate of 0.75% to 1% annually to a target 15%. Net income for the quarter was $458 million, up $93 million, or 25%.

Industrial Alliance impacted by National Life integration

Industrial Alliance recorded shareholder net income of $155.1 million in 2004, up 13% compared to the same period a year earlier. Net income could have been even higher without the $6.1 million after-tax integration charge for National Life.

In fact, net income for 2004, excluding the integration charge, would have been $161.2 million, up 18% compared to 2003. Excluding the charge, return on equity would have been 14.1% instead of 13.6%, compared to 13.9% in 2003.

In addition, Industrial Alliance declared that the integration of National Life had a negative impact of $0.16 on earnings per share in 2004.

Total premiums and annuities amounted to $2.9 billion in 2004 compared to $2.6 billion in 2003, growth of 11%.

In the first quarter of 2005, Industrial Alliance’s net income was 14% higher than in the same period last year. The company earned $24.4 million.

Yvon Charest, president and CEO, said the first quarter allowed Industrial Alliance to get a strong foothold in the mutual funds market. In addition, premiums and deposits rose to $997.9 million, a sum 25% higher than obtained in first quarter 2004. Income was slightly offset by a $900,000 restructuring charge resulting from integrating National Life.