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Life insurers post strong results despite mergers

par Daniela Cambone | June 20 2004 01:58PM

The three largest public insurance companies are experiencing golden years of profitability despite having made costly acquisitions. Sun Life Financial, Great-West Life, and Manulife Financial have all posted double-digit return on equity (ROE) figures for 2003.

Of the three, however, Manulife expects it will be hit the hardest by its acquisition of John Hancock Canadian Holdings, which includes Maritime Life.

Manulife Financial’s 2003 ROE came in at 17.7%, up from 16.2% in 2002. Peter Rubenovitch, the insurer’s executive vice-president and chief financial officer (CFO), says he expects the ROE to drop down to 12.7% at the end of 2004.

The ROE reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. The formula for ROE is net profit divided by average shareholder equity for a period.

Mr. Rubenovitch says the insurer’s goal will be to rebuild the ROE. To do so, Manulife will be building on the Asian market, which Mr. Rubenovitch says is going very well. “We have attractive rates of return, but I think the biggest thing is that we have no bad business. All our competitors have one or two lines that are problematic,” he highlights.

Manulife has exited over two dozen businesses. “We got out of the United Kingdom, we exited the deposit business in Canada, we sold our benefits business in the U.S.; it didn’t fit strategically so we did a house-cleaning.”

Over at Sun Life Financial, Paul Derksen, CFO at the insurer, explains that the current ROE stands at 12%, up from 10.6% in 2003. Mr. Derksen states that the insurer’s goal is to build its ROE 75 to 100 basis points per year, with the overall objective to hit 15% in two to three years.

Mr. Derksen explains that after the Clarica acquisition, the ROE dropped, which he adds, is typical after a merger. However, he highlights that Clarica’s earnings this year are up 33% and that the money management subsidiary Massachusetts Financial Services (MFS) is performing very well.

To maintain its high ROE, Mr. Derksen states that the insurer exited a dozen lines that were not profitable. He names the bank, asset management and the group life and health division in the United Kingdom. As well, the Clarica division was sold in the United States. In Canada, the insurer has no plans to exit any lines at this stage.

Lines it plans to further develop include the group business south of the border. “We are focusing on growing the group insurance in the U.S., organically or by acquisition,” he says.

As well, Mr. Derksen explains that Sun Life’s market in India is growing rapidly, and that it now has 10,000 agents there. He adds that Beijing is another growth story for the insurer, and one to watch in 2004.

Great-West Life’s ROE dipped the least after acquiring Canada Life. Raymond McFeetors, president and chief executive officer of Great-West, says that the ROE at the end of the first quarter 2004 stood at 19.8%. The ROE in 2003 was 20.7% before restructuring costs and 20.4% after restructuring costs, a minimal drop. Great-West acquired Canada Life in 2003. Before that, the ROE was at 22.9%.

He explains that Great-West’s ROE didn’t drop much after acquiring Canada Life because it was a skilful acquisition. “Manulife is buying a lot of problems with Hancock. They will be lucky if they can keep the ROE at 12%. Hancock was a distress and it was for sale to anybody; there are a lot of asset problems there,” he says.

“Our ROE has never been below 20%; we manage capital sufficiently and we are a very profitable business,” highlights Mr. McFeetors. He adds, “ROE is made up of income divided by capital, so you have to have good earnings and you do not want to have too much capital strangely enough. If you have too much capital, you are not employing it efficiently and that is what ROE measures.”

Mr. McFeetors stresses, “We want to be in the 15% to 18% range and we have traditionally been above that.”
Mr. McFeetors adds that the insurer’s segregated fund business is one of its most profitable and one helping to keep the ROE so high, though he adds that all its lines of business are high margin. He explains that dividend growth is at 22% and earnings are at about 20%.

Plans for 2004, include completing the acquisition of Canada Life and looking to add to its business in the U.S. and Europe, particularly in wealth management.

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