They may not be immediately apparent, but several notable shifts are afoot in Canadian life insurance – changes which could have interesting repercussions in the industry – as many companies emerge from more than five years of intent, internal focus on operational and regulatory demands typical of the business today. On the surface, earnings are in, and despite market volatility, regulatory costs and low interest rates, A.M. Best Company analysts say Canada’s top four life and health insurance carriers – Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, and Industrial Alliance Insurance and Financial Services – did reasonably well in 2014, with their combined net income coming in at 23% for the year.

What has changed primarily, say analysts, is a tilt in company focus, from concentration on internal processes, margins, costs, and company defenses against a myriad of external shock possibilities, to a greater focus on external factors and future opportunity.

As insurers readjust their gaze, several trends continue to play out domestically and globally too. Some, like low interest rates, are no-doubt challenging, but appear to be less a source of angst than in years past. In other cases, companies would appear to be well-positioned to capitalize on the trends underway.

Aging clients, for example, are less likely to need life insurance products, but do need wealth management services – a business that companies have been building up for years, primarily for the return on equity (ROE) that wealth management companies can generate relative to traditional insurance manufacturing.

Since 2008 companies have also worked, in several cases, to decouple balance sheets from interest rate and market volatility.

Consolidation within Canada continues as well, although observers say 2014’s activities are likely a remnant of that trend domestically. While there may be smaller acquisitions still to be made, large companies at least, would appear to be more focused on their respective international efforts for growth.

“The last year is a remnant, the tail end of that consolidation and strengthening process” says Keith Walter, insurance senior advisor with Deloitte Canada. “There are still niche opportunities, or smaller opportunities for continued acquisition and consolidation, but it’s a trend that’s been around for a long time.”

What appears to be taking hold in its place, he says, is the start of companies beginning to be more focused on deploying strategies outside of their home offices. “There’s quite a significant amount of change taking place around that.”

Capital deployment

While consolidation opportunities are not exactly rife domestically, two or three traditional deals did go through in 2014 and the first quarter of 2015, with Manulife purchasing Standard Life plc’s Canadian operations, and with Industrial Alliance snapping up Ten Star Group of Companies’ mutual fund, segregated fund and life insurance distribution business in December 2014.


In a less conventional exchange, the Canadian Pension Plan Investment Board (CPPIB) also agreed to purchase Connecticut-based Wilton Re Holdings Limited in March 2014, in a deal reportedly worth US$1.8-billion. In turn, Wilton Re, with help from the CPPIB, then purchased Transamerica Life Canada, and the rest of Aegon N.V.’s operations in Canada the following September, for $600-million.

Unconventional strategy

Moving into the truly unconventional then, Sun Life announced in March 2015, that it had acquired $5-billion of pension liability from the Bell Canada Pension Plan in a new longevity insurance agreement – the first of its kind in North America.


Internationally, all four companies continue to build up their businesses in the United States, as well.

South of the border, Sun Life’s roster of deals included the acquisition of New York-based Ryan Labs Asset Management at the beginning of 2015. Sun Life is also expected to increase its stake in Indian life insurance company, Birla Sun Life, once India’s government allows increased foreign ownership in the sector.

Manulife’s U.S. division, John Hancock Financial, meanwhile entered into an agreement at the beginning of 2015 to acquire New York Life’s Retirement Plan Services (RPS) business. Great-West Life, following its 2013 acquisition of Irish Life, also completed its acquisition of Kansas City-based J.P. Morgan Retirement Plan Services in 2014.

In early 2015, Manulife also announced a deal with Singapore-based DBS Bank, giving the Canadian insurer 15 years of exclusive access to the bank’s six million customers in Singapore, Hong Kong, China and Indonesia. The US $1.2-billion cost to Manulife will be amortized over 15 years, beginning in January 2016.

Peter Routledge, managing director with National Bank Financial says Manulife’s operations in both the U.S. and Asia, are one of the industry’s significant growth stories: “Their mutual fund business is growing in leaps and bounds in both regions,” he says. “We’re starting to see that show up in earnings. Again, it doesn’t require a lot of incremental capital to run that business.”

Dividends, often a shareholder-preferred means of deploying capital, also began re-emerging during the period.

According to the A.M. Best review of annual reports, total equity increased 12.5% for the four companies in 2014. Although payout ratios declined, they say both Manulife and Industrial Alliance increased quarterly dividends to shareholders, 19% and 14% respectively during 2014. In the first quarter of 2015, meanwhile, Great-West increased their quarterly dividend to $0.326, and Sun Life’s dividend increased for the first time since 2008, to $0.38 per common share.

Although dividends remain below where they were prior to 2008, analysts say the announcements are “quite significant,” and possibly indicative of the industry’s future direction.

While the insurance industry’s pursuit of wealth management business is another trend well underway in Canada, it is interesting to note that trends supporting that particular business are not exclusive to domestic markets.

“Globally, the responsibility for both health and retirement (planning), is shifting down from the government and employers, to employees,” says A.M. Best vice president, Steve Irwin. “That presents opportunities as well.”

In addition to the higher ROE business being more capital-efficient to operate, wealth management is additionally supportive for life insurers, who are seeing clients pay less in risk premiums as they age, but who now require retirement services. “They’re looking at (meeting) different needs within the timeline of people’s lives.”

Distribution will likely continue to be a point of focus for insurers, as well.

Technology investments

Innovation, meanwhile, is not a word typically associated with life insurance, but new and ongoing technology investment by companies in the sector could turn this around, as well.


Technological improvement to underwriting systems and processes are underway. Perhaps a more significant shift, however, is the increased importance and use of analytics to inform and improve the relationships more companies are beginning to forge, directly with consumers.

“They’re looking at predictive analytics, modelling. For underwriting, (technology is) making the process simpler and quicker,” Irwin adds.

On top of marketing interest (think social media), companies are investing in digital platforms to improve customer interaction, mobile applications, and communication tactics sometimes unrelated to the company’s products at all.

In short, direct consumer engagement efforts are growing at the carrier level as companies shift focus, yet again, this time from products to the consumer relationship.

“Some of the insurance companies I’m talking to say they’re far more interested in YouTube placement than they are in traditional advertising,” says Walter. “It’s all about the relationship with the customer, and how that plays out in different ways.”

Consumer engagement

In the U.S., for example, the John Hancock Vitality Program gives clients a free Fitbit, and the opportunity to lower their annual premiums, along with shopping rewards and discounts. Group insurer, Green Shield Canada recently launched a similar rewards program through its Change4Life web portal.


“There are a lot of interesting angles like that, which are now on the radar screen, and (showing up) in strategic discussions,” he adds. “There is a noticeable increase in direct to consumer, in many forms, that wasn’t there in the past. I would describe that as noticeable, and something to watch,” says Walter.

“Technology is the enabler, the driver of that. Near and dear too, is the use of analytics to understand the customer and to reach the customer. It’s a combination of digital interface with the customer, and analytics behind it to do the right thing when you are interfacing with the customer. It’s opening up some very new avenues and opportunities for the insurance industry.”

A.M. Best says growth in assets under management increased 13.5% for the top four companies in 2014, while net premiums saw “a more modest increase” of just 4.1%.

Only Industrial Alliance suffered net mutual fund redemptions during the period, thanks to poor performance on some of its sub-advised funds. The company also lost access to Laurentian Bank’s branch network during that period, as well.

In a similar, but completely reversed scenario, Sun Life also ended a significant distribution agreement, in this case, with CI Financial.

“CI financial no longer has privileged access to the Sun Life’s career agents’ sale force,” says Routledge. “Critical to success for any fund management business, is having some measure of control over your distribution. Lifecos have varying degrees of that control. Sun Life’s made great strides in penetrating their own proprietary distribution force with Sun Life products.

“They have this great distribution channel, career agents, and most of them are pretty good at selling mutual funds. They have done a good job at positioning their own manufactured funds in that channel and they’ve been picking up share quite rapidly; from something like 0% to 25% share of that channel in the last couple of years.”

In general trends, interest rates mean sales of whole life are more popular than universal life products, while participating products are given an edge over non-par products. “The relative value of products has shifted in this low interest rate environment,” Routledge adds. “Until that reverses, I don’t see the trend reversing.”

Group insurance is also a weight on some company results, but those affected say the problems are “re-pricable.”

Going into the new year, all four companies emerged with capitalization rates well above 200%.

A.M. Best expects companies will continue to study proposed changes to international reporting standards being phased in, as these could result in some products, particularly those with long-term guarantees, becoming “less competitive in the marketplace.”

Interest rate movements, meanwhile, will likely affect each company a little differently going forward.

“You can almost see the direct link between interest rate expectations, and how that plays out in stock prices,” Walter says. Rates are still an issue, but analysts say companies are managing well, with some choosing to remain exposed to interest rate fluctuations, while others have worked to remove this volatility.

Regulation and actuarial rules, Routledge says, have “really forced the lifecos to assume a Japan-like interest rate scenario where interest rates fall and stay low for 20 years. Compared to U.S. life insurers, Canadian life insurers have assumed a pretty draconian interest rate scenario in their actuarial reserves.”

What that means, he adds, “is that insurance is now quite a low ROE business, but one that is fundamentally sound and solvent.”

In particular, he says Sun Life and Manulife have worked hard to decouple rate fluctuations and returns. “If rates go up, the benefit to those players will be less than they would otherwise have been. There won’t be this windfall capital release for them.” But, he adds, the return on invested capital for new products will go up if higher rates return.” Industrial alliance, on the other hand, largely maintained their interest rate exposure through this period, making the company a possible long-term play on rising interest rates.

Across the board, analysts say they expect more of the same from Canadian life insurers going forward.

For 2015, we see 8% year-over-year EPS growth,” Routledge says. “For 2016, it’s about 11%. Our EPS estimates do reflect acquisition activity. On an organic basis, we expect EPS to grow in the high single digits over the next three years,” Routledge says. “The nominal GDP in Canada and the US are just growing 4% to 5% over that time frame. So, lifecos are growing their EPS at twice nominal GDP which is not bad.”