Saturated home market spurs insurers to look abroad for growth

By Reynaldo Marquez | June 18 2006 08:19PM

Finding Canada increasingly cramped, the big three Canadian life companies are stepping up their efforts to garner new sources of revenues overseas.

Rating agencies Standard & Poor’s and A.M. Best expect this trend to accelerate in the Canadian life insurance market over the next few years.

The three Canadian life giants, Manulife Financial, Sun Life Financial and Great-West Life are feeling increasingly pent up in a market over which they have a nearly 70% stranglehold.

With only minimal room to grow on local turf, these insurers have few options but to strike out for overseas pastures, the two agencies maintain. And their determination to cultivate foreign markets will surely increase, the analysts forecast.

The speech by Sun Life CEO Donald Stewart at the shareholders and policyholders meeting on May 10 confirms these international aspirations, says Stephen Irwin, vice-president, life insurance at A.M. Best.

At the meeting, Mr. Stewart underlined the key role of international operations and suggested that Canadian companies would gain by honing their international competitiveness if they want to prosper, a press release reports. Mr. Stewart emphasized the importance of developing Canada’s trade relations with China and India.

Sun Life expanded its U.S. distribution network following an agreement signed with M Financial Group on February 28. With over 110 member firms in 35 American states, this leading distributor of financial products serves an affluent clientele, including companies in the Fortune 1000 group.

Eye on the globe

Despite having made solid inroads in the U.S., Europe and Asia, the trio are intent on tapping these markets in earnest for new sources of growth revenues, says Richard McMillan, senior financial analyst at A.M. Best.

“Although Manulife has been present in Hong Kong for the last 150 years, and Manulife in the States for the last 100 years, they really are going to focus on their efforts abroad looking for growth because the Canadian market is very mature,” he says.

Growth opportunities are particularly strong in Asia because the number of people with disposable income is steadily rising, Mr. McMillan adds. These mega-insurers distribute more protection products in Asia than they do in North America and Europe where sales are more focused on retirement products.

Neil Parkinson, national director of insurance practices at international accounting firm KPMG, agrees. He says that even though some of the largest Canadian insurers have been present in Asia for over a century, many things have changed since they set up shop. “Not that many people were buying insurance products (in China) 150 years ago. The same applies to India.”

These two countries each have more than a billion inhabitants. And with increasing development of these economies, the number of people in China and India that now have the means to purchase insurance is growing on a monthly basis, Mr. Parkinson explains.

Donald Chu, director of Standard & Poor’s institutions rating group, also believes that the three largest insurers will be betting on the international market in the coming years. “At this point in time, Canada has been fully consolidated. The big three will continue to look either at the European or U.S. market for acquisition opportunities.”

Currently, adds Mr. Chu, “they have multiple (acquisition) opportunities from which to choose, including in the Asia Pacific region.”

Nevertheless, Mr. Chu expects insurers to be cautious before proceeding into any acquisitions, especially because the three companies have recently emerged from a phase of acquisition integration in their home markets, such as Sun Life and Clarica, Great-West and Canada Life and Manulife acquiring John Hancock Financial and Maritime Life.

When it comes to foreign acquisitions, Mr. Chu predicts these Canadian insurers will look only at the choicest deals. “They are going to be opportunistic in this. It is only when an opportunity will present itself that they will bid.”

Mr. Parkinson of KPMG believes that the big three are definitely acquisition-ready. The growth potential generated by acquiring foreign insurers, particularly those based in emerging economies, surpasses that of companies purchased locally by Canadian insurers, he explained. Yet gaining control of an insurer active in a developing country poses a higher risk for Canadian companies, Mr. Parkinson warns.

“When you buy in an emerging country you take in the risks that come with a change of jurisdiction, a change of government, a change of legislation. The economies of those countries may go though some trouble in terms of their commodities or their currencies. There are fewer risks when buying domestically, but then again, in a mature market you lose the upside potential that is found in companies acquired in emerging markets.”

Growth Potential

Having clearly returned to profitability in recent years, insurers active on the international scene are now weighing growth possibilities, KPMG concludes.

In all mature markets, including Canada, insurers are seeking ways to cultivate growth abroad. Mergers and acquisitions may play an increasingly prominent role, even though organic growth and business partnerships (joint ventures) are the development avenues of choice.

The global insurance industry, in life and property and casualty insurance (P&C) alike, is heading straight into a new consolidation phase in the coming years, says a KPMG survey whose results were announced on May 19. The study involved 200 insurance companies around the world, including Canada. All respondents sit on corporate boards of directors, 42% are president and chief operating officers of their organizations.

The survey revealed that 70% of respondents expect a wave of consolidation to unfold on global life and P & C insurance markets in the next three years. What’s more, 85% of respondents believe that the international insurance market offers “good” and “very good” growth opportunities within the next three years.

Asian respondents are generally “extremely confident” in the growth opportunities in their own market.

The largest insurers plan to continue making acquisitions: 81% of insurers that generate $500 million in direct written premiums are actively trying to buy out their competitors, should a good opportunity arise. This percentage is 61% for more modest-sized insurers.

Meanwhile, 35% of the largest companies have made acquisitions in the last three years, compared with 23% for smaller insurers.

Acquisition strategies in the last three years were driven mainly by insurers’ profitability and growth objectives.

In total, 40% of insurers surveyed say they plan to channel up to US$500 million into acquisitions over the next three years. Close to 6%, mostly European players, claim they are ready to inject up to $3 billion.