Wilton Re sets sights on long-term growth with Transamerica acquisitionBy Susan Yellin | December 02 2014 10:40AM
A U.S.-based life insurance company, boosted by the promise of more financial backing from its new owner, the Canada Pension Plan Investment Board (CPPIB), is making its first foray into Canada with the $600-million purchase of Transamerica Life operations in Canada.A name change will come soon, but other than that, current staff and products will remain, keeping a major insurance company in the country.
Wilton Re, acquired by the CPPIB in March for $1.8 billion, announced in mid-October that it is buying the majority of Transamerica Life operations in Canada for $600 million from Dutch-based Aegon NV.
While a number of life insurance companies have come and gone from the Canadian life insurance landscape over the past few years, Wilton Re said in a statement that buying the Transamerica Canada business is “well-aligned with our strategy to provide risk and capital solutions to clients throughout North America. Wilton Re is committed to the middle market and Transamerica Canada is well positioned to serve the middle market in Canada. We intend to support the profitable growth of this business.”
Subject to regulatory approvals, the deal is expected to take place in the first quarter of next year. The acquired business includes a $10.6-billion portfolio of assets made up of individual life, annuity and segregated funds policies, as well as credit insurance products. Wilton Re also takes ownership of Aegon Capital Management and Aegon Fund Management.
CPPIB originally purchased Wilton Re because it is “led by an experienced management team and we have confidence in their abilities to expand their business,” said a CPPIB spokesperson. As well, “Wilton Re’s focus is closed-blocks of life insurance, which provide attractive risk-adjusted returns with a multi-decade cash-flow profile and is well-suited to a long-term investor like CPPIB.”
When CPPIB first acquired Wilton Re, it said it planned to invest further capital into the company to support its continued growth. While no decision has been made right now regarding where future investment opportunities may lie, the spokesperson said Wilton Re has an ideal platform for CPPIB to make future investments and “we expect to invest substantial follow-on capital to continue to grow the company.”
Doug Brooks, president and CEO of Transamerica, says having a strong Canadian institution like the CPPIB involved in the company’s ownership shows long-term commitment with a long-term investment horizon. “This is very consistent with the nature of the life insurance business, so I think there’s strong alignment there.”
It’s that kind of backing that has stakeholders pleased, knowing that Transamerica Life will remain a major competitor in the Canadian industry for some time to come.
“It’s not like private equity where they are going to buy a company and flip it five or six years later,” said Terri Botosan (formerly DiFlorio), president of Hub Financial Inc. “The way the folks from Wilton Re explained it, this is a long-term investment for them. And that’s how the CPPIB invests and will invest further in the Canadian life insurance marketplace rather than plan any exit strategy in the coming years.”
Jim Virtue, president and CEO of PPI Solutions Inc., said he believes the deal is good overall for employees of Transamerica, MGAs, advisors and consumers because it does not remove Transamerica as a player in the mid-market.
“I think it’s a good thing it wasn’t purchased by one of the other three big Canadian insurance companies and then swallowed into it. This is good because it will continue to operate as a separate entity and keeps the competition better.”
In early September, Manulife Financial announced it was buying Standard Life’s Canadian operations for $4 billion, wrapping the company into its fold. Unlike the Manulife-Standard deal, the Wilton Re-Transamerica transaction will see Transamerica remain basically intact, with the same personnel and products, although there will be a name change within the next six months.
There had been rumours for some time that Transamerica was on the auction block and that had clouded people’s vision of the company, said Virtue. “Now that’s off the table and they can move on.”
BlueSun, a financial services technology company that had recently completed work on a data feed for Transamerica, said there has been no change with its relationship with the insurer since the buyout announcement came out.
“We have been working with Transamerica for over a decade partnering on sales and distribution opportunities,” said president Stewart Wigg. “They have some really forward thinkers and we are looking forward to seeing what they do next.”
Wilton Re and Transamerica share a similar clientele target – the middle market – those with dual-family incomes as high as $200,000, said Brooks. But he said he tends to define that market more on the kinds of insurance solutions the clients need rather than income. In that range, clients require basic insurance coverage, not specialized complex products as they do in the high net-worth category.
At one time, Transamerica had a large block of segregated funds, but four years ago, maturing seg fund policies resulted in $1 billion worth of redemptions and another $1 billion in top ups over the market value of the policies. The result, said Brooks, is that when those funds matured, Transamerica’s block of segregated fund business dropped to about one-third of what it was at its peak. The company also developed and implemented a hedging program to effectively hedge all the equity risk that remains in that portfolio. The company is no longer actively marketing seg funds, although it does have one seg fund product for sale, he said.
Its core products now are life insurance, including two universal life offerings – a level cost of insurance and an annual renewable product – as well as term insurance, and critical illness.
In 2013, Transamerica had more than $680 million in gross life premium revenue and by the end of the year, it had more than 538,000 policies in-force with more than $173 billion of insurance coverage.
Wilton Re is in the business of acquiring simple life products, either blocks that are in run-off or blocks that they will continue to write, said Tana Higman, a director at Fitch Ratings in Chicago. “I think they saw an opportunity here to enter the Canadian market,” noting that the CCPIB is also very familiar with the Canadian market.
Higman said Fitch views the Canadian life market as “very mature, very stable. There isn’t irrational competition there. So I think the potential is there for very steady, stable earnings for Wilton Re from this acquisition.”
It is Wilton Re’s first move outside of the U.S. and Higman said there could be some challenges of entering a new market for the first time. Particularly, she said, the Canadian market is dominated by three players – Manulife, Great-West Life and Sun Life Financial – each with significant market share. There are many U.S. insurers competing for business.
Fitch did not change its ratings on Wilton Re, but it did place Transamerica Life Canada on rating watch negative even though it said the company holds solid market positions in term insurance and universal life. “However, Fitch believes the company has a narrow scope and smaller base in Canada, where the three largest companies represent two-thirds or more of the market. While net income increased to $134 million in 2013, TLC’s profitability has consistently fallen short of [former parent] Aegon’s targets in recent years.”
A.M. Best also left Wilton Re’s ratings unchanged, saying the deal would add to Wilton Re’s geographical diversification by providing an in-force book of Canadian life business as well as a foothold to expand into Canada. While Wilton Re and its insurance subsidiaries are “adequately capitalized” through CPPIB, it added that “Wilton Re could face challenges given Transamerica Life Canada’s earnings sensitivity to changes in Canadian interest rates, and equity markets.”
For its part, Aegon said it will use the proceeds of the deal to pay outstanding debt. It said the Canadian operations of Transamerica did not meet its aims.
“We continually review the performance of our businesses to ensure that they support our ambition to become a leader in our chosen markets”, said Alex Wynaendts, CEO of Aegon. “We have concluded that our Canadian life insurance business does not support that goal.”
Full steam ahead
Brooks, an actuary by training who has also worked at Confederation Life, Mutual Life (later acquired by Sun Life) and at the helm of Transamerica for six years, says there is only one change in senior positions and that is for a person moving to Transamerica in the U.S. Other than that, he says, it’s full steam ahead.
“We are very much looking forward to it as an opportunity to build a Canadian business, focused on the middle market with strong backing and support behind us and the management team is very much looking forward to the opportunity.”