Canada Life ventures into mutual funds

By Alain Thériault | June 20 2002 06:32PM

Canada Life will soon venture into the mutual funds market, reveals the companies second in command, Bill Acton, in an interview with The Insurance Journal. Mr. Acton also took the opportunity to state his preference for growing the company organically.

Two months after having started operating in the securities sector, Canada Life is now taking aim at mutual funds. It will favour a strategy of home development to do so. "The economics of buying a fund developer don't make sense," says Bill Acton, Executive Vice-President and Director for the Canadian Division.

Transactions in the securities sector over the course of the last few years saw examples like Investors Group, which paid 16 times the earnings before interest, taxes, depreciation and amortization (EBITDA) for Mackenzie Financial. Then there was AIM, which bought Trimark at 14 times its EBITDA. The agreement between Sun Life and mutual fund producer CI Funds was concluded at a multiple of nine.

A few years ago, Standard Life also concluded that acquisition costs were prohibitive and chose to construct its own product. Good or bad year, Standard Life Investments has each year doubled its mutual fund assets under management, which today number $804.1 million.

Mr. Acton would not give a entry date for the fund subsidiary given the state of the project. "We are currently examining the operations costs for such a project." The success of the subsidiary will depend on its distribution network and the scope of mutual funds exclusive to Canada Life, he says.

Acquisitions in sight

In the insurance sector, Canada Life won't put aside the possibility of a U.S. acquisition. The target will be in group life and health insurance.

According to Brian Lynch, Vice-President for Investor Relations at Canada Life, the current finances of the company will easily allow it to make a purchase of anywhere between $500 million and $1 billion. Minimum continuing capital and surplus requirements (MCCSR: the ratio used by regulatory authorities to measure a company's capacity to fulfil its financial obligations) in the first quarter was at 213%, well beyond the target range of 175% to 200%. The company has excess capital of between $500 million and $600 million.

Although the company is not planning to make any really big purchases, says Mr. Acton, it remains a buyer. In fact, he adds, about half of his time is spent working on that subject. This clearly contradicts the circulating rumours that Canada Life is up for sale.

Mr. Acton doubts the notion that the big transactions that have taken place in the last several years have always been to the benefit of the buyers. Big acquisitions are not an absolute solution, he says. "If you look at the history of companies that have gone that route, it isn't rare to see a fall in returns after a certain time. A large size is not synonymous with success. The bigger a company is, the harder it is to manage."

So can Canada Life allow itself to remain in third or fourth place in Canada? "There is room for more than just two companies," affirms Mr. Acton. Will larger companies simply crush the smaller ones? "I don't think so. They don't dominate the industry, they participate in it."

According to Mr. Acton, success comes from proper distribution, quality products, and services offered to consumers and to brokers. For Canada Life, the market is not limited to Toronto. The size of the teams in Montreal and in Regina bear witness, says Mr. Acton. "Canada is composed of a series of regional markets. In Toronto, the downtown segment is not the same as the rest of the city, area code 416 doesn't have the same needs as area code 905."

The last large acquisition at Canada Life was the purchase of the Canadian group pension line of business from TD Bank announced November 8, 2001. Those assets, worth $5.1 billion, include the administration of defined contribution pension plans, group RSP plans, profit sharing plans and stock plans.

Canada Life currently has 66% of total revenue derived from wealth management. Mr. Acton wants to see that proportion increase to 80%.

Mr. Acton also referred to the Sun Life purchase of 30% of CI Funds in exchange for considerable mutual and segregated fund assets. "That alliance is a good strategic decision for Sun Life," he says. "Neither company was dominating the mutual fund market. They'll just be stronger as a result."

Is that disposition of assets a sign that insurers no longer find segregated fund management profitable? Mr. Acton doesn't think so. "Profit margins are very interesting in the segregated fund sector," he says. "There is no bad business. There is just bad management."

Within the framework of its organic growth strategy, the insurer founded subsidiary Canada Life Securities, an investment dealer, in April. CLS will complete mutual fund, pooled fund, guaranteed income certificates, and company stock transactions for its trust-based clients. Its creation was an effort to conform to various aspects of Canadian regulations. Mr. Acton says it was a "small nod to the regulators. It's far from my intention to build another BMO Nesbitt Burns!"

Kanetix in the black

As to technology investments at Canada Life, Mr. Acton revealed that online insurance aggregator Kanetix broke even for the first time in April. Created by the company in 1999, Kanetix now regroups more than 12 suppliers. The service offers life and property and casualty insurance rate comparisons. "The volume is tripling every period relative to last year. It is an excellent investment. That said, though, the profitability does tend to minimize the size of our initial investments."

While refusing to divulge total costs for his technology investments, Mr. Acton did concede that the company had spent more than $70 million on its back-office systems. He doesn't agree that technology development is as expensive as perceived. "It's the inverse that makes sense. There is a risk that everything will cost more if we continue to ignore online technology development. The industry as a whole is showing a lack of will. It is partly responsible for its own lack of success. It is looking for solutions without first understanding the problems," he says, "and that's how the costs go up."

Examples of how technology can benefit a company are observable at Canada Life, Mr. Acton says. Last year, a firm doing business with the insurer wanted to give its employees the choice to invest their annual bonus into a pension fund. "It took us two weeks to create the forms, a week to distribute them, and six weeks to have them filled out," recounts Mr. Acton. "We had to make 450 calls to complete missing information which resulted in a 15% error rate. This year we've invested in software that will accomplish the same thing. Now it will take just one day to make the change the firm wanted! The calls and error rates have been reduced to zero."

"If there was a way to make money in the paper era, then there is certainly a way to make money in the technology era!" he says.

Mr. Acton doesn't foresee an actualization of the Life Companies Central (LCC) project in 2002. LCC is a common electronic interface system between suppliers of insurance products and their distributors ­ something similar to FundServ, but for the life insurance industry. Though Mr. Acton is "a long time supporter of the LCC." He doesn't hide the fact that if the project were to fall through, he would immediately lend his support to a future generation of LCC. "Whatever happens, I know that one day we will have the solution."

He says business processes simplification is essential for representatives. It is to that end that RepNet, an online marketing and sales support for brokers selling Canada Life products, was created. The site holds extensive information and offers technical support to its members.

Shares fully priced

Mr. Acton did not deny his company's shares might still be overpriced, despite a fallback in recent months. May 31, Canada Life shares were trading at $39.80 ­ 17% below the 52 week high. "The share price is still set at a level where investors are anticipating a purchase by another company. In the long run I think the share value will more adequately reflect our capacity to create value."

Total premiums, premium equivalents and new deposits at Canada Life grew to $11.229 billion by the end of 2001, an increase of 21% over 2000. Assets under administration rose to $65.425 billion, up 3% from 2000.


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