Many insurance professionals are bemoaning the loss of yet another key player in the insurance industry with the recent announcement that Manulife Financial is buying Standard Life’s Canadian operations for $4 billion. The deal will boost Manulife’s presence in products it has identified for growth and increase its presence in Quebec, while allowing it to distribute Standard Life products throughout Canada, the United States and Asia.

Some advisors, especially those who have been down the consolidation road before, were unfazed by the announcement. But others see the agreement as the loss of a major supplier, with the sale significantly reducing shelf space percentagewise and further consolidating the country’s Big Three life insurance companies – Manulife, Sun Life Financial and Great-West Life.

“Every time there is a consolidation, we lose market and competition and that’s not good as one by one all the so-called smaller players in the industry have been bought out,” said one advisor, who asked not to be named.

“It leaves us in a situation like the Tim Horton’s-Burger King merger. Every time I want a coffee or a burger does that mean I have to go to Tim Horton’s or Burger King? What if I want to go to one of the unique little restaurants? With the Manulife-Standard deal, we’re using fewer of the latter group and I don’t think I like that,” the advisor added.

Standard Life, whose parent company is based in Edinburgh, Scotland, has been in Canada since before Confederation, providing savings, investment and insurance products to more than 1.4 million Canadians and accumulating more than $52 billion in assets under management. A few years back, Standard Life turned away from the individual life and critical illness insurance markets to focus more on wealth management products by building out its mutual fund platform and group benefits program, particularly its group pension side. These were the same kinds of assets that Manulife had identified for growth in Canada. So while it may have surprised some in the industry, few were shocked when Manulife announced in early September that it had won the bid after Standard Life started requesting bids several months ago. The deal is subject to regulatory and shareholder approval, but the transaction is expected to close in the first quarter of 2015.

Advisors like Bradley Sumner with Investment Planning Counsel in Kingston, Ont., say he feels Standard Life has a reputation for being a high-quality and excellent service provider. But now, “the deal takes Standard, with its pretty good, well-serviced, well-managed company out of the mix.”

After 30 years in the business, Sumner has seen his share of consolidations. He’s not concerned about current business on his books that will go from Standard Life to Manulife, because, he says, the provisions of each policy are locked in. But he believes he will now have to look further afield if he ultimately decides to take new business to a smaller player if he believes that’s in the best interests of his clients.

Service challenge

Speaking about consolidations in general and not specifically about this situation, Roger Thorpe, president of Thorpe Benefits, said that in many mergers or buyouts there is a concern that as companies get larger they often lose touch with the end customer. “It makes it a challenge to service clients properly if the back office is too slow or inaccurate.”

Thorpe, whose firm is an integrated benefits consulting company, noted that other carriers may see a need to buy or sell now, shrinking the number of choices for advisors and benefits providers even further. “We still have enough choice to offer our clients, but you always have to wonder where we will be five to 10 years from now. We don’t see many – or any – new carriers coming along.”

Potential advantages

The agreement, once completed, could provide some advantages in the wealth management and retirement sides of the business, said Henry Toby, an independent life insurance consultant, who has been in the industry for 25 years. Both Standard Life and Manulife have excellent offerings in the small- to mid-sized marketing segment, said Toby, so the consolidation of the two should provide for some greater advantages, perhaps by reducing some expenses.

The sale could mean more work for advisors who had significant portfolios with Standard Life because – as in any consolidation – there could be changes the plan administrator needs to know about, as well as training on systems and tools and perhaps changes to the investment options for some clients.

Toby acknowledged smaller brokers will be hit hardest. “But I personally don’t see it as that big of a threat at present – there are plenty of other choices beyond the Big Three.”

Mario Malatesta, president of group benefits MGA GroupQuest Benefits Resources Inc., agreed there are a number of positives about the announced agreement, including that it will boost Manulife’s growth in the group pensions business.

Like the many mergers and buyouts before this one, the industry will generally work through any bumps in the road, said Malatesta. But he feels for those advisors who may have moved clients out of a Manulife product in the past and into Standard Life – only to have to start looking again.

“I don’t ever want to put a client under that amount of stress, or an advisor under that amount of work.”

While it was widely viewed that Manulife, with $300 billion in global assets under management, would seek its next acquisition in Asia, Manulife CEO Don Guloien said the deal to buy Standard Life’s Canadian operations was the “best bang for the buck.”

Larger Quebec footprint

As well, it would allow Manulife, which began selling insurance in 1887, to increase its presence in Quebec and make a larger footprint in the province’s unique market. The company said it hoped to gain a senior leadership team based in Quebec that would provide country-wide business decisions, and also “high-quality, customer-facing service to Francophones” in Quebec.

“Manulife was underrepresented in Quebec both in terms of penetration of the market and in terms of our physical presence in Quebec. So this is a chance to upgrade both,” Guloien said the day of the announcement.

Other insurers have also appointed specific presidents of Quebec to underscore the importance of having a Quebec presence and a dedicated resource in the province.

Manulife said it had committed to Montreal as an international financial centre. As well, the “vast majority” of the jobs in Quebec are to be retained and the company expects to have even more jobs in Quebec than Standard Life has currently, Manulife said in a statement. Standard has about 2,000 employees.

One industry insider said Manulife has a history of keeping its word on maintaining the bulk of staff and services in a buyout. When it purchased Maritime Life in Halifax, for example, Manulife established a couple of centres of excellence to retain the staff there and look after local service issues.

In the meantime, Manulife said it’s business as usual for everyone during the integration, which is expected to take between 18 and 24 months.

MGA Financial Horizons Group has made a number of acquisitions in Quebec in the past few years, and president John Hamilton said he too is sorry to see a supplier like Standard Life leaving. But in the end, he said he doesn’t see the agreement making much of a difference to his firm. “We are very strong with both Manulife and Standard Life in Quebec,” said Hamilton. “We are Standard’s No. 1 MGA in terms of distribution, new premiums and probably assets under management and I think we’re No. 2 with Manulife. So we will have to see how it plays out.”

Hamilton also said the situation may create some opportunities for other companies to get business with advisors who have been long-term supporters of Standard Life.

Some of those other companies might include Equitable Life, Canada Life and Empire Life. Even RBC Insurance has ventured into the segregated fund market, said Hamilton.

Insurers set for expansion

A.M. Best Company said it sees positives coming out of the deal for Manulife. “A.M. Best believes the transaction will help to support MLI’s (The Manufacturers Life Insurance Company) strong market position in Canada, specifically in the Quebec market, while providing an opportunity to further grow its wealth management business globally. The transaction will add scale to MLI’s core business lines in Canada, including group retirement, mutual funds and group benefits,” said the insurance rating company.

Manulife pointed specifically to group benefits, group retirement, certain areas of asset management, investment risk oversight and liability-driven investing as areas where it wants to expand.

Many of Canada’s life insurance companies are in the financial position now where they can make mergers and acquisitions – a big change from a few years ago during the “crisis period” where these kinds of purchases weren’t even on the table, said Meny Grauman, a research analyst with Cormark Securities in Toronto.

Life companies didn’t have either the financial means or the risk appetite for any transactions of significant size for quite some time, said Grauman. Instead, they were busy shoring up their existing businesses and not expanding through transactions.

“But that’s changed and all of them are open for business. Specifically, there had been rumours that Standard Life’s Canada life business was up for sale. I think most investors assumed that when Manulife would do a deal, it would be in Asia, but definitely there was also this view out there that the Standard Life business was being shopped around and was for sale.”

Who will be next?

Many agree that this is not the end of consolidation in the Canadian life insurance industry.

As to which company will be next is now a great conversation starter. A report by BMO Capital Markets, released just two days before Manulife’s announcement, noted that Standard Life and Transamerica Canada are the last two major players owned by non-Canadians, “which could have some appeal at the right price.”

A long list of other foreign-owned companies has already left the country – names like Metlife, Royal and Sun Alliance, Zurich and Aetna.

The report noted that both Standard and Transamerica had recently refocused their Canadian operations, “so in our opinion the likelihood of these properties being sold in the near term is small. That said,” the report continued, “every asset has a price.”

Many of the small life insurance companies have already closed down or been bought up in earlier rounds of consolidation, especially after demutualization. Now while there are mainly the Big Three, there still are some medium- and smaller-sized firms. But, said one industry stakeholder, if you’re going to go through all the trouble of buying a company, you might as well go after something more substantial than the little fish.

“If I am going to buy something, the integration effort – due diligence, all the work I have to do to make this happen – is not much different if I buy a smaller company or a larger company – I still have to go through the systems integration and do all the work. So there is an advantage to buying big. But there aren’t many big left to buy.”