Fortunes of a life insurance company often follow the direction of the economy, but even this is not a sure thing. There are a fair number of relatively unrelated concerns to grapple with, such as regulatory pressures and increased use of technology. But, there is also hope for growth, particularly in Asia.
Speaking to The Insurance and Investment Journal, Donald Chu, director at Standard & Poor’s said despite a drop in earnings, 2015 was not a bad year for Canadian life insurers.
“There were some noises here and there, but overall they did well. If you look back to the financial crisis, they did well compared to their global peers. There were equity raises through the crisis, but 2015 was a fairly good year,” said Chu. “There was noise with Manulife and Industrial Alliance; Industrial Alliance took a reserve adjustment, related to their life insurance policies.”
Companies have shown interest in the longevity market through pension risk transfer deals. Early in 2015, Bell Canada completed the first transaction for a pension fund in Canada with a $5 billion pension liability transfer to Sun Life. A.M. Best expects further activity in the pension risk transfer space with many players in the insurance and financial services industry operating in Canada and the United States.
Manulife cited external factors for 2015 finishing flat and posted a $2.1 billion dollars profit, down from $3.5 billion dollars in 2014 and ROE was down from 8.1 per cent to 2.3 per cent. In the company’s 2015 annual report, Donald Guloien, Manulife president and chief executive officer said, “This was a disappointing year in terms of net income, largely due to sharp mark-to-market declines in oil and gas prices, diminishing an otherwise great year.”
“During 2015, Manulife had close to $900 million dollars in investment losses on the oil and gas sector but they are mark to market adjustments. If oil and gas prices recover then those evaluations will recover,” Chu said.
Manulife expects the “macroeconomic” headwinds and energy price volatility to persist. The company believes it will be difficult to achieve their earnings goal of $4 billion this year. Sun Life Financial recorded growth but faced similar problems as Manulife. In Sun Life Financial’s 2015 annual report, Dean Connor, president and chief executive officer, said “The drop in commodity prices, the TSX decline and lower interest rates created headwinds for SLF Canada. However, the resulting devaluation of the Canadian dollar increased income generated from our business outside of Canada, which also benefited from relatively stronger economic growth.”
Asia, the big standout
Speaking at the National Bank Canadian Financial Services Conference in Montreal this spring, Steve Roder, Manulife’s senior executive vice president and CFO and Colm Freyne, Sun Life’s executive vice president and CFO, said the Asian market is a big focus, after record growth in the region.
“We have a 35% increase in insurance sales, we doubled our net wealth flows in 2015, we got 80% of our agents running around now using iPad technology on the streets of China and the level of confidence in our operation was at the highest I had experienced,” said Roder.
Manulife saw record growth in ten of their twelve Asian markets in 2015, while Sun Life Financial increased its joint venture partnerships in India and Vietnam. Sun Life boosted its Vietnamese joint venture PVI Sun Life ownership to 75 per cent and increased its stake in Indian venture Birla Sun Life to maximum foreign ownership of 49 per cent.
“We see tremendous opportunity in India. We have a 50%-50% joint venture with the Birlas on the asset management side and that’s doing very well. And the life insurance side has had more ups and downs, but again long term protection needs in India are substantial and we see lots of opportunity there, said Freyne.
Opportunity in India
Freyne said companies are having success in Asia because of the knowledge experience they have in designing products and managing large insurance companies, while their local partner brings knowledge of the local market, distribution expertise, brand and so forth.
“Between the two of us, we make sure that we build a very sustainable platform. One needs to be very flexible, because relationships change, different players on each sides will change and having something that’s sustainable long term is not an easy task,” said Freyne.
Chu said the Asian market is compelling to invest in due to the young nature of the market compared to Canada which is mature.
“The interesting part of Asia is the demographics. They’re very compelling for growth and the products are simpler than in Canada. Manulife in Asia has entered into two distribution agreements. One is with DBS bank, based out of Singapore, it is the biggest bank in Singapore and the other is Standard Chartered in Hong Kong,” said Chu.
While Manulife’s Japan and Hong Kong operations continue to rake in the core of their earnings, China continues to be the most exciting market for Manulife, where Roder has never seen such a high level of confidence in a Manulife operation, despite an apparent slowdown.
“Mainland China is still a very small proportion of our total activity. However, it is a huge opportunity for us,” said Roder.
One of the reasons insurers seem to have so much enthusiasm for the Asian market comes down to the way insurance is selling.
“In Hong Kong, Manulife is number two in that particular market place. They’ve made the process of buying insurance seamless, so you can go to a bank and do all you’re banking and insurance in one place at the same time. They’ve worked together to make it a great customer experience,” said Chu.
With the prolonged period of low interest rates, Manulife believes lessons it has learnt in Japan, which is dealing with negative interest rates, will help the company back in the Canadian and North American markets.
“We are an active player in Japan and we have learned how to navigate these low interest-rate markets and in fact we have had very, very strong growth in Japan but it has been through selling product largely where we are not so exposed to interest-rate risk,” said Roder.
“Low interest rates are not helpful, I’m not pretending I like them. But I think in many ways we have mitigated the impact of them so it is not something that keeps me awake at night.”
For the past year, continued low interest rates and limited domestic growth due to the mature nature of the Canadian life insurance marketplace have remained earning headwinds according to A.M. Best. Net premiums written saw a slightly modest increase of 4.3% growth in 2015 compared to 4.1% in 2014 as growth remains a challenge. The re-pricing of products has also continued due to low interest rates and unfavourable policyholder behavior in products such as disability income and long-term care.
“Some of the challenges they face with low interest rates, is so much of their balance sheet is invested in fixed income investments. The good news on that front is, when they tend to sell a product they tend to match fund it. If they sell a year 20 product, they will buy a 20 year bond to match it,” said Chu.
Mergers and acquisitions remained strong in 2015 and A.M. Best saw companies look for expansion through acquisitions in the asset management space.
“Sun Life’s assets under management grew during the year, driven by the acquisitions of Ryan Labs, Prime Advisors, and Bentall Kennedy. Sun Life also continued its growth with the announced acquisition of Assurant’s employee benefits business in the United States.
Manulife’s top line growth for the year was mainly driven by the completed acquisition of Standard Life Plc’s Canadian operations during the period,” said A.M. Best in their April 2016 report on the 2015 Canadian life insurance industry.
After a calm year for Great-West Lifeco in terms of acquisitions, Chu forecasts that Great-West will make more noise on this front in 2016 and beyond.
“I think Great-West is going to start coming into capacity and doing M&A and quite frankly that is their state of business strategy. Overtime they tend to do fairly chunky and large acquisitions which tend to make tactical sense,” said Chu.
Great-West Lifeco’s European subsidiary, Irish Life acquired Aviva Health Insurance Ireland and GloHealth, which allows them to provide health insurance as well in Ireland, while Canada Life acquired high net worth wealth management company, Legal & General International (Ireland) Limited in the UK.
iA Financial Group (Industrial Alliance) was a participant in a strategic acquisition. During the fourth quarter of 2015, the company acquired BBA Financial Group, a Quebec-based brokerage firm that specialises in the distribution of life and health insurance products. A.M. Best said this partnership fits the company’s focus on adding new distribution to its retail insurance and wealth management. iA also acquired Les Services financiers Planifax, a mutual investment funds firm.
2016 and beyond
Canada’s life insurers have a stable outlook according to Standard & Poor’s 2016 outlook for life insurers in North America, however their business and financial risk profiles vary from strong to extremely strong, which indicates the direction the companies plan to take in the near future.
Standard & Poor’s say there is a change of demographics in the middle market, which require new and innovative products and distribution and this provides an opportunity for growth. “Generations X and Y consumers are interested in accessing most of their financial information online and are comfortable making most purchasing decisions on their smart phones,” said S&P.
“Some insurers have started to make in-roads into the middle market by making the necessary investments to adapt to the changing dynamics of this space. But there is still plenty of undiscovered potential in the middle market for a retail-oriented insurer to increase its market presence,” said S&P.
Chu sees life insurer’s overseas interests as their biggest strength heading forward.
“Their main strengths are their international operations. They dominate in the Canadian market, which is really the cash cow of the operation and with the excess profits that they are able to generate from Canada and their footprints in international markets, they are able to expand their reach,” said Chu.
On the heels of regulatory changes, the life insurance industry remains well-capitalised according to A.M. Best, as many insurers remain conservative with their capital strategies until the full impact of regulatory changes are better known.
“As volatility in commodity markets such as oil and gas, the weakening Canadian dollar, and the Bank of Canada’s reduction in the overnight rate have led to economic challenges for Canada, many insurers continue to seek opportunities globally to grow and diversify,” said A.M. Best.