Of the old four pillars of Canada’s financial system—banks, trust companies, investment dealers and insurers—the insurers are the only ones besides the banks that survived financial services deregulation in the 1980s. The banks gobbled up the major investment dealers and trust companies. But Ottawa kept several major barriers between banks and life insurers, such as rules that prevent banks from selling most forms of insurance from their branches, and likewise annuities that pay out an income until death.
Starting in 1999, insurers were also allowed to demutualize—to switch from ownership by policyholders to ownership by shareholders. That gave them access to equity markets, and the Big Three bulked up and swallowed rivals. As a result, they are similar in size, but their operations differ. Great-West has been the biggest success recently because, in many ways, it was the stodgiest—the least willing to try new products and brash investment strategies. “We’ve been a very disciplined company for a long time,” says CEO Loney. “For example, we don’t invest in below-investment-grade corporate bonds.” In the early 2000s, Loney says, Great-West paid “quite a price” for that conservatism—it lost market share to Manulife and Sun. Since 2008, however, that caution has limited the damage to Great-West’s traditional insurance and annuity offerings. “Great-West didn’t write many products with complex guarantees,” says Routledge. “They were happy to sell you a variable annuity, but they wouldn’t make you a ridiculous promise.”
Great-West was also more diversified in Canada than the other two, continuing, among other things, to operate London Life and Canada Life as distinct divisions. All told, the group has about a 50% market share in some lines of business. And Great-West is part of a strong conglomerate—it’s 72%-controlled by the Desmarais family’s Power Financial Corp. Great-West’s biggest overseas holdings are in Europe, which is a difficult market these days. Yet Great-West earned a $643-million profit there last year. The U.S. is also a troubled market, but Great-West’s largest acquisition there was fortuitous. In 2007, it bought not another insurer, as Manulife did, but Boston-based Putnam Investments—an asset- and fund-management company.
None of the Big Three can simply abandon or sell off all their traditional businesses. So what is their game plan? One element is simply increasing prices, which they’ve done. Another is to steer clients to participating policies. While those products allow policyholders to share in more of the upside from investments, they also expose them to more risk. All three companies are also trying to rely more on wealth management, which provides reliable fee income. Last year, Sun Life raised its stake in fund manager McLean Budden to 100% from 68%, and folded it into its MFS Investment Management unit.
For Manulife and Sun Life, there’s also Asia. If North America is an economic and demographic nightmare, Asia is a dream—a young, growing and increasingly wealthy population, and the source of a third of Manulife’s total 2011 operating profit of $2.8 billion. Asia only accounts for about 5% of Sun Life’s business, but that number is growing fast. As Connor said in his speech at his company’s annual meeting, “Sales [in the first quarter of 2012] were up 27% across the region to $219 million of premium, over four times our sales in Canada.”
Unfortunately, back in Canada, investors are more focused on insurers’ problems of the past, and the fallout that will still be very much a part of their future.