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As boomers near retirement, insurers embrace asset management

Of the 12 mutual funds launched by Sun Life Global Investments (SLGI) in October, 2010, four managed through Sun Life’s U.S. asset management subsidiary MFS Investment Management ranked in the top quartile of returns, according to Morningstar rankings

Michelle Siu/The Globe and Mail

Since Sun Life Financial Inc. re-launched its asset management business three years ago, the unit has increased the number of its funds fourfold, highlighting efforts Canadian insurers have made to build their wealth management operations to offset weakness caused by low interest rates.

Of the 12 mutual funds launched by Sun Life Global Investments (SLGI) in October, 2010, four managed through Sun Life's U.S. asset management subsidiary MFS Investment Management ranked in the top quartile of returns, according to Morningstar rankings. SLGI has amassed $6.7-billion in external client assets in its first three years, and now has 52 funds in its retail lineup.

"The nature of the company is morphing to be more and more about wealth management," Kevin Dougherty, president of Sun Life Financial Canada, said in an interview.

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Other Canadian insurers have also intensified their wealth management focus in the last few years and Manulife Financial Corp.'s Manulife Mutual Funds unit had more than $20-billion in net assets under management at the end of 2012. Last month, Manulife rolled out a new guaranteed investment product that allows for equity market participation and future lifetime income for clients nearing retirement. Unlike banks, insurance companies can offer segregated funds that guarantee a minimum return.

As baby boomers edge closer to retirement (the oldest are now in their late 60s), banks, independent retail brokerages and insurers want to capitalize on these consumers' need for money management, retirement and estate planning, investment protection and advice. Insurers are touting their orientation as stable, risk-sensitive investors to appeal to this group, a pitch that resonates following years of market volatility. Long-term mutual fund sales can serve as a good indicator of the gains the insurers have made in the Canadian wealth business, says Goshka Folda, senior managing director of financial consulting group Investor Economics. Life insurers had a 4.8 per cent share of the industry as of August this year, up from 4.3 per cent in 2010, Investor Economics data show. The insurers' assets in these funds have grown by 50 per cent in that three year period, where the rest of the industry's growth rate is 34 per cent.

Investors do not "fully understand or appreciate the assets under management growth," Tom MacKinnon, analyst with BMO Nesbitt Burns, wrote in a recent note to clients. The global wealth management businesses of Canada's four largest life insurers now accounts for between 35 and 45 per cent of their total bottom lines, he said. That compares to 15 per cent for Canadian banks, which have the lion's share of assets invested in Canadian retail brokerage accounts.

Insurers have been bulking out their asset management business further by acquiring smaller competitors both abroad and at home. In 2009, Manulife bought the retail fund division of AIC Ltd., for an undisclosed sum, and in July this year Industrial Alliance Insurance and Financial Services Inc. bought asset management company Jovian Capital Corp. for $94-million.

Insurers say that investment products with guaranteed returns to investors who are ready to retire – or still reeling from volatility caused by the financial crisis that began in 2008 – are helping them grow. Insurers manage money over longer periods of time to cover insurance policy obligations, and they argue that this expertise gives them a leg up in retirement savings and investment products.

"Consumers have shifted to be more interested in capital preservation, long term … they're a little more risk averse," said Paul Lorentz, executive vice-president of retail for Manulife. "I think the big advantage for us is being able to offer a guaranteed payout."

Wealth management became more of a focus for insurers after stock markets plunged during the financial crisis that started in 2008. At that time, life insurers took hits from losses on riskier insurance products that guaranteed minimum payments, while a rock-bottom interest rate environment cut margins. Stock prices of the three largest life insurers fell by between 70 and 80 per cent from their 2007 highs, and none has fully recovered yet.

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The insurers have spent the last 10 years "playing catch up on the wealth management side in terms of the investment fund assets," said David Scandiffio, head of Industrial Alliance's wealth management division.

Investor Economics measures the industry's size through calculating Canadians' household investable assets. This pool of assets counts bank deposits, investments funds, and assets in retirement plans, among many other categories. It also aims to reduce duplications. The total size of household financial wealth reached $3.1-trillion in December, 2012, and is expected to jump to $5.4-trillion in the next decade.

Heightened capital requirements have also forced insurers to build reserves to make sure they can support policies in the long term. Wealth management requires a smaller capital cushion because there is less risk associated with managing money for clients.

What is clear is the lines that used to separate financial service companies are breaking down. "Insurance companies are not pure insurance companies," Mr. Scandiffio said.

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