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The sun sets over the Petronas Twin Towers in Kuala Lumpur, June 26, 2006.Zainal Abd Halim / Reuters

Half of Canada's top companies are competing fiercely in Asia, even as economic growth in the region has softened. But operating in emerging economies means contending with underdeveloped, illiquid capital markets -- a hurdle for life insurers looking to grow abroad.

Manulife Financial Corp. and Sun Life Financial Inc. -- the country's most widely traded lifecos -- have spent decades building up businesses in 11 and eight Asian markets respectively. But insurers are by nature long-term investors, and the lack of developed corporate or sovereign bond markets that go beyond ten-year terms makes it tough to invest to cover long-dated products.

How to put Asia's capital pools to work is a topic up for discussion at this year's Canada-Asia 2013 conference held by the Asia Pacific Foundation of Canada, which starts Tuesday in Vancouver. A panel will debate how to improve efficiency in Asia's markets with the expectation that it could lead to the next phase of growth for financial services companies and others.

The insurers need strong capital markets to cultivate their insurance and wealth management efforts. "Underdeveloped capital markets can be a challenge, particularly as our businesses gain scale and we look for assets to support longer-term commitments to our customers," said Philip Hampden-Smith, Manulife's chief marketing officer in Asia.

To address those concerns, Manulife has regular talks with investors and tries to get involved in developing economies to boost their capital markets. "For example, after the Asian economic crisis in the early 2000s we were amongst the early supporters of the Indonesian bond market as the Indonesian government sought to recapitalize its economy," Mr. Hampden-Smith said.

A strong covered bond market, in particular, is key to capital market development because it would force the collaboration of politicians, regulators and investors, according to a McKinsey & Co. report on liquidity and funding for Asian banks from April.

But as the study notes, none of the emerging economies have been strong issuers of such bonds -- in countries such as India the market is poor, and in Malaysia interest is still being generated.

Sun Life chief executive Dean Connor thinks that one of the ways to grow the capital markets in countries such as Malaysia and Vietnam, which it entered in the past year, will be the development of pensions, which create long-term pools of capital.

"When you look at the Canadian market, for example, the development of annuities has done a lot to increase investment in infrastructure, which is desperately needed in most countries in Asia," he said. "And insurance companies and pension funds are some of the biggest investors in infrastructure in Canada that are long-dated -- 30-year or even longer -- loans and help capital formation in Canada."

Mr. Connor said that this development is one of the key interests of finance ministers in Asia he's spoken to. They equate a robust pension system and resulting annuities with a way to funds get invested back into the hospitals and infrastructure they need to encourage more development.

That development will take time and so will the growth of a useful derivatives market, the absence of which makes it tough – nearly impossible in some cases-- for insurers to hedge equity and interest rate risks.

But ultimately, whether the challenge is lower interest rates, regulatory changes, slow growth or trying to encourage growth in emerging market capital markets, insurers have made investments in Asia for the long haul and at both Manulife and Sun Life, a so-called portfolio approach to business may help cushion them against uneven development.

"There will be times when one market is facing headwinds, like India, but other markets are thriving, like the Philippines," says Connor of the current climate. "So agility and a balanced and diversified portfolio are important."

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 22/04/24 4:00pm EDT.

SymbolName% changeLast
MFC-N
Manulife Financial Corp
+1.69%23.46
MFC-T
Manulife Fin
+1.32%32.14
SLF-N
Sun Life Financial Inc
+0.9%51.57
SLF-T
Sun Life Financial Inc
+0.54%70.68

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