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The Manulife offices on Bloor Street East in Toronto. The insurer increased a key capital measure by 19 percentage points to 248 per cent over the third quarter.Glenn Lowson/The Globe and Mail

Industrial Alliance became the first Canadian life insurer to increase its dividend since the before the financial crisis on Thursday, just one of many signs that capital strength has returned to the sector.

As the major lifecos reported earnings this week, Industrial Alliance surprised investors not only by posting earnings that beat expectations, but also by raising its quarterly payout by 6 per cent to 26 cents a share. While some analysts had forecast the insurer would return capital to shareholders this year, the move outpaced most expectations.

The hike is significant given that the industry was rushing to shore up capital reserves amid plunging markets just a few years ago. Now, modest increases in long-term interest rates and gains in equity markets have improved insurers' capital ratios. This opens up the insurers options to buy back shares, raise their dividends or even acquire new businesses.

Several of the insurers made progress in raising a key measure of the insurers capital levels, called the Minimum Continuing Capital and Surplus Requirements Ratio (MCCSR). For example, Great-West Lifeco Inc.'s MCCSR increased two percentage points to 223 per cent in the fourth quarter. The company now has the flexibility to pursue acquisitions, dividend hikes, and share repurchases, according to analyst Peter Routledge of National Bank Financial.

"While share repurchases reflect our preferred avenue for deploying Great-West's financial flexibility, we foresee this representing a fairly measured portion of GWO's capital strategy," Mr. Routledge said, noting that the insurer bought back $46-million worth of shares in this quarter.

Not all of the major insurers plan to return capital to shareholders straight away, though. Sun Life Financial is taking a different road by deploying capital through restructuring reinsurance contracts and with plans to redeem $500-million of subordinated debt at the end of the first quarter of 2014.

Sun Life's chief executive officer Dean Connor said he sees many opportunities to invest in the business, and possibly make bolt-on acquisitions. Sun Life will likely put these moves ahead of any return of capital to shareholders.

Manulife Financial Corp. also expressed hesitation over increasing its dividend in the near future even with the strong capital levels it displayed when it reported earnings Thursday. Its MCCSR reached 248 per cent at the end of the year, up 19 percentage points over the third quarter and 37 points over 2012's ratio. That's close to the highest level since 2010, according to Darko Mihelic of RBC Dominion Securities Inc.

Manulife arguably struggled most with its capital levels during the crisis. Starting in 2008, Manulife decreased share buybacks, cut its dividend and even issued equity to boost capital.

So it may not come as a surprise that Manulife isn't in a hurry to return capital to shareholders now. "We're obviously very pleased, but this ratio is an inherently volatile ratio and whilst it's nice to have 248 per cent it doesn't mean that we're going to take any specific actions," Steve Roder, chief financial officer at Manulife, said in an interview. "It may continue to increase, but who knows."

The company plans to wait for clarity on regulation and accounting changes before considering a dividend increase. Late last year the Office of the Superintendent of Financial Institutions (OSFI) delayed a decision on changes to insurers capital requirements until 2016, though the banking and insurance regulator has said that it sees the risks that Canada's insurers are exposed to as adequately balanced with the assets they have on hand.

Without a dividend hike on the horizon, Manulife will need to show major progress in approaching its target of $4-billion in core earnings by 2016 before the stock moves significantly.

Mr. Routledge expects more dividend increases from Industrial Alliance in the coming quarters, but added the insurer may also want to pursue investment management acquisitions with some of its excess capital. And analysts predict Manulife and Great-West Lifeco Inc. may follow Industrial Alliance with their own capital return initiatives in 2015.