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Insurers raise profile in wealth sector

The industry is slowly increasing its market share of the profitable business of managing people's money

WATERLOO, ONT. -- FINANCIAL SERVICES REPORTER

The lengthy push that life insurers have been making into the lucrative and highly competitive wealth management business is paying off, highlighting a slow but seismic shift in the industry.

Insurance companies and their subsidiaries accounted for $251-billion, or 9.3 per cent, of the total financial wealth assets in Canada at the end of 2009, up from $147-billion or 7.4 per cent five years earlier, according to data that Investor Economics compiled for The Globe and Mail.

Insurers have made steady inroads even as banks and other money management firms have put new muscle into a high-stakes turf war. It's one that is heating up as financial institutions seek to capitalize on the 15-odd years until the Baby Boomers are all retired.

The battle is of vital interest to the life insurance companies, whose overall profits are under pressure from low long-term interest rates.

The success that insurers have had in attracting wealth management assets points to a slow but dramatic evolution in their business, from one that concentrated on clients who are worried about dying to one that focuses just as much on clients who are worried about outliving their assets.

"You think about insurance companies such as Sun Life as primarily being about life insurance, but the reality is that our business has grown and broadened considerably over the last decade or so," said Kevin Dougherty, Sun Life Financial Canada's president.

Wealth management markets are growing more quickly than the so-called "protection" markets for more traditional insurance products, he added. "Demographics would say there will be a lot more pouring into this over time."

In some respects, Sun Life finds itself playing a bit of catch-up in this space. It has long been a heavyweight competitor in the wealth management arena, with holdings such as Toronto-based institutional money manager McLean Budden and Bombay-based Birla Sun Life Asset Management Co. But in 2002 it decided to sell its two retail mutual fund subsidiaries - Spectrum Investment Management Ltd. and Clarica Diversico - choosing instead to own a large stake in CI Financial, which it sold to Bank of Nova Scotia six years later.

Now it is about to re-enter the fund business through the creation of Sun Life Global Investments (Canada) Inc., which will officially launch Oct. 13 and start taking in deposits around Oct. 25. The new fund company will make available in Canada funds from Sun Life's Boston-based subsidiary, MFS Investment Management.

It will also be launching a series of structured funds similar to its Milestone funds, whose guaranteed maturity value offers some protection against the possibility that stock markets plunge just before they retire.

"People's risk appetites have changed entirely" in the aftermath of the financial crisis, Mr. Dougherty said.

At the moment, roughly 40 per cent of Sun Life's Canadian income comes from wealth management, but that should be back up to 50 per cent within a few years, with the remainder coming from more traditional insurance products, Mr. Dougherty suggested.

"Lower interest rates certainly add more new business strain to individual insurance businesses and could impact profitability for this key protection business, so companies may put more emphasis on less capital-intensive businesses like wealth management, especially mutual funds, on the retail side in Canada," said Bank of Montreal analyst Tom MacKinnon.

Canada's life insurers begin reporting their third-quarter profits on Nov. 3, and interest rates are one of the key areas that analysts are watching.

Low long-term rates have been a headwind to life insurance profits in several quarters over the past two years, and this is expected to be another difficult quarter because interest rates trended down yet again, noted RBC Dominion Securities Inc. analyst André-Philippe Hardy.

"Low interest rates and volatile equity markets are essentially the opposite of an optimal operating environment for the life insurance industry," noted CIBC World Markets Inc. analyst Robert Sedran, who lowered his 2011 profit estimates for all of the life insurance companies because of the unfavourable environment.

Analysts are expecting Manulife Financial to post a loss again this quarter, in the neighbourhood of 44 cents a share. The company is expected to review certain actuarial assumptions, and its long-term interest rate assumptions.

The consensus estimate for Sun Life calls for profits of 67 cents a share, while Great-West Lifeco is expected to earn about 50 cents.

© 2007 The Globe and Mail. All rights reserved.

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