03 November 2005

Cdn Insurers Show Cdn Banks How it's Done

The Globe and Mail, Sinclair Stewart, 3 November 2005

There's a lesson to be found in the recent quarterly results of Manulife Financial Corp. and Sun Life Financial Inc., but no one has to explain it to the country's banks: The insurers, unlike their Big Five brethren, have found a way to crack the lucrative U.S. market, and it's beginning to pay huge dividends.

Despite incurring a punishing charge for hurricane Katrina, Manulife was able to eke out a small increase in profit during the third quarter, aided mainly by its purchase last year of Boston-based John Hancock Financial Inc. and impressive contributions from its U.S. life insurance and wealth management businesses. Combined, these units produced 30 per cent more than the company earned in all of Canada during this period.

But Manulife, Canada's second-largest company, is not alone. Rival Sun Life, which has experienced problems in the United States, signalled last week it is getting back on track after some difficulties with regulators and a few years of pain in the fixed annuities business. Its U.S. businesses made $133-million during the quarter, or 45 per cent better than the previous year.

“Clearly the U.S. operations have been a significant driver of incremental profit for both Manulife and Sun Life,” said Robert Wessel, an analyst at National Bank Financial Inc.

“I think the life insurers have more competitive platforms in the United States, and now you're seeing the benefit of them relative to the banks.”

Of course, insurers have a natural advantage: They don't have the cost of establishing or buying expensive branch networks to service their customers. Instead, they focus more on designing products, and then rely on agents to sell them around the country. The banks, by contrast, are both manufacturers and distributors.

Mr. Wessel cautioned that it is difficult to generalize, especially since some banks, like Toronto-Dominion Bank, are only now laying the groundwork for their U.S. retail strategy. Others, like Royal Bank of Canada, have returned to an upward trajectory after stumbling for several quarters. Bank of Montreal may be the biggest exception, given it has been cemented in the U.S. Midwest for decades. Yet while its Harris Bankcorp subsidiary is an important contributor, it only accounts for about 20 per cent of the bank's annual profit, and performance has been uneven.

Manulife's results illustrate the gap between banks and insurers in terms of developing a U.S. presence. Its profit for the quarter reached $742-million or 92 cents a share, a 4-per-cent increase from $713-million or 87 cents a year ago. While the Canadian operations delivered a strong showing, it was the U.S. businesses — particularly on the investment side — that grabbed the attention of investors.

The company booked 46 per cent of its profit south of the border this quarter, and the growth opportunities there only figure to increase this number. Although some insurers have struggled in the current climate, chafing against both the rate environment and higher reinsurance costs spawned by the recent hurricane devastation, Manulife executives insisted Thursday the company is diverse enough to make money regardless of which way markets and rates are moving.

The stock markets, for instance, performed much better this year than last, providing a major lift to investment returns and wealth management profitability. Profit from U.S. wealth management rose to $163-million, up 37 per cent from a year ago. Without the effects of the stronger Canadian dollar, the increase would have been more pronounced, at nearly 50 per cent. The U.S. life insurance division reaped similar rewards, churning out $144-million in profit, an increase of 29 per cent.

Manulife chief executive officer Dominic D'Alessandro said Thursday that the insurer's performance underscores the success of the John Hancock merger, and suggested cost savings from the deal may reach $500-million, up from the previous estimate of $385-million.