The late afternoon sunlight streamed over Confederation Life Insurance Co. chairman Patrick Burns’s shoulder one day earlier this fall as he sat in his Toronto office and noted that he is literally in the twilight of his 46-year career. But unlike many other top-level executives approaching retirement age, the straight-talking 64-year-old has had little time recently to sit back and rest on his laurels. After expanding rapidly in the late 1980s, and investing more heavily than its competitors in then-booming real estate markets, Canada’s third-largest life insurer has suffered some sharp reversals over the past year. In 1991, Confederation’s profit fell by 82 per cent to $19.2 million after it made provisions of $155 million for nonperforming investments, mainly in real estate. Last week, the company announced plans to become the first Canadian insurer to directly tap public debt markets with a $ 100-million issue of subordinated debentures.
However, while Confederation’s experience is unusual among Canada’s large life insurers, Burns acknowledged that Confederation and, indeed, the entire industry face major challenges over the next few years. “Until a recovery comes, you are going to see other companies hit with the same problems,” said Burns. “We just might have been a little earlier and a little more acute than others.”
Many industry executives and analysts say that sobering assessment is accurate. And last week, the respected New York City-based credit rating agency Standard & Poor’s Corp., released a long-awaited report on 20 of Canada’s largest life insurance companies. For more than a century, those companies have been among the most stable and successful in the world, and the agency’s ratings of the claims-paying ability of 13 of them confirmed that. It rated all 13, including Confederation, as AA(excellent) or better. But the report also warned that the industry will have to meet unprecedented strains in the 1990s. Among the reasons: new regulations permitting Canada’s Big Six banks greater entry into the insurance business; the
waning popularity of highly profitable long-term life insurance policies in favor of term insurance; a shortage of investment opportunities; and administration and sales costs that Standard & Poor’s said are too high. As a result, Mark Puccia, Standard & Poor’s director of insurance rating services, predicted that “some companies are going to be forced out of business.” For consumers, Puccia said that the Stan-
will also have to trim their administrative bureaucracies to remain competitive. “There are going to be some cutbacks,” he said.
Even before Standard & Poor’s released its report, Canada’s life insurance industry was already showing some signs of struggle. In January, the Montreal-based Coopérants Mutual Life Insurance Society, a medium-sized company which operated almost exclusively in Quebec, became the first Canadian life insurer to fail in more than a century, largely because of the company’s poor real estate investments. The Coopérants owed more than $100 million to its policyholders, and its collapse has sparked a court battle over who will reimburse them.
In 1990, the industry established its own consumer protection fund called CompCorp,
dard & Poor’s study underscores the need for them to consider the credit risk when dealing with any one of Canada’s 170 life insurance companies. “You have to ask some more questions when you buy an insurance policy,” he said. Puccia added that the 60,000 Canadians who work in the industry, including 24,000 company sales agents and independent brokers, will feel the pressure as well. Already, agents and brokers are receiving lower sales commission rates as insurers shift from selling life insurance policies to less profitable annuities, pensions and other retirement savings instruments similar to those sold by banks and trust companies. But Puccia said that insurers
which is funded by a half-a-percentage-point levy on each member company’s annual premium income. The fund raised $80 million nationwide in 1991 and will likely raise $60 million this year. But in the case of the Coopérants, CompCorp has asked Quebec-based life insurers alone to pay the entire cost of the bailout, provoking a still-unresolved lawsuit spearheaded by 12 Quebec insurance companies.
In preparing last week’s report, Standard & Poor’s interviewed executives with the companies that they rated and examined both public and private financial data. Insurance executives understandably said that they were pleased with the resulting high ratings. Com-
pared with more than 4,000 other insurance companies that Standard & Poor’s rates around the world, the Canadian life insurers’ mostly AAA and AA ratings are extremely high. The world average is BB+, meaning that an insurer’s financial security “may be adequate.”
But in addition to the ratings, the 30-page report also assesses the industry’s growth prospects—and came to relatively pessimistic conclusions. First, the study argues that population trends and consumer preferences are working against the industry. Demand for life insurance is directly related to population growth, and experts predict that growth will remain flat over the next decade. As well, during the years of high inflation in the 1970s and early 1980s, the so-called baby boomers who still dominate the financialservices market shied away from traditional long-term policies that eroded dramatically in value during those years in favor of term life insurance and other shortterm investments that offered them better returns.
Confederation’s Burns, for one, argues that baby boomers who have grown up with government social programs that protect them from catastrophe have never been as receptive as their parents were to the traditional insurance representative’s promotion of security. Added Burns: “People were no longer as frightened of premature death.”
Because of that changing demand, Standard & Poor’s predicts that life insurers will likely continue to diversify into annuities and other savings instruments in the 1990s, products that now account for about half of their business. But those instruments are similar to those offered by banks and trust companies. And because life insurers must match the returns offered by their competitors, those vehicles are far less profitable than traditional insurance policies.
That shift to annuity-type business, and the aftermath of the upheavals of the 1970s and 1980s, have also forced insurance companies to re-think their investment strategies. During the 1940s, 1950s and 1960s, investing was comparatively simple. Life insurers backed long-term policies with investments in longterm bonds or mortgages—many of them with 25or 30-year terms. Defaults were rare, and interest rates were stable and predictable. But in their efforts to steer through rapidly changing markets and to continue to grow during the
1980s, some insurers moved into risky and unfamiliar territory—and were badly battered.
Because of such experiences, most Canadian insurance executives have recommitted themselves to a conservative investment strategy. But that so-called flight to quality has created problems as well, because there are a limited number of low-risk, top-grade investments in Canada, and the competition for them is intense, and driving up their prices. Adding to the uncertain prospects for life insurers is the near-certainty that Ottawa will soon allow banks to compete directly with them. Ottawa
began deregulating the financial-services sector in 1986 with the intent of eliminating regulatory barriers among banks, trust companies and insurance companies. But so far, in a battle between two of the most effective lobby groups in the country, the life insurers have blocked the banks’ drive to gain the right to sell life insurance in their branches. Under revisions to banking and insurance laws passed in June, the barriers remain.
Bankers argue that they can provide insurance more cheaply through branches than insurers can by selling through agents and brokers. But life insurance executives vigorously dispute that argument. Although they concede that the banks would likely drive many insur-
ance companies out of business if all barriers disappeared, they claim that because of decades of regulatory protection, the banks possess unfair competitive advantages that are unrelated to efficiency. John McNeil, the outspoken chairman of Sun Life Assurance Co. of Canada, the nation’s largest life insurer, claims that one of the biggest advantages the banks have is their access to almost complete computerized financial information on their customers. “We in the life insurance business have access to all the banks’ customers only because they are in the telephone book,” McNeil said. “We do not have access to that privileged information.”
But even McNeil acknowledged that “the banks are going to get into the insurance game one way or another.” Indeed, Standard & Poor’s predicted that Ottawa will likely remove the last barriers to bank entry by 1997. For their part, the banks are already circling around the edges of the insurance business. Although the banks failed to win the right to sell their own insurance in their branches in the latest banking law revisions, they did gain the right to buy insurance companies. Last week, the Royal Bank of Canada became the first bank to do so, buying the nation’s largest travel insurer, Brampton, Ont.-based Voyageur Insurance Co., from its British-based parent company for an undisclosed sum.
The Standard & Poor’s report said that the prospect of bank entry will hasg ten the shakeout in the life í insurance industry. Puccia " said that many unspecialized, medium-sized compaI nies in particular are likely 1 to disappear. He added that “ whether they sell off all or portions of their business to other companies, merge or simply fail depends on decisions the industry makes itself. “There is a cheap alternative and an expensive alternative,” he said. He also questioned whether CompCorp would be able to withstand several failures. For his part, Mark Daniels, president of the Canadian Life and Health Insurance Association, the industry’s umbrella group, agreed. Declared Daniels: “CompCorp is like the mortician. Hopefully, we’ll get the doctors in there beforehand.” But despite that speculation about doctors and morticians, the Standard & Poor’s study confirmed that, for the moment at least, most of the patients appear to be remarkably healthy.
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