The acquisitions of major U.S.-based asset-management firms and an emphasis on growing their retirement-related businesses are the probable reasons why three of Canada’s biggest life insurers remain among the top 10% in New York-based Tower Watson’s annual ranking of the world’s top 500 asset managers.

At 37th overall, Toronto-based Manulife Financial Corp. leads all Canadian asset-management companies in the Pensions & Investments/Towers Watson World 500 ranking with slightly less than US$419 billion in assets under management as of Dec. 31, 2009.

Manulife was followed by Toron-to-based Sun Life Finan-cial Corp., at 39th overall with US$412.3 billion in AUM; and Winnipeg-based Great-West Lifeco Inc., at 50th overall with US$323.4 billion in AUM.

The Towers Watson report notes that the Canadian firms have grown steadily in market share over the past decade. Ten years ago, Sun Life was Canada’s highest ranking firm on the survey, ranking 49th on the list, while Manulife, the next most successful Canadian firm, ranked well down the list at 113th overall.

Manulife’s rise to the top of Canadian asset managers is because of its purchase of Boston-based John Hancock Financial Services Inc. in 2004 and the growth of pension assets and retirement product sales on both sides of the Canada/U.S. border.

“With the acquisition of John Hancock, Manulife’s U.S. operations really started ramping up its 401(k) and variable annuities business,” says Byren Innes, principal and senior vice president of NewLink Group Inc., a Toronto-based consultancy to the insurance industry. “Segregated funds also started to take off, and Manulife launched its [Manulife IncomePlus GIF seg fund with a] guaranteed minimum withdrawal benefit. In Canada, it’s probably been the most successful launch of a single financial product — ever.”

Innes estimates the launch of the GMWB product gave Manulife more than $1 billion in AUM almost overnight.

However, Tom Mackinnon, an analyst with BMO Capital Markets Corp. who covers Manulife, contends that seg funds have their own challenges: “Those have embedded option guarantees, so they may not be something to brag about.”

Given the recent problems that Manulife has encountered as a result of these products, Mackinnon has a valid point.

As for Sun Life, its buying and selling of other firms has dictated its position on the Towers Watson list over the past decade. Sun Life’s position in 1999 as Canada’s largest asset manager was attributed to its ownership of Boston-based MFS Investment Management and several mutual fund families. But since then, Sun Life has sold its Spectrum Investments Inc. and Clarica Diversico Ltd. fund families to CI Financial Corp. in 2002 in exchange for a 30% stake in CI. This stake in CI, which increased to 37%, was sold to Bank of Nova Scotia in the autumn of 2008, thereby ending Sun Life’s participation in Canada’s mutual fund business for a time. Sun Life has only just returned to that business.@page_break@“The difference is Manulife never dumped anything,” Innes says. “It just kept growing organically, while Sun Life has been in and out of the wealth-management business. Had it kept its seg fund and mutual fund business, Sun Life could be higher than Manulife now.”

GWL ranks 50th in the Towers Watson ranking, for similar reasons. First, GWL more than doubled its AUM when it acquired Boston-based Putnam Investments Trust in 2007, adding US$192 billion in AUM. Another reason is GWL’s role in the seg fund world.

GWL had been the Canadian leader in seg funds for decades, Innes says. It had a 34% market share in 2007, but it then backed off in the business somewhat by deciding to stay away from the GMWB craze. GWL, Innes notes, has since “come back into seg funds at a time when the market is more rational about what the product guarantees look like.”

The top-rated Canadian bank in the Towers Watson report was Toronto-based Royal Bank of Canada, with US$238 billion in AUM, but that earned it only the 65th position overall — well behind the leading independent Canadian insurers, a trend that has persisted in the past few years in the Towers Watson survey.

“The reason [RBC is] behind is that it’s not in the seg fund business to any degree,” says Innes. “You’re getting [sales] gains in mutual funds these days in the low double digits, but [sales of] seg funds are growing at 30%-40%.Second, [RBC] has never had a big acquisition of a wealth-management firm in the U.S.” Rather, RBC is much more interested in purchasing brokerages that deal in securities — such as its acquisition of Minneapolis-based Dain Rauscher Wessels in 2001. It’s this strategy that has RBC chasing the three major Canadian life insurers.

Overall, although there have always been a number of cross-border acquisitions in the financial services sector originating from Canada, Innes asserts that Canadian firms are initiating such takeovers now more than ever.

As well, he adds, it has been even easier to build AUM through U.S. acquisition since the recession: “Canadian companies still have strong balance sheets, so they have money to spend. Whereas U.S. companies got trashed.”

This means that Canadian companies could move up even higher in the Towers Watson ranking in the years ahead if they continue to make major acquisitions of U.S.-based asset-management firms. Stay tuned. IE