Canadian Demutualization.

Three of Canada's five largest mutual life insurance companies--Mutual Life Assurance Company of Canada, Manufacturers Life Insurance Co. and Canada Life Assurance Co.--converted to shareholder-owned companies last year. The other two--Sun Life Assurance Co. of Canada and Industrial-Alliance Life Insurance Co.--plan to follow suit. These companies are so big that collectively, their distribution of stock and cash to policyholders will likely represent the greatest transfer of wealth in that nation's history.

Despite their size, the companies face strong competition from Canada's banks and foreign financial-services conglomerates, which dwarf them in market capitalization. Converting to today's preferred "currency" for acquisitions--equity capital--gives them a key tool for growth and expansion into more kinds of financial products and services. Even the smallest of Canadian banks, Toronto Dominion, has a market capitalization of about $20 billion, about twice that of Canada's largest publicly traded life insurer, Manulife Financial, said Bill Bawden, a PricewaterhouseCoopers partner in charge of the Canadian life insurance practice.

The demutualizations are critical to their futures, Bawden said. "They're effectively competing for wealth-management business with the banks, which in Canada have already been able to own insurance subsidiaries. Without access to the capital markets, they're limited in what they can do," he said.

So far, Canada's demutualizing insurers have used proceeds of their initial public offerings to pay policyholders that wanted cash and to cover demutualization expenses. They don't need capital now because they already have substantial surpluses These are typically invested in lower-yielding assets such as bonds--investments that tend to drag down the companies' returns on equity.

The demutualized companies are expected to focus on achieving leaner operations and better bottom-line results. At the same time, they'll try to build scale through acquisition and try to realize expense savings through that larger size.

They'll have to work fast: Canadian law provides two years of protection from hostile takeovers. If they can achieve better performance, higher stock prices will follow. And those higher prices could reduce the threat of being acquired.

Bawden said he expected the insurers to use the two-year honeymoon to divest themselves of noncore businesses, a process already well under way, and to pursue mergers and acquisitions, probably with companies outside of Canada, where historically the Canadian life insurers have been well represented. "Clearly, I'd expect they'd be in a much stronger position in terms of return on equity after the two years," he said. "When you look at the size of these companies compared to some of the big U.S. and European insurers in terms of market capitalization, they're pretty small, but they're in a position to change that over the next couple of years, to implement a strategy they wouldn't have been able to pursue as mutuals."