The CEO of industrial Alliance Insurance and Financial Services Inc. says a tough but ultimately successful battle to acquire mutual fund company Clarington Corp. has positioned his company to expand in Canada’s wealth-management market.

Yvon Charest, 49, says Industrial Alliance’s $216.5-million purchase of Clarington in the face of tough competition from another suitor, Toronto-based CI Investments Inc. , bulks up his company’s fund business in the independent broker channel and increases its reach across Canada.

The deal means Quebec City-based Industrial Alliance now has $10.2 billion in mutual fund and segregated fund assets under management for the retail market, in addition to its individual insurance, group insurance and pension businesses.

“We believe that to be successful in Canada, you have to have fund manufacturing capability and, at the same time, be close to distributors,” Charest says. “That’s exactly what we’re doing with Clarington.”

The Clarington deal came after a string of smaller wealth-management acquisitions that confirm Industrial Alliance’s approach to the market. The company has done other 10 deals in the past five years totalling about $100 million.

“We started with a smaller base, with the idea of testing our business model and, if successful, we were willing to move to another level,” says Charest, a 26-year Industrial Alliance veteran who was appointed CEO in the spring of 2000.

He pointed to the 2004 purchase of BLC-Edmond de Rothschild mutual funds from Laurentian Bank of Canada as a success that set the stage for bigger things. The deal included a 10-year agreement that sees Laurentian distribute Industrial Alliance funds to clients.

“It has been accretive to our earnings and improved our offering to independent brokers by adding many new mutual funds,” Charest says of the Laurentian transaction.

“The reaction from independent brokers has been good enough that we felt we should go to another level” with the addition of Clarington, which, he says, made a good geographical fit with the Laurentian business.

Before the Clarington deal, 77% of Industrial Alliance’s mutual fund business was concentrated in Quebec. The proportion has fallen to 24% with the addition of the Clarington assets.

“While BLC was mostly in Eastern Canada, Clarington is just the opposite. And, in that sense, it’s quite complementary,” he says.

Clarington’s $4.4 billion in AUM increases Industrial Alliance’s ranking among mutual fund companies to 17th, with a 1.7% market share, from 19th, with a 1% share.

Among companies that sell through independent advisors, Industrial Alliance is now tenth, with a 3.1% market share. The senior management of Clarington has agreed to stay on under the new ownership.

Charest says it’s important to achieve scale in the fund business to make optimal use of portfolio management and back-office services. The lack of scale was behind poor profit performance at Clarington despite rapidly rising revenue.

“Industrial Alliance already has a platform of segregated funds, [and] we can get economies of scale within the families of seg funds and mutual funds,”Charest says. “And that’s what we will be trying to achieve.”

During the bidding against CI, No. 1 in the independent-advisor market with $53 billion in AUM, executives of the two companies exchanged barbs.

An Industrial Alliance executive at one point insisted that CI hadn’t made a valid bid for Clarington’s shares. CI’s voluble CEO, Bill Holland, shot back by questioning Industrial Alliance’s experience in making acquisitions.

In the end, Industrial Alliance won the contest with a bid of $15 a share, an increase of 75¢ a share over its original offering price.

Charest puts Holland’s comments down to the fact that Industrial Alliance is relatively unknown in the fund business. “It might have been just a normal reaction to a new player that isn’t that well known in this market,” he says.

There’s little wonder that Industrial Alliance wants to expand its wealth-management business: profits in the segment are growing much faster than in its traditional insurance business.

Charest notes that stock market performance has been strong in the past three years, but also observes that Industrial Alliance’s wealth-management acquisitions have been accretive to earnings.

“The growth potential, as we speak, is better in wealth management than in retail insurance,” he says. “The main reason is a lack of life insurance distributors in Canada. There is quite a bit of data showing that the life insurance penetration rate is not as good as 10 years ago.”

@page_break@He notes that some 60% of advisors whose primary product is mutual funds also hold a licence to sell life insurance. Industrial Alliance is hoping to encourage those advisors to sell its life insurance products.

In 2005, Industrial Alliance’s earnings took a nasty hit from losses it sustained as a result of its relationship with Montreal’s Norshield Financial Group, a firm it had used to manage its clients’ hedge fund investments.

In the third quarter, Industrial Alliance set aside a provision of $77.9 million, the full amount of its investments in Norshield, which led to a $52.1 million charge to net income.

Last June, an Ontario court put Norshield into receivership at the request of securities regulators in Ontario and Quebec. The move followed Norshield’s decision to halt redemptions in its funds in the wake of a rush of client withdrawals that the firm blamed on bad publicity from a legal dispute with Cinar Corp. The receiver has said investors stand to lose almost all the $482 million they entrusted to Norshield.

Industrial Alliance has made good on client money invested at Norshield and, Charest says, his company has taken steps to ensure there will be no repeat situation for clients. About a quarter of Industrial Alliance’s investments are managed by outside firms.

“We’ve learned a lesson — there’s no doubt about it,” Charest says.

Industrial Alliance, which went public in 2000, is No. 5 among Canadian life insurers. But, Charest insists, it has the scale it needs to compete further. He notes the company was No. 3 in the first three quarters of 2005, in terms of generating new individual life insurance business in Canada.

The company, which is provincially regulated, is sheltered from becoming an acquisition target itself by the fact that it would take legislation by the Quebec national assembly for any shareholder to own more than 10% of the firm.

“Twenty years ago, this organization was in Quebec only. Now it’s slightly larger outside of Quebec than in Quebec, and the game plan is to continue to grow,” Charest says. “As we speak, we are very confident of our capacity to grow and deliver a good return to shareholders.”

Mario Mendonca, financial services analyst with Genuity Capital Markets in Toronto, says Industrial Alliance has proven itself to be well managed, even though its stock trades at a discount to larger insurers.

“It has shown itself over the past few years to be able to grow earnings fairly consistently and to be able to compete with its larger peers, particularly in areas such as segregated funds and individual [life] insurance in Canada,” says Mendonca. “Clearly, Industrial Alliance messed up with Norshield. But the last thing I would say is that it doesn’t know what it’s doing. Management is very competent.” IE