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\u2019s wealth-management market.
Yvon Charest, 49, says Industrial Alliance\u2019s $216.5-million purchase of Clarington in the face of tough competition from another suitor, Toronto-based CI Investments Inc. <\/b>, bulks up his company\u2019s 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.
\u201cWe believe that to be successful in Canada, you have to have fund manufacturing capability and, at the same time, be close to distributors,\u201d Charest says. \u201cThat\u2019s exactly what we\u2019re doing with Clarington.\u201d
The Clarington deal came after a string of smaller wealth-management acquisitions that confirm Industrial Alliance\u2019s approach to the market. The company has done other 10 deals in the past five years totalling about $100 million.
\u201cWe started with a smaller base, with the idea of testing our business model and, if successful, we were willing to move to another level,\u201d 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<\/b> 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.
\u201cIt has been accretive to our earnings and improved our offering to independent brokers by adding many new mutual funds,\u201d Charest says of the Laurentian transaction.
\u201cThe reaction from independent brokers has been good enough that we felt we should go to another level\u201d 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\u2019s mutual fund business was concentrated in Quebec. The proportion has fallen to 24% with the addition of the Clarington assets.
\u201cWhile BLC was mostly in Eastern Canada, Clarington is just the opposite. And, in that sense, it\u2019s quite complementary,\u201d he says.
Clarington\u2019s $4.4 billion in AUM increases Industrial Alliance\u2019s 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\u2019s 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.
\u201cIndustrial Alliance already has a platform of segregated funds, [and] we can get economies of scale within the families of seg funds and mutual funds,\u201dCharest says. \u201cAnd that\u2019s what we will be trying to achieve.\u201d
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\u2019t made a valid bid for Clarington\u2019s shares. CI\u2019s voluble CEO, Bill Holland, shot back by questioning Industrial Alliance\u2019s experience in making acquisitions.
In the end, Industrial Alliance won the contest with a bid of $15 a share, an increase of 75\u00a2 a share over its original offering price.
Charest puts Holland\u2019s comments down to the fact that Industrial Alliance is relatively unknown in the fund business. \u201cIt might have been just a normal reaction to a new player that isn\u2019t that well known in this market,\u201d he says.
There\u2019s 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\u2019s wealth-management acquisitions have been accretive to earnings.
\u201cThe growth potential, as we speak, is better in wealth management than in retail insurance,\u201d he says. \u201cThe 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.\u201d
@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\u2019s earnings took a nasty hit from losses it sustained as a result of its relationship with Montreal\u2019s Norshield Financial Group<\/b>, a firm it had used to manage its clients\u2019 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\u2019s 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\u2019s investments are managed by outside firms.
\u201cWe\u2019ve learned a lesson \u2014 there\u2019s no doubt about it,\u201d 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.
\u201cTwenty years ago, this organization was in Quebec only. Now it\u2019s slightly larger outside of Quebec than in Quebec, and the game plan is to continue to grow,\u201d Charest says. \u201cAs we speak, we are very confident of our capacity to grow and deliver a good return to shareholders.\u201d
Mario Mendonca, financial services analyst with Genuity Capital Markets<\/b> in Toronto, says Industrial Alliance has proven itself to be well managed, even though its stock trades at a discount to larger insurers.
\u201cIt 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,\u201d says Mendonca. \u201cClearly, Industrial Alliance messed up with Norshield. But the last thing I would say is that it doesn\u2019t know what it\u2019s doing. Management is very competent.\u201d \tIE<\/b>
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