Consolidation in the Life Insurance Industry: How Does David Compete in a World of Goliaths?

Transcription

1 The Edmonton Chamber of Commerce Consolidation in the Life Insurance Industry: How Does David Compete in a World of Goliaths? Notes for Yvon Charest President and Chief Executive Officer Industrial Alliance Insurance and Financial Services Royal Glenora Club, Edmonton Wednesday, November 10, 2004

2 Thank you Mr. Chairman. It s a pleasure to be here. It s the first time I ve had the opportunity to meet with the business community in Edmonton, and I d like to thank the Chamber of Commerce for this opportunity. I d like also to thank Mary Arnold, a prominent business community leader in the Western Provinces for having made this occasion a possibility. Mary was appointed to the Industrial Alliance Board a little more than a year ago and her experience and expertise in finance and corporate governance is much appreciated. As the Chairman of the Chamber of Commerce indicated in his opening remarks, Industrial Alliance was created over one hundred years ago and is now the fifth largest life and health insurance company in Canada. For many years, the life insurance industry has had the reputation probably welldeserved of being the most boring sector in Canada (one of the reasons being that it s full of actuaries, like myself). But I can assure you, that s not the case anymore. In fact, as you may be aware, the life insurance industry is going through a major restructuring process. The industry has probably gone through more changes in the past five years than it has in the past 100 years. Five of the country s largest life insurers have demutualized and the consolidation has accelerated to the point where the three largest life insurers now control more than half of the Canadian market. While the life insurance market used to be quite fragmented, with well over 100 companies operating in the marketplace, it s now evolving quickly towards an oligopoly, like the banking sector. In this kind of environment, how can a mid-sized company like Industrial Alliance compete? Or, more generally, how can the Davids of the world compete against the Goliaths?

3 3 Today I would like to talk to you about my vision on how mid-sized companies can sustain competition in a world of giants. And they surely can, by developing what academics call permanent competitive advantages. I believe that Industrial Alliance can serve as an example for all mid-sized companies that have to compete against bigger competitors. Because the fact is, we re all mid-sized companies. Only one competitor can have the biggest share of a given market, so most companies have to settle for a smaller share. A few words about Industrial Alliance Before I begin, I d like to take a few minutes to tell you a bit about Industrial Alliance. As I said earlier, the company was created over 100 years ago. Our head office is in Quebec City. We offer a wide range of insurance products and financial services, both for individuals and on a group basis, including life insurance, GICs, RRSPs, segregated funds, mutual funds, securities, and various types of annuity and pension products. Back in the 80 s, Industrial Alliance had a dream: to become a big, Canada-wide life insurance and financial services company. To achieve this dream, we had to break out of our core market in Quebec, where we excelled, and develop the markets in Ontario, Western Canada and the Atlantic Provinces. We decided to grow outside Quebec organically and through acquisitions. That s why we decided to purchase North West Life, a Vancouver-based company, in 1982, and National Life, a Toronto-based company, in About five years ago, we also purchased Seaboard Life, another Vancouver-based life company. The two western companies were merged to become Industrial Alliance Pacific, which is the only life insurance company with a head office west of Winnipeg. It employs close to 400 people. Overall, the Industrial Alliance Group of Companies has invested some $1.8 billion in Western Canada. Today, thanks to these acquisitions, Industrial Alliance derives over 50% of its business from outside Quebec, including close to 20% from the Western Provinces.

4 4 Most of our individual products are offered through our Personal Financial Services division, and our group products, through our Group Insurance and Group Pensions sectors. In the retail market, we distribute our products in the Western Provinces under the Industrial Alliance Pacific brand name, and in the group market, under the Industrial Alliance brand name. In the Western Provinces, we have Group Insurance and Group Pensions offices in Winnipeg, Calgary, Edmonton and Vancouver. This is another example of our commitment to the West. Today, Industrial Alliance insures more than 1.7 million Canadians, employs over 2,400 people and manages and administers over $25 billion in assets. As you may also know, Industrial Alliance demutualized at the beginning of 2000, just after Clarica, Canada Life and Manulife, and just ahead of Sun Life. Industrial Alliance stock is now listed on the Toronto Stock Exchange. Our stock was first issued at a price of $15.75, in 2000, and is now trading at its highest level ever, at around $50.00, more than three times the IPO price. A few words about the competitive landscape The competitive landscape has changed dramatically since the life companies demutualized. In the past two years, Sun Life has purchased Clarica, Great-West has purchased Canada Life, and Manulife has just completed the acquisition of Maritime Life, a company it acquired through its purchase of one of the biggest US life insurers, John Hancock. These acquisitions are just the most recent in a long string of mergers and acquisitions that have taken place in the Canadian insurance market over the last few decades. In fact, since I joined Industrial Alliance just after graduating almost 25 years ago, I ve seen about 50 mergers and acquisitions between insurance companies in Canada. Of the top ten life insurers that were writing business 10 years ago, six have disappeared.

5 5 Today the market is dominated by three big life insurers: Great-West Life, Manulife and Sun Life. These three companies now control over 60% of the Individual Insurance market, some 70% of the Group Insurance market and around 75% of the Group Pensions market. Industrial Alliance generally sits just behind the top 3, among a group of 2 or 3 other companies. Although we are smaller than the top 3, we have experienced rapid sales growth in the past few years, even more rapid than industry growth, for all lines of business. And the concentration in the industry creates tremendous opportunities for smaller players to take advantage of the current shortfall in product and service offerings. Given the bigger new competitors in the marketplace, what many investors want to know is, despite the Company s past success, what about the future? Is Industrial Alliance big enough to continue to compete successfully in today s consolidated environment? I d like to take a few minutes to talk about what can make a mid-sized company like us a success in a world of giants. Development strategy We believe that, to succeed in the business world, the most important thing is not the size of the company, but rather a well-designed, well-thought-out and well-executed strategy that s adapted to its size. We believe that when a company isn t dominant in its sector, it needs four fundamental elements to succeed. It needs to: excel in one functional skill; make itself less vulnerable by avoiding head-on competition; build dominant positions in chosen markets; and exploit industry changes. What does all of this mean? Let me take a few minutes to go over these points one by one.

6 6 Excel in one functional skill First of all, for a non-dominant company to succeed in its market, it needs to do a number of things well, but it needs to do at least one thing very well. It needs to excel in one functional skill. It needs to focus on developing one area of expertise that may become the benchmark in its industry. And it needs to cultivate this expertise to the point of making it an obsession. As the Harvard business strategy expert Michael Porter once said, a company can outperform rivals only if it can establish a difference that it can preserve. At Industrial Alliance, this core competency is distribution. We chose to excel in distribution because we feel that reps have a decisive influence on consumers when it comes to buying life insurance and financial services. In fact, unlike most other products on the market, we believe that life insurance is a product that is sold to consumers, not bought by consumers. This is one of the most deeply rooted beliefs in the industry. Consumers go out of their way to buy most other consumer products furniture, cars, etc. but they rarely go out of their way to buy life insurance. Don t ask me to replace one of the many coffee shops on Jasper Avenue in downtown Edmonton with the finest shop window if it is to sell insurance. I don t think that it would successful. Our experience has shown us that consumers constantly put off buying life insurance or annuities, even if they need them. Consumers act against their own long-term interests because insurance is an intangible, complex product that provides no immediate satisfaction. When people buy insurance, what they re actually buying is protection for their loved ones, financial security, peace of mind, financial independence for the future. You first have to care about somebody to buy insurance.

7 7 As you can see, representatives are essential to the life insurance industry. So in order to be successful, an insurance company needs to focus on developing its distribution networks. That s why our strategy has always been to build solid distribution networks that are well rooted in their community. Our success in this area has always come from treating the reps like professionals, and never taking them for granted. We treat them as though we need to earn their trust every day. We listen to what they have to say, and we do everything we can to help them achieve their own success and build long-term relationships. Make itself less vulnerable by avoiding head-on competition Secondly, for a non-dominant company to succeed, it needs to make itself less vulnerable by avoiding head-on competition. But how is that possible? How can we avoid head-on competition when competitors are all around us? If I can draw an analogy, it reminds me of a boxing match that took place in Montreal over twenty years ago, between Roberto Duran and Sugar Ray Leonard, the two biggest boxers of their time in their weight category. Roberto Duran was known for his devastating punch; he had a number of knockouts to his credit, and no one could withstand his striking power. Sugar Ray Leonard was known as the master in the art of dodging his opponents. Like Mohammed Ali, he was constantly weaving and ducking to avoid punches. When a journalist asked Sugar Ray Leonard how he would withstand Duran s punches, his answer was: You obviously don t know anything about boxing. The goal is not to withstand the punches, it s to avoid them! In the business world, it s the same thing. The goal is not to show your adversaries how much you can withstand competition, it s to avoid head-on competition altogether.

8 8 In our industry, it means doing everything you can to avoid competing solely on price. That means that a non-dominant company needs to stand out on the basis of something other than price. Of course it s up to each company to find their own strategy. But at Industrial Alliance, we ve decided to stand out from our competitors in a variety of ways. We look to specialize in markets that are often neglected by other insurers, and where there is a possibility to grow and reach our profitability objectives. That s why we target the medium-sized business market in the Group Insurance and Group Pensions sectors, while still looking for opportunities to underwrite large groups as well. The medium-sized business market is much less saturated than the large business market. It s also a market where our strengths, like our accessibility, flexibility and the quality of our service, can make a difference; To avoid head-on competition, we also try to develop certain segments that are not well served by traditional insurance products, like the special risks market, or that require specific expertise, like the group creditor insurance automobile dealers market. These two markets are currently being tapped by Industrial Alliance Pacific, which has established key positions throughout Canada; To avoid head-on competition, we also try to develop a greater degree of loyalty with our reps by providing them with a comprehensive support program and up-to-date technology tools, and by offering them long-term incentive packages; We also want to stand out through the innovative nature of our products. For example: - we re the only insurance company to date to offer registered education savings plans; - we were the first insurance company to make hedge funds available to all investors. In the past, this product was restricted to sophisticated investors only;

9 9 - in the Group Pensions line of business, we distinguish ourselves through personalized investment solutions, such as the Dynamic Asset Management services; and - in the Group Insurance line of business, we recently launched a state-of-the-art web service, called Web@dmin. These are just a few examples of the innovative products that help us distinguish ourselves with the reps, giving them one more reason to do business with us, and in many cases, giving them a door opener with their clients. Build dominant positions in chosen markets The third component of a winning strategy for a mid-sized company is to have a dominant position in some chosen markets. Even if a company is not as big as its competitors, it should still try to carve out leadership positions in those markets where it can make a difference. This is also I believe what Michael Porter was getting at when he said that before thinking about exporting its expertise outside its community, a company had to first demonstrate its ability to succeed in its local market. This is what we do at Industrial Alliance. For example: in individual insurance, over the past several years we have consistently maintained a market share above 10% with respect to new business. This is mainly because we have developed our expertise in the middle-income market, a market that is less saturated than the high-income market, which we are breaking into more and more; in group creditor insurance, we are ranked number one in Canada in the automobile dealers market, with a market share of over 40%. It s actually Industrial Alliance Pacific that sells this product for the Group; in group insurance employee plans and group pensions, we are a dominant player in Quebec in our target market of medium-sized businesses, and our market shares are growing outside Quebec.

10 10 Exploit industry changes Finally, in order to succeed when a company is not dominant in its market, it needs to be able to take advantage of all new trends in the industry. Management must be forwardlooking. This is partly what was behind our national growth strategy that began in the 80 s when we felt that economic activity was gradually moving towards Western Canada. This is also the principle behind our wealth management strategy, which aims to take advantage of the rapid growth in the savings and retirement market and the convergence in distribution. The retirement of the baby boomers is creating tremendous market opportunities in the area of savings and retirement products. Not only will the baby boomers inherit huge amounts of money from their parents, but they may also leave huge inheritances for their own children. That s why, in order to meet their needs effectively, we have become active in the area of segregated funds, which is a 50 billion dollar market, as well as mutual funds, a 500 billion dollar market, and securities, another huge market. Indeed, we just announced last week the purchase of the mutual fund manufacturing operations and asset management business of Laurentian Bank. Laurentian Bank was managing 1.75 billion dollars of assets, which will now be managed by Industrial Alliance. We now have subsidiaries in all financial services sectors with the ability to manufacture and sell all wealth management products and services. The strategy, once again, is not related to size. It is related on what we do well, that is building distribution. Conclusion These, in our opinion, are a few of the key components of a winning strategy for midsized companies. Similar to the way David defeated Goliath, for a mid-sized company to come out ahead in the business world, it must have faith in its abilities, just as David had faith in his, and adapt its strategy to its size, as David did by building his strategy around skill rather than mere strength, as Goliath did.

11 11 As you can appreciate, the success of an organization is not achieved overnight. It is a lengthy process that requires long term strategic planning, and the long term commitment of everyone involved. Neither revolution nor breakthrough. Just hard work. Our strategy rests on several strengths: the size and diversity of our distribution networks; our ability to manage and grow these networks effectively; the scope of our product line; our ability to innovate and stand out in an increasingly competitive market and, perhaps most of all, the hard work of our reps and our employees who, like us, are committed to the organization s success on a national level. We re proud of our success in the Western Provinces, and we are strongly committed to Alberta and Western Canada. Like the theme of our 2003 annual report says, We re worth our weight. We say so because we have the size in our chosen markets, we have the diversity, we have the depth and, perhaps above all, we have an unfailing desire to succeed. So, this is our story. If one day you start hearing about the Company as if it suddenly popped up out of nowhere, you ll know the real story. You will know that we are quietly making headway in a consolidated environment. I d like to conclude with a message of hope: the smart mid-size companies of today might well be the big companies of tomorrow. Thank you.