IAG playing catch-up with big boys

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Yvon Charest has long kept an office in Toronto. But although he was within sight of Bay Street, his Industrial Alliance has remained largely out-of-mind for most of the professionals who work in the country's financial capital.

Running the fourth-largest life insurer in Canada is a bit like running the seventh-largest bank, or the third-largest airline: You may be big enough to matter but you're still dwarfed by the big guys, and it's hard to get attention.

That may finally be changing for Mr. Charest and Quebec City-based Industrial Alliance, which has lived in the shadow of Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. since it went public in 2000. For investors in the Big Three - Manulife in particular - the financial crisis was a scarring experience.

But Industrial Alliance shareholders are now back to even; they've made almost 4 per cent since Sept. 1, 2008, including dividends. It has outperformed its larger competitors over the past 10 years as well.

RBC Dominion Securities analyst Andre-Philippe Hardy says Industrial Alliance will likely be the first life insurer to raise its dividend, probably in 2011.

"When we became a public company we were the unknown," Mr. Charest said in an interview this week. "Then we became the little surprise. I'd say now that people realize we have characteristics of a good long-term performer."

Now, having proved the company can expand beyond Quebec without stubbing its toes, Mr. Charest is taking on new targets, including the U.S. market.

The insurer, which traces its roots back to 1892, recently entered a period of significant growth. In addition to a burgeoning U.S. business, it's muscling further into the mutual fund business, and it is beating much larger rivals in a couple of key areas.

For instance, as many bigger insurers struggle to restructure their troublesome segregated fund and variable annuity businesses, Industrial Alliance is wooing their customers. So far this year it has secured the top ranking when it comes to net sales of segregated fund products in Canada, taking 31.1 per cent of sales in the market during the first quarter, according to company data. That compares to a fourth-place finish with 10.1 per cent of sales in 2009.

"Every time that we are either first, second or third, it means that at least one of the big three are behind us," Mr. Charest points out.

Industrial Alliance lagged Manulife and Sun Life in releasing guaranteed minimum withdrawal benefit products a few years ago. When Industrial Alliance did launch the products, it decided to take fewer risks than competitors, who were luring customers with sweeter guarantees and lower prices, Mr. Charest said.

The stock market plunge that began in the fall of 2008 forced a number of other insurers across North America to boost prices and reduce guarantees on their products - and, in many cases, to raise capital to satisfy regulators that they could make good on those guarantees. But Industrial Alliance, unlike its peers, "has not had to reduce product features in answer to equity market declines," Mr. Hardy wrote in a note to clients after the company held an investor day in Toronto this week.

Mr. Hardy is expecting Industrial Alliance to earn more per share in 2010 than it did in 2007, and anticipates Great-West's EPS will remain flat relative to 2007 and Sun Life's and Manulife's will decline.

Despite its recent success, there is still a measure of skepticism about Industrial Alliance's strategy, especially its U.S. expansion path.

Until the early 1980s, the company's sales came entirely from Quebec. A slow migration beyond that province's borders into other parts of the country has resulted in 55 per cent of sales coming from outside Quebec, and Mr. Charest hopes to increase that at a rate of one or two percentage points per year. "Among all of the Quebec-based financial institutions, we have been the one that has been the most successful at establishing a Canada-wide operation."

In 2005, his team sat down and pored over a number of possible paths for expansion outside of Canada. Like many Canadian financial institutions, it settled on the U.S. "It is so big that you can have a niche strategy - you can be active in the U.S. without competing with the giants there," Mr. Charest said.

The company acquired a tiny U.S. presence with its 1982 acquisition of Vancouver-based North West Life, but "it was only in 2005 when we had the conviction that the Canada-wide business plan was working and our mutual fund operation was working that we made the decision to seriously look at the U.S. market," he said.

Industrial Alliance took a look at a dozen U.S. acquisition targets over the years, four of which it spent significant time on. But most of the time, the closer Mr. Charest looked, the less he liked what he saw. "The financial crisis made it difficult to do deals," he said. "In the U.S., generally speaking, organizations are more aggressive in their business strategies and investments. The vast majority of companies we looked at, after doing the analysis of their investments, we just decided to walk away."

Until last November, that is, when it came across Texas-based American-Amicable Holding Inc. Industrial Alliance spent four months checking out that prospect, and then signed on the dotted line of an offer to pay $145-million cash, including excess capital of about $45-million.

Waco-based American-Amicable was founded in 1910 and has about 115 employees. It sells life insurance products to middle-income Americans, primarily in Texas, Puerto Rico, California, Illinois, Alabama and North Carolina. Industrial Alliance was attracted to its debt-free balance sheet, its relatively low-risk portfolio, and its mature distribution network. Its products are sold by more than 6,000 independent agents.

Mr. Charest's next task is to prove to the market that that deal will work, before he begins hunting his next target. "In everything we do, we try to walk before running," he said.