To double its life insurance market share outside of Quebec by 2008, Desjardins Financial Security (DFS) is negotiating with financial institutions to acquire portfolios and even entire subsidiaries. The objective: to grow premiums in force from $250 million at the end of 2005 to $500 million by 2008.
In an exclusive interview with The Insurance Journal, François Joly, president and chief operating officer of DFS, explained that the company needs to expand its business in the rest of Canada because its domination of Quebec has created a mature local market.
On December 31, 2005, DFS had a market share outside Quebec of 2.4%, with $250 million of premiums in force. It is now aiming for $500 million in life insurance by 2008. This objective includes individual insurance, group insurance and caissassurance (insurance sold in its branches), but excludes segregated fund investments and annuities.
“It is clear that acquisitions will be instrumental,” Mr. Joly said. What types of acquisitions? “These are elements that will quickly earn us value. We are targeting returns of about 20%.”
In 2005, DFS posted a return on equity of 24.9%, up from 19.6% in 2004.
One week after his interview with The Insurance Journal, DFS announced its first acquisition. On March 9, it acquired Performa Financial Group (see inset text) from Standard Life Financial.
Mr. Joly explained that DFS will have trouble increasing its life insurance market share in Quebec because it is already dominant, with an 18% share. “Holding onto this share is already quite a challenge,” he says. All segments, from individual insurance, to group insurance and annuities are in a similar position.
Taking on the rest of Canada is an ambitious objective, Mr. Joly admits: 80% of the market is cornered by the big three insurers: Manulife Financial, Sun Life and Great-West Life (and its subsidiaries London Life, Canada Life and IGM Financial).
DFS’s past growth in individual insurance was driven mainly by its own financial advisors’ supplying insurance to members of caisses populaires. In place at DFS since 2000, this distribution channel model has sparked envy among some Canadian banks. Governed by a federal charter, the banks are forced to follow the dictates of Ottawa, that has barred them from distributing insurance to their clients in branches.
The “Desjardins model” has been a boon for DFS. Since 2000, it has sold 75,000 policies insuring 125,000 individuals. In 2005 alone, new sales reached $13.8 million, up 5.3% since 2004.
This success story has its limits. “We believe this market is reaching maturity. In 2005, 40% of customers did not hold insurance before coming to us. This proportion was 50% the first year of operations.”
In addition, the average premium is lower in the DFS network than the brokerage network, Mr. Joly revealed. The clientele referred by caisses populaires generates an average premium of $650. By comparison, the LFS Laurentian Financial Services network, DFS’ brokerage channel, generates an average premium of $1,000. New sales in 2005 in the LFS brokerage network reached $19.1 million compared to $19.8 million in 2004. In 2006, the growth target in the LFS network is to keep pace with the market.
To sustain its growth, DFS plans to operate throughout the rest of Canada, via its financial centre network LFS. In 2005, four new centres were opened in Ontario, Alberta and British Columbia.
In 2006, two or three agencies will be added, mainly in western Canada. “I am in no hurry here,” Mr. Joly explained. “Above all I’m looking for good value.” The focus is still on partnerships, as opposed to wholly owned subsidiaries. Desjardins plays the role of investor, and supplies its line of insurance products and investment funds through its subsidiary Optifund Investments, along with the technological infrastructure and employee training. The administrator partner assumes the costs of managing the agency.
In Quebec, however, LFS is facing an obstacle erected by the Autorité des marchés financiers (AMF), Quebec’s financial market regulator. In December, the agency criticized the subsidiary for lacking transparency with respect to its relationship with its affiliation with DFS.
The AMF lobbed similar accusations at other insurers, but the other companies specialize in P&C insurance. (See The Insurance Journal, January 2006.) Desjardins and LFS are denying the charges, claiming that their documentation, Internet site and press releases specify the ownership ties.
In the end, the AMF billed LFS for $400,000 to cover the inquiry. LFS explained that it paid to avoid a lengthy legal battle. “It was a business decision; despite the fact that we felt our disclosure was clear, we decided to pay,” Stéphane Dulude, vice-president and general manager at LFS told The Insurance Journal in January.
DFS will honour the agreement with the AMF, Mr. Joly confirmed. This judgment and its sizeable bill might be a sign that the LFS network should be harnessing the synergy of belonging to DFS. Hypothetically, all it would take is renaming the network to convey the financial force behind the Desjardins brand.
Mr. Joly commented that this situation sparked extensive analysis at the insurer and distributor. “The two boards of directors agree that the companies should be closer. They will seize this opportunity to take their analyses further. Nothing has been decided for now, but all suggestions will be analyzed,” he said.
Mr. Joly explained that group insurance is the engine at DFS, even if sales in this sector are cyclical. Here too, acquisitions are on the agenda. This segment has already undergone national reorganization at DFS, and the structure is functional.
Mr. Joly is counting heavily on this segment for growth because there is room for DFS in this market. The organization’s past performance speaks for itself, he said. From 2000 to 2004, in group and business insurance DFS’ annual average growth rate of premiums in force was 16.6%, versus 8.9% for the industry overall.
Mr. Joly sees Ontario as a fertile ground for DFS’ group insurance. He pointed out that 53% of the group insurance market outside Quebec is concentrated in the Toronto area. “With 1.5% of this market, we have room to grow.”
To shore up its efforts, the insurer signed a partnership with the MAXIS network, an international group of insurers that operates in 65 countries. Under this agreement, DFS has become the exclusive Canadian representative of this network.
Mr. Joly touched on another promising sector that is presently below the radar: the banking information system of Mouvement Desjardins. This system was implemented in the credit union network in Ontario in October 2005. The Desjardins platform has now supplanted the CGI technological platform, which had been supplied to about 40 institutions.
This platform is a strong selling tool for Desjardins Financial Security’s products, Mr. Joly said. It distributes all of the DFS insurance products for all loan and mortgage products in the caisse network.
“We have moved from philosophical mode to operational mode,” Mr. Joly announced. “This can generate revenues in our 2006-2008 three-year plan, but expect to see considerably more revenues in the next plan!”