The Canadian life insurance market is witnessing the emergence of a player with a new vision, operating on a principle from the investment industry: the contrarian method. While many life insurers are abandoning segments and discontinuing products, SSQ has reaffirmed its confidence in life insurance by buying AXA Life. Why? "Because we are risk takers," says SSQ CEO René Hamel.At a time when interest rates are low and the new International Financial Reporting Standards (IFRS) are being implemented, SSQ stands out from the crowd. Taking over a portfolio of individual life insurance may seem daring, but Mr. Hamel said he believes it is still a good time to make this kind of purchase.
"We see ourselves primarily as risk takers. What distinguishes an insurer from other financial institutions is its ability to offer consumers products with long-term guarantees – and respect them,” comments Mr. Hamel. When the Quebec insurer’s CEO stopped by The Insurance and Investment Journal’s offices in mid-January, the head of SSQ said that he believes this kind of risk assumption is an insurer's fundamental role.
Among the conditions that are worrying many insurers are low interest rates and the new International Financial Reporting Standards (IFRS). Insurers can manage the first by raising prices, says Mr. Hamel. These price increases make long-term guaranteed products less attractive. He believes that this is a temporary situation.
“The need for long-term protection remains. We are not just there for the next two years. By buying AXA, we have taken a long-term position in the market for individual life insurance,” says Mr. Hamel. “In time, interest rates will eventually rise.”
For Mr. Hamel, the IFRS question is much more troublesome. He is concerned that Canadian rules governing the valuation of actuarial liabilities will be particularly affected by the proposed standards.
“Currently, we have the best of both worlds: liabilities are matched to assets,” he says. If the insurer is obliged to pay $40 million dollars of insurance compensation in 22 years, it buys a bond that reaches this value at maturity. No matter what interest rates do in the meantime, the asset will still be worth $40 million in 22 years.”
However, IFRS rules will set a benchmark rate that insurers must use to assess their liabilities each year. This rate can vary from year to year, regardless of the value of the underlying assets. When the benchmark rate falls, the liability increases significantly for a given year. This injects a significant dose of volatility in the financial performance of insurers.
“The IFRS rules come from Europe, where insurers are not subject to this interest rate leverage because they take mostly short-term risks.Their activities are more like those of the banks. If the IFRS were to be applied in full, they would totally destroy the capacity of Canadian insurers to offer long-term products.There is a strong commitment in our industry to protect the supply of these kinds of products.”
The first task that he has set for himself is to revamp AXA’s individual life insurance products. “We want to update products that have lost their appeal,” he says.
Strongly influenced by orders from its parent company in France, AXA had put certain long-term products on the sidelines in Canada. However, the portfolio still contains these products, notes Mr. Hamel.
“Our desire to support them is greater than that of the previous owner. By buying AXA, we are playing to our strengths: we are focusing on risk assumption.This strategy has made us one of the most successful insurers in the last ten years.”
SSQ also has geographical reasons for this acquisition. Already present in the Toronto area, SSQ will inherit offices in Vancouver, Calgary and Dartmouth. At the same time, the insurer will expand its distribution capabilities. AXA had a network of just over 2000 representatives. The insurer also wants to take advantage of synergies between the distribution of individual life products and its traditional network of fund distributors.
“The marriage of two reputable companies will give us access to new advisors. We see growth potential. Before, the AXA representative had a briefcase of life insurance products and the SSQ advisor had a briefcase of investment products. Today, both have one full briefcase.”
Mr. Hamel also believes that SSQ will sell more individual life insurance than AXA had anticipated in its own projections.“In five years, we believe we can increase sales by four to five times, and we can double the fund sales thanks to the AXA network. Having both product lines will bring us new advisors who did not want to deal with a supplier who had only one or the other,” he explains.
SSQ also acquired a $50 million block of group insurance business that will generate some interesting synergies. This is a specialized portfolio, focused on expatriate workers, critical illness, as well as death and dismemberment coverage. SSQ is present in the more traditional group insurance market. “They have developed a niche of products but there are also some large clients who are spread across the country,” says Mr. Hamel.
SSQ first highlighted its intention to acquire a block of individual life insurance in 2010, when it was revising its 2008-2012 five-year plan. Its primary criteria was that the target had to offer complementary functions.
“We’re a player specialized in group life insurance and savings, but we did not have the background in individual insurance. We decided to acquire the expertise and products that would complement our activities,” comments Mr. Hamel.
Before AXA, SSQ’s individual insurance activities were limited to products designed for group plan members who were retiring. SSQ will maintain this business.
SSQ’s first foray in the individual sector dates back to the launch of its first segregated funds in 1997, the Astra funds. Early on, there were only a handful. Now, there are nearly 80 funds in the lineup and most of them are available to members of group savings plans as well as to individuals.
SSQ has also made itself more available to advisors and private sector enterprises. “Emerging from the crisis of the early 1990s, the public sector accounted for more than 80% of our business,” says Mr. Hamel. The private sector now accounts for 55% of its insurance business.
In 2011, SSQ’s in-force premiums came to $1.4 billion in group insurance and deposits (annually), while its investment funds reached $1 billion. With the AXA acquisition, the insurer has an individual insurance portfolio with about $100 million of in-force premiums. Assets under management in segregated funds were $ 3.5 billion at the end of 2011.
As for the market outside Quebec, which is increasingly important for the Quebec-based insurer, it generated $300 million of group insurance premiums and savings deposits, and another $250 million of annual deposits in investment funds for 2011.
SSQ estimates that profits realized in 2011 came to between $35 and $40 million. This year, the acquisition will have the effect of increasing earnings by 50%. In addition to the $40 million in profits that SSQ expects to deliver in 2012, there will be another $20 million in profits from AXA. The reason lies in the balance sheet, where the value of AXA shares has been fueled by the sale of securities.
SSQ paid $300 million for AXA thanks to a liquidity injection from the Fonds de Solidarité FTQ, a shareholder owning 71% of SSQ (the SSQ mutual holding company is the other shareholder, holding the remaining 29%). AXA was not able to achieve the $190 million in sales that had been expected for 2011, partly because it had sold its portfolio of credit insurance.
New team, new name
On Jan. 1, AXA became SSQ Insurance Corporation, and will report to its parent SSQ Life Insurance Company. Along with SSQ Home and Auto, these companies are run by SSQ Financial Group. SSQ Financial Group is not a separate entity, but simply a name, explains Mr. Hamel.
Bernard Tanguay, an actuary who has worked at SSQ for 15 years, was appointed head of SSQ’s individual division. He will take over the individual insurance operation at SSQ Financial Group, where he will also continue to oversee all the activities of the investment and retirement department.
A steering committee of eight executives will support Mr. Tanguay in his new role. Among them is Marc Trépanier, vice president of national business development. Besides Mr. Trépanier, who is also from SSQ, all other members of the committee are transplants from AXA. Gilles Loiselle will be vice president of customer service and administration. Sylvain Charbonneau will be vice president of actuarial and new business selection. Jennifer Hurst will be vice president of business development for Ontario and Western Canada. Karl Amoakon will be senior director of group pricing and operations.
Three members of the executive committee will become first vice-presidents of SSQ Financial Group, dealing with institutional services, finance and real estate, as well as human resources and internal communications. These people are Marcel Gaudet, vice president of corporate actuarial, Claudine Yelle, director of business control and Isabeau Normandin, director of human resources.
Mr. Hamel says that SSQ plans to retain most AXA staff. He expects, however, that there will be other cuts as the integration approaches its final stage. “I cannot yet say how many but it will not be a large number,” he says. As for technology, AXA’s system will prevail in individual life insurance, where it is the most up-to-date. On the group side, business will be done using SSQ’s systems.
In corporate services (human resources, finance, etc.) SSQ came to an agreement with Intact Financial Corporation, where the latter will manage the transition and continue to provide these services to people from AXA.