ROBERT M. ASTLEY - CLARICA LIFE INSURANCE COMPANY - (TSE:CLI)
CEO Interview - published 02/05/01

DOCUMENT # LAR615

On July 1, 1989, ROBERT M. ASTLEY, FSA, FCIA, was elected a director of Clarica Life Insurance Company and was appointed President and Chief Operating Officer. He became Chief Executive Officer on January 1, 1993. Mr. Astley is a graduate of the University of Manitoba with an Honours degree in Science. He is also a Fellow of the Canadian Institute of Actuaries. In 1996, Wilfrid Laurier University honoured Mr. Astley with the conferring of an Honourary Doctor of Laws degree. With the exception of three years as a pension consultant in Toronto, he has been with the company for his entire career, where he has held numerous positions. Mr. Astley holds positions in other companies within the Clarica organization, including serving as Chairman of The Mutual Group (US), and as President and CEO of Clarica Trust. He is actively involved in the Canadian Life and Health Insurance Association (CLHIA) as past Chairman and current Board member. He is also a director of the Conference Board of Canada. One of Mr. Astley's commitments is to community organizations. He presently serves on the Stratford Festival Board of Governors, and is a member of the Wilfrid Laurier University Foundation. He is former Chair of the Board of Governors of Wilfrid Laurier University, and former Chair of the Dean's Advisory Council of the School of Business and Economics. He also served as Chair of the Corporate Division for Campaign K-W, the fundraising Campaign for the Grand River Hospital in Kitchener-Waterloo.

Sector: Life Insurance

TWST: Could you give a brief overview and history of the company?

Mr. Astley: Indeed, the company is 130 years old. It started as a mutual company in Waterloo, Ontario, in 1870. In 1999, we became the first large Canadian mutual company to go public. At that time we also changed our name from Mutual Life to Clarica Life Insurance Company, changed our visual identity and launched a major program to build brand and name awareness in Canada and in selected areas of the United States.

TWST: Why the decision to go public?

Mr. Astley: There were several factors that influenced our decision to go public but two of the most important were: First, we could see that the financial services environment was heading for dramatic change, a scenario in which the mutual form would no longer be relevant and where the public company form would be needed to continue to thrive and to execute our strategy. The second reason was that we believed that going public was the best way to serve our owners, the policyholders. So those two factors were very big in our minds.

TWST: As you look at the business today, how would you describe it?

Mr. Astley: We are very strong in the Canadian market. About 80% of our net income comes from Canada with the remainder coming from the United States. In Canada, we are one of the dominant players. We have a 15% market share in individual life insurance, and after having announced an acquisition in late December, we now will have a 16% market share in the defined contribution group pension business, which is similar to the 401K business in the US. We also have a substantial market position in the wealth accumulation and group insurance businesses in Canada. I would like to add one more thing. The distinguishing feature in Clarica’s Canadian retail operation is our exclusive sales force of more than 3,000 agents, managers and specialists from coast-to-coast in Canada. Our life retrocession business predominantly covers American lines for mortality risk. This is a niche market where we enjoy a 20% market share. Our US. life insurance business is focussed on universal life and annuities sold to individuals and banks through elite independent marketing companies. We’re meeting our financial targets and we are enjoying very strong recognition in the investment community and on the stock market.

TWST: What goals have you set out?

Mr. Astley: The major goals we’ve set are earnings per share growth of 10% - 15% per year. We will finish 2000 with a 22% increase so we’ll exceed our growth target in 2000 and we continue to forecast EPS growth in the 10% - 15% range going forward. We have also set a target of 10% top line growth, which includes insurance and annuity premiums, deposits into mutual funds and segregated funds, and the premium equivalent for the “Administrative Services Only” group insurance business. The third major goal is achieving a 14% return on equity (ROE) by the year 2003.

TWST: When you look at the Canadian market, who are you competing with?

Mr. Astley: We compete with a wide variety of players because we’re not only in the insurance business — life and health insurance — we’re also a big player in wealth accumulation. So we compete against all of the mutual fund companies, against the banks, the credit unions for retirement savings and for non-registered savings as well. But within the insurance sector, we certainly see the likes of Great-West, Sun Life, ManuLife, Canada Life, Industrial Alliance as our major competitors.

TWST: As you look out over the next couple of years, what kind of environment do you see in the market that you’re addressing?

Mr. Astley: It continues to increase in competitiveness. It’s a very intense environment. What I do see is that companies will increasingly specialize and focus on what they do very, very well. So players will exit lines of business where they have a mediocre presence and conversely, will try to bulk up in those businesses where they have a sustainable advantage, just as we did by increasing our group pension business through an acquisition in late December. Also, as I look forward, there will be pressures on consolidation and industry structuring. Canadian federal government rules have really put a constraint on that activity for the major companies until 2002. But as I look beyond that period, it’s quite likely that there will be efforts to consolidate companies as well as companies seeking alliances and perhaps selling off or acquiring blocks of business.

TWST: Given your recent acquisition, I guess you would view yourself as a continuing consolidator?

Mr. Astley: We certainly are going to be active in that regard and we will be focused on growing through acquisition. We’ve done so in the past and we intend to continue to do so. There is lots of talk about Clarica being a very attractive takeover target in itself. What we are going to do is to be smart and ready for overtures that might come our way but our best defense is to run the company very competitively to warrant a high stock price and to continue to grow.

TWST: As you look out, where do you see the biggest opportunities for the company?

Mr. Astley: We see substantial opportunities in the wealth management business in Canada where we believe we’ve got untapped potential in leveraging our relationships with our customers. That’s one of our prime growth areas without a doubt. We also see substantial opportunity in what we call sponsored marketing. This includes workplace marketing where we have group relationships. In the US, we see some real interesting opportunities in niche markets. We have a relatively small presence in the US, but we believe that we can grow by being nimble, by identifying niche opportunities and taking full advantage. I might also say that the reinsurance business, which is built around a business line called life retrocession, is an area where we see continuing growth. We provide extra capacity to the reinsurance companies to reinsure life insurance mortality risk and we have an approximate 20% market share in North America in this very attractive niche market.

TWST: You said you’re in limited parts of the US. Where are you in the US?

Mr. Astley: Our operations are in Fargo, North Dakota, and Brookfield, Wisconsin, and our main emphasis is around individual insurance and annuities with an emphasis on independent marketing companies and personal producing general agents. So that’s our focus in the US where we sell through these distributors.

TWST: Can you offer anything different in the US than the domestic companies?

Mr. Astley: We are very much a domestic company in the sense that our operations recognize the unique characteristics of the United States market and all of the competitive dynamics. We would not claim to be a unique provider but what we can do is provide outstanding service from a company with high financial strength and a strong parent.

TWST: You mentioned early on that one of the things that gives you an advantage is your big sales force. Is that atypical in Canada?

Mr. Astley: It is certainly less common than it was years ago. There are two large exclusive sales forces in Canada — Clarica and Freedom 55 Financial. There is a third I should mention and that is the Investors Group, whose exclusive sales force is primarily involved in the sale of mutual funds. It is less common than it used to be but we have proved that we can make it work. We’ve continued to invest in it and we continue to be able to make it grow and to achieve profitable sale of new products and services.

TWST: As you look out over the next year or two, are there any changes, new products or approaches that we should be aware of?

Mr. Astley: Probably one of the biggest changes is one that affects every business and that would be the advent of e-business — the whole power of the Web. There is little doubt in my mind that the Web is having a powerful impact on our business and we’re investing heavily to make sure that we will be near the leading edge of change in that respect. We’ve done some very innovative things on the deployment of e-business technology integrated with our other customer touch points, our sales force, our call centers, and our home office — so that it’s an entire integrated package. That I would say is one of the biggest environmental shifts taking place and it’s moving at a very fast pace.

TWST: What are you doing on the Web?

Mr. Astley: We’re providing a very rich customer information service to our customers whereby they can access all of their products and services that they have with Clarica through the Web. We are selling some products online but the major effort there is really to understand customer behavior and to understand what it takes to conduct business online. We’re also increasingly using the Web for making service transactions easy for customers, for our distributors and for our service people.

TWST: What’s the response of the marketplace to what you’re doing?

Mr. Astley: It’s early but I think very positive in the sense that we have shown that we can implement these developments in a way that is fully integrated with our existing operations. It’s not as if we’re building an e-business off to the side. We are doing it in an integrated fashion, so that if you can buy it on the Web you can still take it back to the store. I’m quite pleased with the acceptance by our customers and by our sales people.

TWST: Are people reacting to it in the way you had hoped?

Mr. Astley: One of the unique things we have done is to provide a way of sharing the benefits of e-business with our sales people. So on certain online transactions our agents get a commission when their clients purchase online.

TWST: Are there any other parts of the insurance business that you want to be in longer term that you’re not in today?

Mr. Astley: One of the other areas where we see significant opportunity is in retail health insurance products in Canada where we have products such as critical illness insurance, long-term care insurance, which is really in its infancy in Canada, and also what we call personal health insurance. This is supplementary insurance for individuals who don’t have coverage from their employers. As I look longer term, I can foresee a growing number of alliances with other manufacturers or distributors to bring a larger range of products to our customers or to find other avenues for our own products as well.

TWST: Geographically, where will your growth be over the next couple of years?

Mr. Astley: We said that our focus is on Canada and the United States and that remains. So I see significant growth in both geographies. We’ll do that organically and also by acquisition, where these make sense.

TWST: Are you seeing more outsiders coming into Canada to challenge, or is it just competition from people already in the marketplace?

Mr. Astley: It would be more competition from people already in the marketplace, in what I’ll call the more traditional insurance business. In fact, over the past half a dozen years, we’ve seen many more foreign insurers leaving than entering. In the wealth management business, though, we see players from all around the world, the names that would be very familiar are Charles Schwab, Fidelity and Amvestcap PLC, a mutual fund organization based in the United Kingdom.

TWST: Are there barriers to coming in?

Mr. Astley: There are no insurmountable barriers. There are always the issues of needing to comply with local regulation, which might require a different approach, and the need to build up local distribution or manufacturing. But there are no fundamental barriers to entry.

TWST: Why have people left the insurance marketing game?

Mr. Astley: I think it’s because success does demand a certain critical mass and the smaller to medium-size players were finding it increasingly difficult to compete for technology expenditures, to compete for customer or distributor attention and simply the economies of scale in the business. So like many other areas of business, the larger companies appeared to have a significant advantage overall.

TWST: Does size matter?

Mr. Astley: Size does matter. If you looked at all of our lines of business taken together, there’s no doubt that we would be in the top two or three in Canada and that is, we believe, a sustainable position.

TWST: For investors keeping an eye on the company, what should they use as kind of benchmarks or milestones to judge you over the next year or two?

Mr. Astley: Certainly financial performance and meeting our stated targets is critical. We understand that as a management team. The other key measure would be the top line growth because that’s the source of future profitability. The third I might mention would be the productivity of our Canadian retail sales force. Investors are already watching that very carefully. There would be a fourth interesting issue coming up, and that is embedded value. Canadian companies are just now beginning to disclose embedded value figures. This is a valuation method that has really gained a great deal of attention in the United Kingdom and Europe and is only just now beginning to be viewed in North America as a valuable method of assessing a life insurance company. We expect to be disclosing our embedded value analysis early in the second quarter of 2001 and the other major companies are expected to disclose in the near future as well.

TWST: What is embedded value?

Mr. Astley: It is a method of valuing the built in profits in the existing book of business. Insurance contracts are long-term contracts and the liabilities on the balance sheet are conservative. Embedded value is a way of measuring the present value of future profitability that is expected to flow out of that existing book of business. It’s a tool that investors often use when they’re acquiring insurance companies.

TWST: Is it going to be used in a different way?

Mr. Astley: Yes, it’ll be available for most of the insurance companies, if not all, as another comparative measure. The degree of comparability is a topic that analysts are pressing us on. They’d like to have comparability but there is some judgement involved because each company’s circumstances are different and the products on the books are different. Reporting companies will need to try to make their results understandable.

TWST: So this is something that investors can use as a judgement tool?

Mr. Astley: Right, it’s another metric, like a price/earnings ratio or market to book value. Investors would need to understand the significance of the embedded value figure and more importantly, how it’s growing and why it’s growing.

TWST: If you look at the company two or three years from now, what changes would investors see in the mix of your business?

Mr. Astley: I expect they would see a somewhat greater proportion of our net income coming from the United States. They would continue to see Clarica being very strong in our domestic Canadian market, and probably more of our profitability coming from the wealth accumulation business.

TWST: What percentage of the business would you like to see coming from the U.S. market?

Mr. Astley: We haven’t set a specific target but as I’ve mentioned, about 20% currently comes from the US market. That’s our direct insurance and annuity business and our reinsurance business, which is predominantly in the US I’d like to see that grow but we haven’t set a fixed, specific target.

TWST: Is the US business more profitable or there’s just more opportunity?

Mr. Astley: I think it’s just a bigger market. We are, as I said, a niche player, and we have more room to grow.

TWST: What’s the risk in the equation at this point?

Mr. Astley: We’re determined to meet our commitments to our investors and we have ever since we’ve been public. So I would say the downside is relatively limited in our case and we would likely be viewed as a defensive stock by investors. The economy will always introduce some risk into the equation but we believe we’ve got a very well diversified portfolio of assets and we manage our risks on quite a conservative basis.

TWST: Do you have the balance sheet to carry out your program?

Mr. Astley: Oh, yes, We are financially strong. We’re highly rated — AA — and as we have proven over the last two to three years we have the ability to tap the capital markets. We’ve raised preferred shares and subordinated debt this year and as well we have the ability to access capital through our own internal resources that will enable us to do what we need to do.

TWST: Do you have the management team in place that you need to support this kind of solid growth?

Mr. Astley: Yes, I do. And just recently, I’ve announced the filling of an important vacancy, that of Chief Financial Officer, who in addition to his financial responsibilities will lead Clarica’s strategic planning process in the areas of business development, mergers and acquisitions.

TWST: Was that from inside or outside?

Mr. Astley: That was from outside.

TWST: How do you feel about the value the market is currently putting on your company?

Mr. Astley: I’m quite pleased about it. We’re trading at approximately in excess of two times book and at a price earnings multiple that is above the level accorded to the Canadian banks as a whole, so I’m very pleased.

TWST: If you were sitting down with some potential investors, what two or three reasons would you give them to go out and buy your stock today?

Mr. Astley: The main reason is that we have and will continue to meet our commitment to investors. We have a solid growth platform and we’ve managed our risks very effectively and generally on the conservative side.

TWST: Thank you. (TM)

ROBERT M. ASTLEY
 President & CEO
 Clarica Life Insurance Company
 227 King Street South
 Waterloo, Ontario N2J 4C5
 Canada
 (519) 888-3900
 (519) 888-2179 - FAX
 www.clarica.com
 e-mail: investor.relations@clarica.com

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