Tough economic times (1991-1993)
From 1984 to 1990, Quebec-chartered life and health insurance companies underwent spectacular growth as their total assets soared from $2.5 billion to $10.6 billion. Among them, SSQ Mutual Group Insurance ranked fifth with assets in excess of $780 million. These figures, however, mask a different reality: some companies were on very shaky financial ground and did not have sufficient capitalization to withstand the economic turmoil that arose in 1990. While Les Coopérants filed for bankruptcy and La Laurentienne was taken over by Desjardins, SSQ owed its survival to union support, chiefly the solidarity fund established by the Quebec labour federation (FTQ).
Canada's economy was surprisingly robust in early 1990 as the number of housing starts remained high and unemployment fell during the first quarter. Amid fears of inflation, the Bank of Canada decided to raise interest rates, leading to a drop in household consumption and higher unemployment. The contraction of the economy was exacerbated in the third quarter when Iraq invaded Kuwait, triggering a spike in oil prices and, as a knock-on effect, higher interest rates. Quebec's economy was hit hard by increased borrowing costs and the strong Canadian dollar (the GDP rose by only 0.3% in 1990, down from 2% the previous year).
In this highly unfavourable context, SSQ's leadership kept its cool as the company rode out the storm. Unlike some of its competitors, SSQ's troubles were not the result of diversification via leveraged acquisitions; indeed, the size of the company's debt was not at issue. Tapping into its own funds, SSQ had diversified into various interconnected sectors, such as general insurance and individual life insurance. The company's foray into real estate predated its process of "decompartmentalization", while the returns on investment in this sector fully vindicated the decision made by SSQ's board back in 1982. Above and beyond the tough economic times, however, a structural problem was hindering SSQ's development and jeopardizing its future.
1991: restructuring the company
By this time, SSQ's weak equity position had come to the attention of the regulatory authorities. Actuarial reserves were adequate, while the transition from the Canadian asset liability method to the policy premium method in 1991 had even led to a small surplus.1 But the company’s capitalization left it vulnerable to unforeseen events such as real estate crises and higher-than-expected claim rates.
The growth in business during the 1980s had overshadowed any concerns about SSQ's shaky financial foundations. However, the difficulties of Les Coopérants, a century-old company, served as a wake-up call for SSQ's leadership. After a proposal was received to merge the two companies, Jacques de la Chevrotière asked Pierre Genest to review Les Coopérants' financial statements (Genest concluded that the Montreal-based company was headed straight for bankruptcy). Genest also expressed concerns about SSQ's financial position, particularly in terms of its actuarial reserves and certain investments, especially mortgage loans.2 Les Coopérants was finally ordered into liquidation on January 3, 1992. The completion of the insolvency process gave SSQ's management time to find solutions to their own problems.
Thanks to Pierre Genest, SSQ, Life Insurance Company Inc. (SSQ Life) led a group of 12 Quebec insurers that called for contributions to the Canadian Life and Health Insurance Compensation Corporation (CompCorp), which were used to compensate Les Coopérants policyholders, to be divided among all Canadian insurers.3 CompCorp initially opposed this position, although the courts eventually ruled in favour of the Quebec insurers and their position formed the basis of the regulations adopted in 1997. Savings for insureds in Quebec were in the neighbourhood of $135 million.
Financière SSQ was initially conceived as a planning, coordination, development and financing tool; its assets (including those of its subsidiaries) topped $100 million. After due consideration by the board and consultations with SSQ members at regional meetings, this subsidiary was liquidated in 1991. At a special general meeting on November 7, 1991, delegates approved the transfer of the subsidiary's insurance operations to SSQ, Life Insurance Company Inc. (SSQ Life), a share capital company, which was controlled by SSQ, Mutual Management. The latter was then tasked with ensuring that the company's mutualist values were upheld.4 In addition, a new holding company, SSQ Group Inc., was created to oversee the insurance as well as property management operations.5 SSQ's potential partners thus had the option of investing directly in SSQ Life or in the new holding company.
1992: a difficult year
The situation was bad in 1991 and continued to deteriorate the following year. In a bid to find investors, Yves Demers and Pierre Genest met with representatives from European mutual insurers and undertook an outreach campaign across Quebec and the rest of Canada.6The FTQ's solidarity fund expressed an interest, although the investment was ultimately deemed too large. Negotiations were also held with Mouvement Desjardins, although a mutually acceptable agreement proved elusive.7
In his report in 1992, SSQ's chairman noted that two factors had affected the solvency of the company's main subsidiary, SSQ Life.
Revaluing the real estate portfolio
The first of these factors was the real estate slump of the past several years, which had had a negative impact on the valuation of SSQ's portfolio. Since no one expected a return to book value in the medium term, the radical decision was made to write off the loss in its entirety (that way, only safe investments would be recorded in connection with SSQ's financial commitments). This resulted in an $11.8 million write-down (the real estate portfolio had previously been valued at $129.2 million in the company's financial statements).
But SSQ actually believed that the quality of its real estate portfolio was much higher than average, even though its assets were being buffeted by the economic turmoil. The company's responsibility to its insured members and investors motivated its decision to guarantee its commitments to them via assets calculated at the prevailing market value.
Boosting the actuarial reserves
The second factor consisted of certain types of coverage (long term disability insurance in particular) generating a sea of red ink in excess of even the most conservative predictions. Once the year-end accounts were drawn up, the actuarial reserves required a nearly $30 million infusion.
Given the minimum two-year waiting period for long term disability insurance (the main factor underlying the increase in the actuarial reserves), it would take at least three years to accurately calculate the benefits to be guaranteed. The reserve adjustments thus covered a three-year retroactive period before any future rate corrections could be implemented.
Since the premiums received in previous years had not generated a sufficient return, the funds had to be taken from members' equity.
SSQ thus found itself in a situation in which, on the one hand, the technical reserves and values that guaranteed its commitments to its insured members were duly constituted; on the other hand, its equity position no longer provided the official margin of security established by the authorities. This meant that the company was obliged to bring this margin back to the required level.
The only way to do this quickly was to bring in partners willing to provide the additional capital required. This is when the new structures in place proved their usefulness.
After finding several partners, SSQ was able to reconstitute its equity at a compatible security level for insured members and in accordance with regulatory requirements.8
As at December 1, 1992, shareholders' equity was valued at $22 million, down from $60 million the previous year—a far cry from the industry's standards! In addition, the loss of a major contract with the 45,000-member provincial nursing federation (FIIQ) in late 1992 did nothing to allay ongoing concerns, despite assurances from Pierre Genest.9 The 1992 financial year ended with a net loss of nearly $39 million. But shortly after those disappointing results were published, the crisis was resolved: three major union federations, led by the FTQ's solidarity fund, agreed to recapitalize SSQ.10
Recapitalizing the company
"It is with a sense of great satisfaction that the board announces ‘mission accomplished' as we close out 1993," said Yves Demers, CEO of SSQ Life, in his annual report to shareholders. Following a $41.5 million capital injection, the company once again met the solvency standards of the life and health insurance sector. In terms of ownership interests, the FTQ's solidarity fund held a 56.6% stake, with SSQ Group at 42.6% and the employees and managers of the SSQ companies at 0.8%. The unions had come to the rescue once again!
The capital provided by SSQ Group came from the mutualists at SSQ, Mutual Management, as well as from the CSN and Bâtirente employees' pension fund (a group plan designed by CSN for its affiliated unions).11 The Centrale des syndicats du Québec (CSQ), which had played a crucial role in relaunching the company in 1972, was also meant to take part in the rescue effort.12 However, the fact that it was not a pension fund manager made raising the necessary funds much more difficult.13 Nonetheless, the CSQ did renew its contract with SSQ, under which it agreed to support the company by paying significantly higher premiums.14
At a press conference held to announce the financial package, the FTQ solidarity fund's general manager, Claude Blanchet, noted that SSQ accounted for 4.2% of the development capital fund's total equity. The soundness of this business decision was borne out by subsequent events. In 2001, Pierre Genest stated that the solidarity fund's investment had generated a compound return of 15% for its shareholders.15
The agreement was ratified by a special law adopted by Quebec's National Assembly in June 1993, which contained provisions designed to ensure that the company would remain Quebec-controlled in the event its assets were ever sold. Opposition leader Jacques Parizeau voiced concerns about SSQ's future, since the company was no longer owned by mutualists (at least in theory).16 This issue was not immediately relevant since the majority shareholder (the FTQ's solidarity fund) was only entitled to three board members, thereby allowing the mutual to retain effective control.
After a fresh capital infusion of $41.5 million, which was added to the annual operating surplus and the balance from 1992, the funds available for the insureds' security totalled $74.3 million at the end of 1993, which, given the volume and nature of SSQ's business, exceeded CompCorp's minimum capitalization requirement. Since SSQ had nearly $850 million in reserves, it could pursue growth by continuing to focus on operational diversification.
With union support, recapitalization enabled SSQ to weather the storm and look to the future with a sense of optimism. Though the company's history had been marked by other trials and tribulations, the turmoil of 1992 led to a truly dramatic change in course.
Next chapter : A new beginning (1993-2001)
- SSQ, 1991 Annual Report, p. 6.
- Rose-Line Brasset, interview with Pierre Genest, December 10, 2012.
- SSQ Life, 1997 Annual Report, p. 8
- This private member's bill was adopted on December 5 and came into effect on December 31, 1991.
- SSQ, 1991 Annual Report, p. 16.
- Rose-Line Brasset, interview with Pierre Genest, December 10, 2012.
- Eric Clément, "La SSQ cherche à s'associer à Assurance-vie Desjardins", La Presse, January 28, 1993, p. 3.
- SSQ, 1992 Annual Report, p. 1.
- Eric Clément, "La SSQ cherche à s'associer à Assurance-vie Desjardins", La Presse, January 28, 1993, p. A2.
- Eric Clément, "Les grandes centrales syndicales à la rescousse de SSQ-Vie", La Presse, February 19, 1993, p. B1.
- In this case, participation took the form of debentures; the redemption process was completed on June 30, 2011 (SSQ, Mutual Management, 2011 Annual Report, p. 4).
- Rose-Line Brasset, interview with Jean- Claude Tremblay, November 15, 2012.
- These funds were managed by RREGOP (the pension plan for provincial government and public sector employees).
- Rose-Line Brasset, interview with Yves Demers, October 2, 2012.
- René Vézina, "Le cœur à gauche", Revue Commerce, June 2001, p. 16. [French only].
- Quebec National Assembly, Journal des débats, June 18, 1993, (page consulted on June 3, 2013) [French only]. The opposition leader was discussing demutualization.