Intact’s priorities for mergers and acquisitions

Brokers can expect to see insurers representing nearly a fifth of the Canadian P&C market to be bought and sold, the head of Canada’s largest carrier suggested Wednesday.

“We laid out the perspective seven or eight years ago that 20 to 30 [percentage] points of market share will change hands and more than half of that has taken place already,” Charles Brindamour, CEO of Intact Financial Corp., said of M&A in the insurance carrier space. “A good 15-20 points of market share will change hands.”

Brindamour was speaking to stock and bond analysts during a conference call discussing Intact’s financial results for the three months ending June 30.

“You can look at every segment of the Canadian marketplace – ranging from private Canadian companies to [foreign P&C insurers] to banks to mutuals – and one can easily see potential action in each of these segments,” Brindamour told analysts. “If you look out in the next one to two years, it would be very surprising if we didn’t see consolidation activity taking place from a number of the segments I just highlighted.”

The industry-wide return on equity for Canadian property and casualty insurers is 3%. This gives carriers “excellent conditions to deploy capital in the Canadian market,” Brindamour said Wednesday during the call. “In an environment where the average return of the industry is just not cutting it in terms of return, many people are thinking about the way forward.”

Intact reported Tuesday its return on equity during the most recent quarter was 10.6%.

During Wednesday’s conference call, one analyst asked how Intact executives would rank brokerages as priorities for acquisition targets, compared to carriers who “manufacture” insurance, direct writers and U.S. companies.

“Manufacturing in Canada right now would be at the top end of our appetite level, just given the fact that performance in the market is not so good,” said Brindamour.

Intact’s last major deal was in 2017, when it closed its US$1.7-billion acquisition of commercial specialty insurer OneBeacon Insurance Group Ltd., which is based near Minneapolis. Before making another large deal south of the border, Intact officials want their company’s combined ratio in the U.S. is in the low 90s, Brindamour said.

“We are making progress, but we are not there yet,” he said. “Our priority is building the fortress in Canada by consolidating both manufacturing as well as distribution.”

Intact acquired the Canadian operations of AXA in 2011. Separately, AXA acquired XL-Catlin in 2018, re-branding the Paris-based firm to AXA-XL. Intact acquired Jevco in 2012. BrokerLink, a subsidiary of Intact, has bought several brokerages this year.

Intact reported a combined ratio of 94.8% in its U.S. operations during the three months ending June 30, a one-point deterioration from 93.8% in the second quarter of 2018.

In Canada, the most recent merger involving a Top 10 insurer buying another Canadian carrier was in 2016, when Aviva bought RBC General Insurance from The Royal Bank of Canada.

2015 was a year of consolidation in Canada, with Desjardins Group closing its acquisition of the Canadian operations of State Farm, the formation of Heartland Farm Mutual Insurance Inc.  (from the merger of North Waterloo Farmers Mutual Insurance Company and Oxford Mutual Insurance Company) and the acquisition by ACE Ltd. of The Chubb Corp.  Both ACE and Chubb had Canadian branches and the combined company is now known as Chubb.

During  Wednesday’s call, Brindamour suggested size matters more now than it did 20 years ago. “I think what you are seeing is, the cost of investing in technology for smaller players – and the cost of promoting one’s name and one brand – is more expensive than it was historically, ” he said. “It’s not just about performance issues. It’s about strategic positioning and your ability to finance your growth as a smaller player.”