Will more Canadian commercial insurers look south for acquisition targets?

Buying American commercial insurers is a “strategy that could prove rewarding” for Canadian insurance companies, executives from Toronto-based DBRS wrote in a report released Thursday.

Expanding into the U.S. commercial space “requires significant resources,” wrote Stewart McIlwraith, senior vice president and head of insurance for the Global Financial Institutions Group at DBRS, in an article in MSA Research Inc.’s Q4-2017 MSA Outlook Report. The article was co-written by Victor Adesanya, vice president of insurance at DBRS, formerly Dominion Bond Rating Services.

OneBeacon Insurance Group Ltd., based just outside of Minneapolis, was acquired in 2017 by Toronto-based Intact Financial Corp. OneBeacon’s offerings include marine, professional liability and surety, among others. Before it was bought by Intact, OneBeacon was publicly-traded, with the majority of shares owned by White Mountains Insurance Group Ltd. of Bermuda.

Zug, Switzerland-based Allied World Assurance Company Holdings AG has been majority-owned by Fairfax since July 2017. Minority shareholders include the Ontario Municipal Employees Retirement System (OMERS).  Allied World sells both commercial specialty insurance and reinsurance. Fairfax owns Toronto-based Northbridge, London-based Lloyd’s insurer Brit PLC, and Stamford, Conn.-based OdysseyRe, among others.

“If Intact and Fairfax are successful with their respective U.S. expansions, other P&C companies may follow their example,” McIlwraith and wrote, adding that expanding into the U.S. commercial specialty space “is a risk diversification strategy that could prove rewarding if managed properly.”

Nearly half of the Canadian commercial insurance market share is held by five markets. MSA included a bar graph in its report depicting market share in commercial and specialty liens in Canada. Lloyd’s had 13.3% share in 2017, followed by Intact (12.9%), Aviva (8.3%), Fairfax (6.2%) and American International Group Inc. (5.1%).

The acquisition of OneBeacon presents “new challenges” for Intact, Baker wrote. “These include: foreign currency conversion risk, integrating work cultures, managing cross border businesses, operating in a different litigation regime and competitive environment and compliance with the regulatory requirements of a foreign jurisdiction.” These challenges “are manageable,” Baker added.

The Allied World acquisition “enables Fairfax to strengthen its position in various product lines in both the U.S. and globally,” Baker wrote. “These include employment practices liability, excess casualty, environmental liability, pollution legal liability, directors and officers, multi-line insurance, and reinsurance solutions.”

Intact acquired AXA’s Canadian operations in 2011, a year after acquiring Jevco from The Westaim Company.

Before it bought Allied World, Fairfax already owned New Jersey-based specialty insurer Crum & Forster.

Fairfax previously agreed to acquire American International Group Inc.’s local commercial and consumer insurance operations in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey.