Deal or No Deal?

Not long ago, before COVID-19 was a global pandemic, Intact Financial Corporation’s CEO Charles Brindamour hinted in February 2020 that Intact was on the prowl for an acquisition.

At the time, Brindamour was commenting on the company’s 2019 Q4 earnings in a conference call. “Quite frankly our objective is to get back to mid-teens ROE,” Brindamour said of the firm’s Canadian P&C operations. “Once we feel we are there, this is where you capture growth and try to maximize margins where you can, depending on the market.”

Fast forward to 2020 Q3. During the COVID-19 pandemic, the P&C industry as a whole has been labouring to make a 5% ROE, while Intact reported an operating ROE of 16.9%. That’s in the mid-teens, so you know what that means — growth.

And now Canada’s Number 1 insurer is offering to buy the parent company of the country’s Number 7 insurer, RSA Canada. The proposed $12-billion deal would see Intact and the Danish P&C firm Tryg buy RSA plc. If the regulators approve it, the deal would be the biggest deal in Canada since Desjardins bought State Farm’s Canadian operations in 2014.

Such a deal is projected to increase Intact’s annual premiums written by approximately 30%, from $10 billion to $13 billion (Intact’s current market share is just north of 15%). The next runner-up in the food chain, Desjardins, reported $5.2 billion in net premiums written in 2019, representing a 9.15% market share at the time. At first blush, the Intact-RSA deal doesn’t appear to be big enough to engage Canada’s market watchdog, the Competition Bureau of Canada, which takes an interest in cases if market share is in excess of 35%.

One big question for Canadian brokers right now is whether this deal erodes consumer choice in a market in which capacity is already scarce. On this point, brokers’ reviews have been mixed. Many believe there is more room for consolidation within Canada. Others point out that the deal will have different implications across the country, with market consolidation being more of a concern in some regions than others.

Time will tell what the true impact of the deal will be. But expect more consolidation from others in response to the biggest fish getting bigger.