Canadian Underwriter

Anti-trust issues unlikely if Intact acquires RSA Canada: Analyst

November 16, 2020   by Greg Meckbach

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Intact Financial Corp. is unlikely to encounter any opposition from Canada’s competition regulator in acquiring RSA plc’s Canadian insurance operations, an expert from DBRS Morningstar predicts.

“We see a material difference between the life insurance market and the P&C market in Canada. The life insurance market is concentrated with four names while P&C is much more fragmented,” said Marcos Alvarez, Toronto-based senior vice president and head of insurance at credit ratings provider DBRS Morningstar.

Intact announced Nov. 5 it is proposing to make a joint offer with Danish insurer Tryg A/S to acquire London-based RSA. The tentative deal proposes to have Tryg take over RSA’s Sweden and Norway operations, with Intact and Tryg co-owning RSA’s Denmark operations. Intact would essentially acquire RSA’s business in Britain, Ireland, the Middle East and Canada.

Among Canadian P&C insurers, Intact and RSA had 15.27% and 4.35% market share respectively in 2019 when measured by net premiums written, according to the 2020 Canadian Underwriter Statistical Guide.

“If completed, (the possible Intact-RSA deal) would increase the dominance of Intact in some markets in Canada. I do not think that Intact would run into anti-trust issues in Canada with the acquisition,” Alvarez said in an interview this past Friday.

In the Canadian insurance industry, solvency is regulated by the federal Office of the Superintendent of Financial Institutions while provincial regulators oversee market conduct.

But in insurance, as in other industries, the federal Competition Bureau reviews proposed mergers and acquisitions. The Competition Bureau looks at a number of factors – among them the market share that the combined entity would have if a deal were to close.

Once the Competition Bureau defines a market, it generally does not challenge a merger if the combined entity would have no more than 35% market share, competition lawyer Paul Collins told Canadian Underwriter earlier. Collins, who heads the competition and foreign investment group of Stikeman Elliott LLP, made his comment in a 2019 interview about M&A in general, not about RSA and Intact.

“Even if there were anti-trust issues, it might only be in certain provinces, where the combination of RSA and Intact might reach such a high level that the regulator might not be comfortable,” DBRS Morningstar’s Alvarez said Friday. “If that is the case, it could be a matter of exiting or selling some parts of the businesses in particular provinces.”

The Competition Bureau’s 35% market share guideline is generally referred to as a “safe harbour.” The safe harbour guide does not mean that a merger gets automatically approved if the combined entity would have 34% market share, nor does it mean that one would have a major problem if the combined entity would have 36%, Collins told Canadian Underwriter in 2019. The safe harbour guideline means that, with mergers resulting in a 35% market share or greater, the review gets more involved.

One example of a deal outside insurance that is causing concern for the Competition Bureau is Air Canada’s proposed acquisition of Transat A.T. Inc. The two airlines announced Oct. 10 a proposal that was amended from a deal initially proposed in early 2020. The deal still requires approval from Transat’s shareholders as well as from regulators. The Canadian government has neither approved nor blocked the proposed deal, while the European Union is scheduled to make a decision in 2021, The Canadian Press reported last week.

Among the Competition Bureau’s concerns is that if Air Canada buys Transat, it would result in a merger of the only two carriers offering non‑stop service on 22 routes between Canada and Europe, Mexico, Central America, the Caribbean and South America.

Some industries in Canada – such as banking, internet service and supermarket chains – have far less competition than insurance, said Mary Kelly, chair of insurance at the Wilfrid Laurier University school of business and economics, in an interview this past March. Kelly was commenting specifically on auto insurance in Ontario and not on a possible acquisition by Intact of RSA Canada.

“If we have 100 different companies trying to offer a product, we do have a level of competition happening,” Kelly said at the time of P&C insurance.

So there is some potential for more consolidation in the Canadian P&C market, said Victor Adesanya, DBRS Morningstar’s vice president of insurance, in an interview this past Friday.

For example, mutual insurers can merge with other mutuals, said Adesanya, citing the recent merger in Quebec of La Capitale and SSQ as an example.

“Canada has some very niche players in commercial P&C. There is the potential for more P&C carriers in Canada to merge, especially with niche players. Some niche commercial players might leave the market if they do not see enough scale,” said Alvarez.

Desjardins gained market share by acquiring State Farm’s operations in Canada in 2015, Alvarez points out.

The federal Competition Bureau has moved to block deals in other industries in the past. A case in point is a proposed merger between Staples and Office Depot, which never went through. The Competition Bureau opposed that deal in 2015 on the grounds that in Canada, a combined entity would account for more than 80% of sales of office supplies such as pens, pencils, highlighters, staples, sticky notes and paper. Ultimately, in 2016, Staples and Office Depot backed off from the merger after a U.S. court said it would put a stop to it.

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