Intact’s priorities for mergers and acquisitions
August 1, 2019 by Greg Meckbach
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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.”
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It’s ridiculous that Intact is allowed to acquire so many companies. They are the first to argue against “monopolies” when it’s a government insurer that’s monopolized a market. It sounds like they want to be the one’s doing the monopolizing. Stinks like hypocrisy. And when they do acquire companies tenured employees are axed by the dozens in favour of cheaper and inexperienced hires. There’s no loyalty on their part towards staff. So when given a choice between a for-profit insurer and a government insurer I pick government anyday!
In response to Reece’s comments I respectfully disagree. There is not a monopoly in the Insurance Industry. There remain in excess of 100 Insurers in the marketplace. Competition remains healthy. Reece only needs to look to British Columbia where ICBC continues to bear the wrath of the buying public. On more than one occasion the government has been required to provide financial assistance which ultimately is passed on to every consumer whether they drive or not. Finally I would suggest he/she consider the governments’ track record in managing other monopolized services such as health care.
British Columbia is a difficult market and even the private insurers here have significantly raised their rates much higher than ICBC. Most insurance companies will not even come here. In fact I challenge you to obtain a quote from the leading private insurer here. I challenge anyone here to do so and you’ll quickly realize private insurance here is actually far more expensive. How do I know? I worked for the private industry here for a good decade up until very very recently! In fact in my time here we were jacking up rates by 60% over 2 years and were told not to “save” the business because they wanted to shed most of the book of business. “Let them go” was the standing orders. No price matching, no reviews – “just let them go”. I can let out more damning secrets however I was forced to sign a NDA or else I’d need to face them off in court to secure my severance. If you believe you’ll be able to convince Canadians that for-profit healthcare and car insurance is better for them it’ll be a hard sell. People are intelligent. The difficulties our government auto insurer is having here are exactly the same difficulties the private industry here is having except the private industry have either packed up their toys and ran away or have reverted to dumping clients. Elizabeth, I’m an insider and know more than you realize. If I say more my former employer will recognize me and take action against me.
Hello Reece,
I enjoyed reading your comments as they are filled with vigor. Although, I do think there are some serious points made by you which are highly contentious. Especially if we consider the reality that many of the described causes to your perceived unethical practices & status of the private insurance industry are due to the government’s involvement.
For example,
(1); BC
This is an unquestionably monopolized market by the government. Of-coarse no private companies can compete in such a market. No wonder they have higher premium increases, because they are a private company which means they are driven by profit. Unlike government companies which have no incentive to improve as they can forever be subsidized by the pockets of government (in distal antecedent to our pockets). Private companies and a freer market (deregulation) forces them to improve their ability to insure & help push the premium down.
(2); The Ethics of Letting Go of Clients
You don’t seem to explain why companies are doing as such. This act is not an act within a vacuum preceded by no cause. Yet you immediately attributed the most severe of intent, malice, upon these private companies. Totally negating the billions of dollars of claims paid out year after year. It’s not a fair description. In my opinion, the over regulation of the market has substantially reduced the profitability of the entire home & automobile market. It was actually completely not profitable in the automobile portion of insurance. Business needs to be profitable, this is its nature, and they can only function within the boundaries set upon by the government.
(3); For-profit Healthcare & Auto
The United States for-profit healthcare system has it’s flaws, in abundance, but by almost any measure of objective quality of healthcare they beat every country on the planet. Further to this, the private health care system of the United States has been the significant producer in medical technology & discoveries industry in the world. In Canada, our own systems are falling apart & becoming more and more expensive over time. It has become an economic subsidy that is putting our country, in turn ourselves, in an economically unstable debt spiral which will destroy the financial integrity of our country for our children and their children.
(4) Problems faced by government insurance = problems faced by private insurance
This may be true, but here is most important difference. Government insurance just asks for more money. Private companies get better at insuring. Government insurance does not contribute to economic production because it does not make profit. Private insurance does.
None of what I am typing is to say that government insurance is bad and should be totally disregarded. Instead it is counter-narrative to being far too one-sided in trying to solve a problem we as an industry, and society, are facing. Government insurance is surely better than no insurance. Although since there is no perfect system &/or example, outright dismissal of potential options is not economically prudent. In fact, it can be detrimental because by all accounts the government insurance is becoming like the healthcare system, a black hole of expense that is devouring the economic integrity of our country.