November 21, 2017 by Greg Meckbach, Associate Editor
If Economical Insurance gets permission to demutualize, it is “likely” the company will attract interest from a large insurer as a potential takeover target, an investment analyst predicts.
“A very widely held assumption among investors is that Intact would look at targeting Economical once available,” said Paul Holden, an equity analyst with the Canadian Imperial Bank of Commerce’s CIBC Capital Markets unit.
Intact previously acquired Jevco and the Canadian operations of AXA.
Some foreign insurers such as Aviva or RSA might also view Economical as a takeover target, Holden suggested in an interview with Canadian Underwriter.
“I don’t think we can rule out some of those players, particularly some of the European players that have looked to grow their presence in Canada,” he said. “The one that has more recently done a transaction of significance would be Aviva with the RBC deal.
“RSA have also done deals in the past. [The RSA Group] had a tough time in the past, but seems to have righted itself. That is one we might not want to rule out.”
Economical’s future has been the subject of speculation since the company initiated its demutualization process in 2015.
The property and casualty insurance industry in Canada is consolidating, and Economical needs “access to capital to participate in that consolidation,” Karen Gavan, then CEO of Economical, explained to Canadian Underwriter in 2015. “Additional capital would likely be tied around acquisition activity.”
The demutualization process still requires several more steps, including more policyholder votes and government approval.
Regulations regarding the demutualization of federally-regulated P&C insurers include a “requirement that from the point of demutualization and for at least two years (after),” Gavan said, “our shares must be widely held.”
After this two-year period, it is possible and likely that Economical would generate interest from companies looking to grow through mergers and acquisitions, Holden said.
Four major life insurers demutualized in 1999 and 2000 but no federally-regulated P&C insurers have demutualized yet. Economical plans to submit a conversion proposal for review to the Office of the Superintendent of Financial Institutions (OSFI) before Feb. 22, 2018, a year after two policyholder committees were appointed by an Ontario court. One committee represents mutual policyholders and the other committee represents non-mutual policyholders.
“They are currently in the state of negotiations between the mutual policyholders and the non-mutual policyholders,” Holden said Monday. “If you get an agreement between those two parties then I don’t think there would be any significant barriers to an IPO.”
There is one big player that is being overlooked. QBE has grown to their current volume largely through acquisition.
They don’t currently have a large stake in the Canadian market.
If you read the remarks from Karen Gavan, the point of the demutualization is for Economical to raise capital in order to participate in the consolidation activity. Economical is looking to purchase other insurers’ in Canada, not the other way around.