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McDougall-McFarlan merger just the beginning for Definity


May 15, 2023   by David Gambrill

Two groups in parentheses strive for unity. Generalization and reunification into a larger organization. Merger of companies, joining forces. Reconciliation and consensus.

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McDougall’s $232-million merger with Ontario brokerage McFarlan Rowlands last week is only the beginning for Definity, which is seeking more M&A growth to put it into the Top-5 P&C insurance companies in Canada.

In its 2023 Q1 earnings call, Definity announced the company’s organic growth is running at about 10%, but this alone would not be enough to take the company to its desired goal, which is to be a Top 5 Canadian P&C insurer.

2022 financial figures from MSA Research show Definity as the Number 6 company in Canada, with $3.45 billion in Net Premiums Written and a market share of 5.1%. Wawanesa Mutual Insurance sits in fifth place at $3.8 billion in Net Premiums Written and has a market share of 5.7%.

“We don’t need an acquisition to deliver [our] organic target [growth] of close to 10%,” Definity president and CEO Rowan Saunders said on Definity’s 2023 Q1 earnings call. “An acquisition will help us exceed that.

“Our objective is to be a Top 5 player, and if you think about the path we’re on, we’re doing really well….But there’s a pretty significant gap between ourselves getting into that Top 5, at roughly $1 billion [based on 2021 financial figures—according to MSA Research, the gap in DPW between Definity and Wawanesa was closer to $800 million]. And so…in addition to strong organic growth, we would need an acquisition of approximately $1 billion of revenue that would put us into that Top 5 position.”

In addition to being open to acquiring more brokerages, Definity is also seeking to acquire a carrier, although no names were mentioned during the conference call. To be a Top 5 company, Saunders said, “This requires continued inorganic growth, which will include both insurance carriers and distributors.”

What merger targets does the company have in mind?

Definity said it’s been successful in diversifying beyond its book of auto insurance business, which made up a substantial proportion of the company’s business years ago. Now, the company is looking to expand in commercial lines, although it is still open to growth in personal lines as well.

“Our team continues working to identify actionable opportunities in terms of focus areas,” Saunders said during the conference call. “We’re interested in continually expanding our commercial insurance expertise and capabilities, particularly as it relates to specialty. That said, given our investments and technology, our platform is well-positioned to take advantage of any scale opportunities in personal insurance.”

One investor asked for an explanation for the company’s interest in expanding in commercial lines, given that a challenging economy may impede growth in that segment. Saunders said Definity was committed to making the investments that larger brokerages require of carriers to succeed in the commercial space.

“There are a couple of drivers in commercial lines that are relevant for companies,” Saunders observed. “Some companies are more dependent on reinsurance capacity than others and sometimes [that] has to do with the size and scale of your business and balance sheet.

“We know the reinsurance market was really firm [during Jan. 1, 2023, renewals] and that’s a substantial change from previous years. We saw that and we expect that to be a full offensive [to obtain more reinsurance rate] going forward so that certainly puts some pressure on some commercial carriers [and] specialty companies.

“The other thing is that brokers are really raising their expectations. We’re seeing consolidation of brokers. Brokerages are getting bigger [and] they’re looking to consolidate their business. They have higher expectations [of markets] in terms of interactivity [and] service levels. So, there’s a big investment required [for commercial carriers] to step up and do this.

“So, in a time like this — when I think there is some pressure with reinsurance, inflation, Natcat losses — not everybody is willing to make big investments in their business. And I think [Definity’s willingness to make that investment] may bring some more opportunities to [brokerages]. That’s certainly part of the thesis that we have.”

 

Feature image courtesy of iStock.com/Andrii Yalanskyi