Definity Financial Corporation is maintaining its goal of becoming a Top 5 insurance company through a combination of organic growth and M&A activity, Definity president and CEO Rowan Saunders suggested during a recent financial services conference.
“One of the drivers for demutualizing was that access to capital and the ability to be a leader in the industry, and we’re now a credible potential buyer in the market,” Saunders said during a webcast at the Barclays Global Financial Services Conference on Monday.
“We built a business model where we think that we can grow at about twice the rate of the industry, so on average, a 10% growth rate, and to do so in the mid-90s [combined ratio].”
Saunders was asked whether consolidation was a necessary factor in the immediate term to meet Definity’s growth objectives.
He said the 10% annual growth rate is “mostly self-funding” following the demutualization of Economical Mutual Insurance Company (Definity is Economical’s parent company). “As a mutual insurance company, you have no shareholders, you don’t pay dividends, so you retain your earnings and we were in a position with significant excess capital.”
So, optimizing and deploying the excess capital for organic growth is important. “But our ambitions are a little bigger than that,” Saunders said.
“When we say we’d like to be a Top 5 player, if you think about just the mathematics of growing at a rate faster than the industry for the next couple of years, we will still need somewhere between half a billion and one billion of acquired revenue to achieve that,” he said. “It’s just a kind of guide for us… so we do think M&A is important.”
Definity, the 7th largest P&C insurer in Canada by net premiums written according to Canadian Underwriter’s 2022 Stats Guide, has already started its growth path with partnerships earlier this year.
In March, it entered into a strategic partnership with digital broker and MGA Apollo Insurance Solutions Ltd. to complete an initial minority equity investment in Apollo. The deal includes a distribution relationship between Apollo and Definity Insurance Company.
Economical also announced a partnership in February with peer-to-peer car sharing marketplace Turo. Economical was selected as the “insurer of choice” to provide commercial auto coverage (including up to $2 million in liability) for Turo’s host and guest community in Ontario, Quebec, Alberta and Nova Scotia.
And acquisition is part of the strategy going forward.
“I think the world is changing, particularly in P&C,” Saunders observed. “You’re seeing more consolidation happening. There is a need for brands, there’s a need for data, there’s a need for technology, so scale does buy us that.”
Looking ahead, Saunders expects auto loss ratios (which have been relatively low during the pandemic) to normalize as loss frequency increases and inflationary trends shift into firmer market and pricing conditions.
“If you think about Ontario auto, which is 70% of our total automobile portfolio, we stopped giving relief in June of this year and now that is effectively a 5% rate increase that is now passed on [to consumers].”
If Canada enters a recessionary environment, Saunders expects Definity’s commercial portfolio to be “marginally” affected. “For the next 18 months, we really still see a pretty firm commercial marketplace.”
Definity’s personal property is also affected by more intense NatCat events and a “firm personal property pricing environment” for the past decade, along with inflationary pressures. “What we’re really seeing now is upper single digits, low double-digit pricing [increases] in average premium.”