Size matters in p&c space, but foundation must be sound: Desjardins’ Paquette

Size is key in Canada’s property and casualty insurance space and will likely become even more important as customer service expectations increase, Sylvie Paquette, senior vice president and general manager of p&c insurance at Desjardins Group, suggested at a recent company event in downtown Toronto.

Acquisition is the most likely way to achieve the size required to meet both current and future customer needs and wants, Paquette suggested in an interview with Canadian Underwriter. “You cannot be at the top with only organic growth,” she pointed out.

Related: Co-op, mutual sector to play a role in the consolidation of Canada’s p&c industry: Leroux

That was one reason Desjardins moved to acquire State Farm Canada’s operations – p&c and life insurance businesses, as well as mutual fund, loan and living benefits companies – a deal that officially closed in January.

The $1.6 billion acquisition has propelled Desjardins from number seven for p&c insurance annual gross written premiums in Canada (before the deal at about $2 billion) to number two (at an estimated $4 billion following the transaction). State Farm Canada had been number eight in the country.

Noting, for example, that catastrophes are expected to be a more frequent feature on the Canadian landscape in future, Paquette said that she cannot imagine how a small insurer will be able to manage. “What kind of service can they provide five, 10 years down the road when you don’t have the capabilities to invest?” she asked.

The need for enhanced size through acquisition – or, at least, an acquisition of State Farm Canada’s size – became abundantly clear after Intact Financial Corporation’s $2.6-billion acquisition of AXA Canada, Paquette said.

“The trigger really was when we saw the acquisition of AXA by Intact. With a giant like that, and they are running a very good business, we said we have to make an acquisition,” she told Canadian Underwriter.

Although Desjardins had been looking – growing and gaining market share every year – the search took on greater urgency in the wake of the Intact/AXA deal.

Following the transaction, Paquette reported that Desjardins began thinking about strategic issues at the group level. “I said you have two choices: we either go on the acquisition mode to become one of the largest, or you disinvest and just stay in Quebec with Caisse (Populaire, credit unions), with the unique business model.”

Undertaking careful study of the market, she relayed that “at the end of the day, the best fit with us was really State Farm.”

However, the foundation for any growth must be strong. A weak business that grows by acquisition does not necessarily get to be a better business, she advised. “If you’re lousy, don’t think that by buying and becoming larger you will become better,” Paquette said. “You have to be a well-managed organization.”

Size provides a real advantage on the claims side, Paquette suggested. “We’re doing things on the claims side that a small insurer cannot do. That brings more efficiencies, that brings increased customer experience, that helps you manage your claims costs better.”

Beyond size, Paquette explained the State Farm Canada acquisition provides Desjardins with a distribution network that is close to its respective communities; it is multi-line (although the exclusive agents network is currently 92% p&c, there is potential for other Desjardins products and services); and State Farm U.S. is investing $450 million in preferred shares in Desjardins’ Canadian p&c organization and offering a strategic partnership.

State Farm “wants our success in Canada as much as we do,” Paquette said, citing as one example that both sides are contributing to ensuring the necessary integration of systems. “It’s a $70-billion organization, so we are connected with them in the States. That’s a strategic advantage,” she said of State Farm U.S.

Desjardins is currently in integration mode, with Paquette reporting that 99.9% of the employees and 98% of the agents (close to 500) have opted to move their contracts over to Desjardins. The first implementation of Desjardins product, the living and health benefits, is scheduled for April, followed by auto in Alberta and New Brunswick in September, and auto in Ontario in November, she said.

Is it better to be $4 billion across Canada or just in one region? That depends, Paquette noted, but she leans towards the former.

Size provides the potential for greater efficiencies, no matter where an insurance company is operating, she noted.

Looking at automobile, for example, it may be better to have “$4 billion in one region, if the region is healthy, than (having) $4 billion across the country, because the regulation is different,” she said. “You have the diversification of your risk, that’s what being across Canada brings: diversification of risk in terms of growing potential, but also because of the regulation that sometimes makes a market not attractive,” Paquette added.

There is a place for smaller companies for the next five or 10 years, she suggested, “but at one point in time, they won’t be able to give what customers are expecting.” It will leave those operating in the p&c space to go big or go niche.

Desjardins’ previous model of having banking, insurance and affinity partnerships at the $2 billion level was not sustainable, Paquette suggested. It was not a business model of the future. “I believed that we would be running into trouble with that business model and that size,” she said. “If you’re $2 billion with brokers or with exclusive agents, I believe the same thing.”

“We’re number two, but I always say, we’re a small number two, because we’re half of number one,” Paquette said. “Is it the end of it? I don’t think so if we want to take the full advantage of size.”