The slow but steady consolidation of the Canadian home and auto insurance industry is likely to pick up steam coming out of the COVID-19 pandemic, with Intact Financial Corp. and a handful of rivals expected to step forward as dominant domestic players.
Charles Brindamour, chief executive at Toronto-based Intact, laid out his company’s takeover-based expansion plans last week at a virtual investor conference. “We went into the crisis in a position of strength. Now, we are looking for opportunities to deploy more capital," Mr. Brindamour said on Wednesday at an event sponsored by Morgan Stanley.
Intact has made seven significant acquisitions during Mr. Brindamour’s 12 years as CEO. Last week, he said the company is looking at potential takeovers of home and auto insurers in Canada and specialty insurers in the United States, but cautioned Intact will take a disciplined approach and may move slowly. “Acquisitions are not straightforward,” Mr. Brindamour said. “Companies have many parts, and not every part is a business we like.”
Home and auto insurance companies – known as property and casualty or P&C insurers – are performing well during the pandemic: Customers are driving less, so collision claims are down. That has meant a windfall for consumers, as companies such as Intact lowered premiums charged to customers.
However, industry experts say the COVID-19 crisis is creating a sense of urgency, globally, in the P&C insurance industry, and forcing Canadian executives to confront significant structural headwinds. As companies plan for life after the pandemic, they are more willing to consider radical steps. Scotia Capital analyst Phil Hardie said consolidation is inevitable in “a fragmented market with significant performance disparity between top- and bottom-quartile players, [and] limited growth and subpar returns for a number of players.”
“Given the current financial market dislocation and uncertainties related to the COVID-19 pandemic containment efforts, we see this as highly favourable to Intact,” Mr. Hardie said in a recent report. There are 129 P&C insurers operating in Canada, and the five largest companies hold just 47 per cent of market share. He said: “This stands in contrast to many other areas of the Canadian financial services space, such as life insurance, retail banking, and the asset management industry, which are far more concentrated with fewer players.”
Intact is Canada’s largest P&C insurer, with approximately 16 per cent of the market. Its brands include digital insurance company Belairdirect. Mr. Hardie said he expects Intact will use takeovers and aggressive marketing to expand its share to between 25 per cent and 30 per cent over the next five years.
Intact is one of the few publicly traded Canadian P&C companies, and has used its access to equity markets to help finance takeovers. Rival Economical Mutual Insurance Co., based in Waterloo, Ont., plans to go public by next year, in part to access the capital needed to be a diner, not dinner, in the consolidating industry. Economic owns the Sonnet Insurance online brand.
The potential targets in Canada’s P&C insurance industry include local arms of global insurance companies. In Canada, 13 of the top 25 auto and home insurers are foreign-owned, according to industry consultant MSA Research, and they hold a combined 31 per cent of market share. In recent years, global insurers such as Zurich, AXA and Hartford opted to exit the mature Canadian P&C market, using the cash that came from selling domestic divisions to expand in markets with better perceived growth potential.
Mr. Hardie said there are at least six Canadian P&C and commercial insurers that Intact could target with takeovers that would range in value from $1-billion to $2.4-billion. Names on that list include personal insurers Allstate Canada and Royal & Sun Alliance Insurance Company of Canada, Inc., along with the insurance arm of Toronto-Dominion Bank.
The domestic commercial insurance businesses at AIG Canada, Chubb Canada and Zurich Canada could change hands, according to Scotia Capital’s analyst. While smaller insurance operations may be more readily available, Mr. Hardie said: “We continue to believe Intact’s management has a bias to seek out and execute larger deals, given the management resources required to make an acquisition successful and have a meaningful financial impact.”
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